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In recent replies on social media X, Ripple CTO David Schwartz explains AMM liquidity pools in relation to the Ripple USD (RLUSD) stablecoin. This was in response to an X user who had sought clarification as regards the subject matter.
Automated Market Maker (AMM) on XRP Ledger uses liquidity pools instead of traditional order books to facilitate trades. The AMM functionality was enabled with the amendment XLS-30D in March 2024.
The clawback amendment, which went live in January this year, enabled Ripple's RLUSD stablecoin to be floated and traded directly on XRP Ledger’s DEX, boosting its liquidity and trading options and increasing decentralized finance (DeFi) activity on the XRPL network.
RLUSD AMM liquidity pool explained
According to Schwartz, the AMM liquidity pool holds a pile of RLUSD and XRP, each of roughly equal value. It also issues tokens that represent claims against the pool for a proportional share of its assets.
When the price of XRP goes down, the pool converts RLUSD to XRP to equalize the values; on the other hand, when XRP price goes up, the pool converts XRP to RLUSD for value equalization.
The aim is to always increase the value of the pool constant (the amount of RLUSD times the amount of XRP divided by the number of issued tokens outstanding) and never to allow it to decrease.
According to the Ripple CTO, the idea behind the AMM liquidity pool is that, regardless of whether XRP’s price takes a round trip, the value of each liquidity token would serve to maximize the pool constant.
The value of the liquidity tokens in the pool can also increase as individuals use the pool as a liquidity source to trade XRP for RLUSD and pay a spread. The Ripple CTO stated that while the tokens gain and lose value with changes in XRP's price, it may be less significant than those experienced by holding only XRP.
In further responses, the Ripple CTO explained that since the liquidity pool holds half RLUSD and half XRP, the assumption is that the token holders want to be long on XRP and profit from its volatility.
Dan Burgin
Vladislav Sopov
U.Today Editorial Team