Trader Grabs XRP at $0.0428 as Single-Sided Trades Wreak Havoc on XRPL AMM

The recently launched Automated Market Maker (AMM) functionality on the XRP Ledger (XRPL) has introduced a new wrinkle to the ecosystem. While AMMs offer exciting opportunities for liquidity provision and decentralized trading, a lack of experience among users appears to be causing unintended consequences.

Understanding Single-Sided Deposits

AMM pools rely on liquidity providers depositing equal value of two assets to function effectively. A liquidity provider for an XRP/USDC pool would ideally deposit both XRP and USDC in a balanced ratio. However, current user behavior on the XRPL AMM favors single-sided deposits, particularly with XRP. This means users are flooding the pools with XRP without a corresponding inflow of USDC.

This trend disrupts the intended equilibrium within the pool. An abundance of XRP relative to USDC pushes the price of XRP down within the pool, creating an arbitrage opportunity. However, capitalizing on this opportunity can be challenging due to limited USDC availability.

A recent example shared by Neil Hartner (@illneil) on X highlights this issue. On March 22, a liquidity provider deposited a significant amount of XRP into the XRP/USDC pool. This single-sided deposit caused a drastic price drop for XRP within the pool.

A keen trader identified the arbitrage opportunity and swapped $80 for a staggering 1,869 XRP, effectively acquiring XRP at $0.0428. XRP was trading around $0.63 at the time.

While this trade generated significant profit for that investor, it comes at a cost to liquidity providers in the pool. To maintain balance, the XRPL AMM automatically adjusts the price to reflect the new ratio of assets. Consequently, other XRP holders in the pool witnessed a decrease in their holdings. One user revealed in the comments that his 500 XRP had been reduced to 427 XRP.

Ripple CTO Weighs in on Single-Sided Deposits

David Schwartz, Chief Technology Officer (CTO) of Ripple, has acknowledged the potential benefits and drawbacks of single-sided deposits. He recognizes that this feature simplifies the user experience by removing the need to acquire two separate assets. However, he cautioned that it can significantly influence price dynamics, especially in pools with lower liquidity.

Schwartz advised users to leverage available tools to assess the potential price impact before executing a transaction. He also recommended that developers show this information on their user interfaces to aid investors in decision-making.

A crypto expert recently predicted that XRP could drop to $0.1 because of the AMM, and these problems have increased the worry that XRP might decline. Encouraging responsible use of single-sided deposits and understanding their impact on pool dynamics could aid the long-term health of the XRPL AMM.

Follow us on Twitter, Facebook, Telegram, and Google News

Tobi Loba

Tobi Loba is a passionate writer with a vast interest in the stock market. She joined the crypto ecosystem about three years ago and has written lots of ebooks and articles in relation to cryptocurrency and blockchain projects. Tobi Loba earned her degree at the University of Ibadan.