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Ripple

Tech Insights: Ripple CTO Breaks Down The Significance Of The AMM Feature

Godspower Owie
by Godspower Owie
1 year ago
·
Posted in Ripple
Trusted Editorial content, reviewed by leading industry experts and seasoned editors. Ad Disclosure

David “JoelKatz” Schwartz, the Chief Technology Officer (CEO) of the payment firm Ripple Labs, has provided an analysis of the workings of the impending XRPL Automated Market Maker (AMM) feature to help the XRP community better understand the initiative.

Ripple CTO Clarifies AMM Functionality

The Ripple CTO took to the social media platform X (formerly Twitter) to give a clear explanation of how the XRPL’s AMM feature works. His emphasis came in response to the co-founder of Anodos Finance, Panos Mekras’ X post regarding the AMM functionality.

Initially, Mekras used an analogy as he tried to describe the upcoming XRPL AMM, comparing it to a “self-running market stall,” in which demand and supply, rather than a single person’s influence, determine prices. This system ensures a steady flow without the need for manual intervention by automatically adjusting prices in response to trading activity.

Related Reading: Ripple CTO Provides Clarity On XRP Ledger’s Genesis Block Situation

However, David Schwartz weighed in on the subject after a community member voiced worries about the possibility of losing one’s XRP through the AMM. Schwartz underlined that a secure investment would be guaranteed as long as the AMM is bug-free and there are no broken invariants.

Furthermore, the Ripple exec asserted that users are provided with liquidity tokens specific to the pools they donate to. “When you provide liquidity to an AMM depositing into its pools, you get liquidity tokens that are specific to the AMM whose pools you contributed to,” he stated.

After this, he provided information on an unusual technique for measuring these token’s value. It entails calculating the square root of the product of the first asset times the second asset amounts received upon token redemption, divided by the total number of liquidity tokens owned.

Schwartz also highlighted the major goal behind the AMM initiative in his post. According to him, it aims to increase the calculated value over time, regardless of changes in the underlying asset’s price.

This strategy converts volatility into a steady rise in the token’s actual worth. This simply means that even if the asset’s closing price during the volatile period is the same as its starting price, the increase will still manifest.

David Schwartz Warns Of Loss Of Real Value

Despite this uniqueness, Schwartz has warned that while it reduces losses in some situations, it does not prevent a decrease in an asset’s value. “This does not, however, prevent a loss in actual value,” Ripple CTO stated.

Related Reading: Ripple CTO Addresses XRP Price Suppression Accusations

Schwarts then pointed out an example to emphasize his statement and the AMM’s strategy further. When a user gets 1 XRP and $1 for his tokens, and the next day, he gets 1.05 XRP and $1.05 for his tokens, the strategy works.

He also highlighted several “pluses” and “minuses” involved in the system. The benefits include the potential to turn volatility into yield, the chance to generate income by enabling spread trades, and others.

Meanwhile, the minuses include the inability of users to make more money if asset prices increase and no guaranteed yield, among others.

Ripple
XRP trading at $0.5113 on the 1D chart | Source: XRPUSDT on Tradingview.com
Featured image from iStock, chart from Tradingview.com
Editorial Process for bitcoinist is centered on delivering thoroughly researched, accurate, and unbiased content. We uphold strict sourcing standards, and each page undergoes diligent review by our team of top technology experts and seasoned editors. This process ensures the integrity, relevance, and value of our content for our readers.
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Godspower Owie

Godspower Owie

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Godspower Owie is my name, and I work for the news platforms NewsBTC and Bitcoinist. I sometimes like to think of myself as an explorer since I enjoy exploring new places, learning new things, especially valuable ones, and meeting new people who have an impact on my life, no matter how small. I value my family, friends, career, and time. Really, those are most likely the most significant aspects of every person's existence. Not illusions, but dreams are what I pursue.

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