Ripple CTO Breaks Down the Cryptic Mechanism of XRPL AMM

• Ripple CTO David Schwartz elaborates on the notion of XRPL AMM, ensuring a secure investment.
• Anodos founder Panos uses the analogy of a self-running market stall to compare with AMM.
• Though AMM does not guarantee any yield, it boasts the ability to turn volatility into yield.

In an insightful conversation with Panos, the founder of Anodos Finance, Ripple CTO David Schwartz elaborated on the upcoming implementation of XRPL AMM (Automated Market Maker). In a detailed analysis, Schwartz shared insights on the secure investment guaranteed by XRPL AMM.

The conversation was ignited by Panos, who brought forward an analogy of a self-running market stall to compare with AMM. He clarified that the AMM adjusts prices according to trading activity, just like traditional market products’ prices are dependent on supply and demand.

Notably, AMM is a kind of decentralized exchange (DEX) that makes use of algorithmic money robots for easier crypto trade. According to Panos, “the AMM keeps the trading going by balancing supply and demand automatically, without anyone having to manually set the prices.”

While one of the community members shared their anxiety regarding the risk of losing one’s XRP with the AMM in response to Panos’ tweet, Schwartz came forward with a comprehensive explanation. He ensured a secure investment unless there was a bug in the AMM.

Further, Schwartz highlighted the notion of “liquidity tokens” specific to the AMM, which could be acquired by providing liquidity to the AMM. The value of the tokens could be calculated in an unconventional way, as shown by Schwartz. He wrote, “The square root of [(How much of the first asset you get if you reedeem your tokens) times (how much of the second asset you get if you redeem your tokens)] divided by the number of liquidity tokens you have.”

Moreover, he elaborated on the advantages and disadvantages of the system. He cited that the system poses the least possibility of losing value, pointing out its ability to “turn volatility into yield.” In addition, the system does not lead to a major loss if the value of one of the underlying assets dips.

On the other side, AMM guarantees no yield, and there is a lesser chance for a substantial gain even if the asset price increases. Also, when the asset price declines, there could be a potential loss.