David Schwartz, CTO at Ripple and one of the original architects of XRP Ledger, has unveiled the trading strategy employed by the new XRPL Automated Market Maker (AMM) network. This revelation came in response to hot debate within the XRP community.
The XRPL AMM, introduced earlier this year, has garnered attention for its unique liquidity provision and profit-sharing features. Schwartz took to Twitter to elaborate on the intricacies of the system, explaining that the trading strategy employed is a volatility harvesting strategy. It capitalizes on price fluctuations by buying when prices decline and selling when prices rise, effectively arbitraging price differences over time.
He also clarified that the auction mechanism of the AMM sells "arbitrage slots" for liquidity providers' tokens, resulting in the destruction of these tokens. This destruction increases the fraction of the pool's assets represented by existing LP tokens. Additionally, the pool executes a trading strategy and charges a spread when providing liquidity, resulting in larger pools and increased exchange value for each token.
Why Build an AMM?
An AMM will provide efficient liquidity for a wide range of assets, and allows any participant to engage in market making as a liquidity provider (LP) and earn passive income on their tokenized assets. The XRP Ledger’s inherent advantages—extremely low transaction cost, fast block times, fair transaction ordering—make it very suitable and lucrative for all participants within the AMM ecosystem.
Schwartz further shared his findings from simulations conducted on the trading strategy, indicating its success in volatile stocks. However, he noted that its performance diminishes when faced with consistent trends.
Previously, the developer highlighted the uniqueness of XRPL's AMM, positioning it as a potential leapfrogger of other decentralized exchanges. One of its most distinctive features, in his view, is that it allows liquidity providers to claim a substantial share of profits that would typically be allocated to arbitrage.