Ripple CTO Outlines Three Reasons Not To Hold XRP in Automated Market Maker (AMM)

Introduced in July 2012, the XRP Ledger automated market maker (AMM) is set to go live for end-users, giving XRP holders an extra avenue to earn rewards by providing liquidity to the available pools.

Accordingly, Ripple Chief Technology Officer (CTO) David Schwartz expressed his excitement about XRPL’s new AMM network which is now live on DevNet. 

For context, an automated market maker is a type of decentralized exchange (DEX) that uses mathematical algorithms or formulas to price crypto assets and make it easy for crypto traders to buy and sell them. Each AMM holds a pool of two assets and enables users to swap between them at an exchange rate set by a formula.

As stated, Ripple’s upcoming AMM will help in providing liquidity in the XRPL’s decentralized exchange. While Schwartz noted that he is more excited about this feature than any other proposed XRPL feature in the past ten years, the Ripple CTO disclosed that he will only use a handful of his XRP holdings in the upcoming XRPL AMM network. 

In particular, Schwartz said he can only engage one-third or one-quarter of his XRP in the XRPL AMM at the initial stage, noting that he could add more to the liquidity pool depending on how the AMM works over time. 

This he said in response to an inquiry from a user regarding the extent to which he will maximize the DeFi development. According to him, there are three main reasons to not hold XRP in an AMM. 

Here’s what he said:

“…There are really only three reasons not to hold your XRP in an AMM: (1) There could be an implementation bug in the AMM code that causes you to lose money. A low risk, but non-zero.

(2) There has to be some other asset that you are also exposed to. For example, if you pick an XRP/USD AMM, you are exposed to risk that the USD issuer you pick may collapse or fail.

(3) If XRP increases in price rapidly, you will be selling the whole way up. So you won’t gain as much as you would if you just held XRP. In compensation, you won’t lose as much if it drops a lot and you may profit from volatility and market making.”

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