[DeFi 101] AMM in XRP Ledger
XRP Ledger(XRPL) has been playing an important role as an intermediary token with low fees and a Decentralized Exchange (DEX) for other tokens which allow users to trade in XRP for a long time. XRPL has been utilizing the Central Limit Order Book (CLOB) system based on matching buy and sell orders. XRPL started to amend their DEX system to add an AMM which allows any participant to provide liquidity and earn. Introducing AMM in XRPL brings more functionalities to boost up the XRP utility and shifts the exchange paradigm.
Why XRPL AMM?
Even though the first AMM was launched in 2017, after testing within the community thoroughly, XRPL AMM has been designed to improve problems from existing AMMs. There are four main key features of XRPL AMM:
1) Pathfinding
What if both CLOB and AMM systems can bring out the option for traders? In order to find the best exchange rate, XRPL seamlessly integrated the advantages of both. This interoperable unique strategy called Pathfinding method allows users to suggest optimized prices to determine whether swapping within a liquidity pool, through the order book, or a combination of both yields the best price, and executing accordingly. Eventually, CLOB may help cushion any problem from AMM such as slippage and price impact rather than just relying on the AMM system.
2) Trading Fee Vote
With an AMM system, liquidity provision will be more active than just an order book by itself. When Liquidity Providers (LP) deposit their tokens in pools, they will receive LP tokens as the evidence of deposit in a liquidity pool and compensation. LP tokens can be used for liquidity withdrawal and traded as a profit as well. Since high liquidity provision is necessary for the users to swap, XRPL added more authorities to LP token holders to vote for trading fees between 0% and 1%. LP Token holders, being significant stakeholders in an AMM, are best suited to collectively make this decision in a balanced manner.
3) Single-sided Liquidity Provisioning
Typically, liquidity pools require providers to deposit equal proportions of two assets, causing friction as providers need to swap assets to achieve balance. XRPL’s AMM allows depositing a single asset into a pool, automatically converting half of its value into the paired asset. For instance, depositing $100 of XRP into a USDC/XRP pool converts 50% to USD, ensuring equal amounts. For those who have XRP solely, liquidity providers no longer need to have both tokens. Furthermore, as single asset deposit and withdrawal are supported, arbitraging opportunities for LPs will be offered to maximize their profit with flexibility.
4) Novel Feature: Continuous Auction
Volatility or asymmetric trading may cause the relative price of assets in AMM pools to deviate from that of external markets. However, the AMM does not automatically adjust prices due to a lack of external market information (price-feed). This results in arbitrageurs having to wait for the profit from arbitrage transactions to exceed the trading fees or compete against others, reducing their probability of success. XRPL AMM invented a new way of amplifying incentives for LP token holders as arbitrageurs to bid a spot to capture price discrepancies. A continuous auction mechanism provides trading advantages for 24 hours at almost zero trading fees, so makes the process profitable for liquidity providers by narrowing the window of decreased trading volume for the pool and sharing the profits from arbitrage transactions. If someone outbids a slot-holder, part of the proceeds from the auction is refunded to the previous slot-holder.
In conclusion
With the potential of these robust features and great characteristics of XRPL as a blockchain network providing a network with fast speed and very low-cost, XRPL AMM brings remarkable changes to XRP ecosystem. As the on-chain transaction increases and revitalized, XRP holders will get more familiar with DeFi services, so that we can take one step closer to XRP DeFi summer. Moai Finance will be supporting the XRPL AMM with user-friendly experience to become a leading DeFi protocol in XRPL.
Links
- Website: https://moai-finance.xyz/
- Twitter: https://twitter.com/MoaiFinance
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- Contact: support@moai-finance.xyz
*** This post is for general informational and educational purposes to help users who are unfamiliar with DeFi investing using cryptocurrency to use the service. It is not a recommendation to invest in crypto assets and should not be used as a basis for investment decisions under any circumstances. It should not be construed as financial, legal, or other professional advice and you should seek advice directly from a qualified professional.*
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