Ripple CTO Outlines 3 Reasons Not To Hold XRP in AMM

According to the CTO of Ripple, there are only three identifiable risks of holding XRP in an AMM, which could include exposure to other assets.

Ripple’s CTO David Schwartz recently outlined three potential risks of holding XRP in an Automated Market Maker (AMM). When asked how much of his XRP tokens he intends to hold in the forthcoming AMM set to go live on the XRP Ledger (XRPL), Schwartz made this disclosure.

Probably between 1/3 and 1/4. There are really only three reasons not hold your XRP in an AMM:
1) There could be an implementation bug in the AMM code that causes you to lose money. A low risk, but non-zero. …

— David “JoelKatz” Schwartz (@JoelKatz) April 25, 2023

An AMM is a decentralized exchange that uses mathematical algorithms to determine the price of traded assets. Traders can trade their assets directly with a liquidity pool, a pool of funds contributed by other traders, without relying on a central authority. Ripple unveiled a native AMM for XRPL in July 2022.

With the launch of the XRPL AMM drawing closer, Schwartz revealed that he plans to hold between a third to a fourth of his total XRP bag in the upcoming AMM. 

Schwartz noted that he could only identify three risks associated with holding XRP in an AMM, and they include the following:

Implementation Bug

An AMM allows traders to trade a pair of two different assets. In the context of XRP, an XRP/USD AMM would allow people to trade XRP for USD.

An implementation bug in the AMM code could cause errors in the price calculation or lead to other technical issues that result in people losing money when using the AMM. While the risk of this happening is low, it is still possible.

Exposure to Other Assets Besides XRP

When using an AMM, you are not just trading XRP. You also trade another asset paired with XRP, such as USD or BTC.

If you choose an XRP/USD AMM, you are also exposed to the risk that the USD issuer you pick may collapse or fail. In other words, if the USD issuer goes bankrupt or becomes insolvent, the value of the USD you hold may decrease, resulting in a loss for you.

Selling XRP the Whole Way up

If XRP increases in price rapidly, you may not gain as much by using an AMM as you would by simply holding onto your XRP tokens. This is because when using an AMM, you constantly sell and buy XRP as the price fluctuates. However, using an AMM can also help you mitigate losses if XRP prices drop significantly.