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Ripple CTO Schwartz Breaks Down AMM's Trading Strategy

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Fri, 2/06/2023 - 6:03
Ripple CTO Schwartz Breaks Down AMM's Trading Strategy
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Ripple CTO David Schwartz took to Twitter on June 1 to offer an explanation of automated market makers' (AMMs) trading strategy in layman's terms.

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Schwartz initially tweeted a description of the trading model, which essentially turns volatility into profit. The CTO underscored how AMMs, despite the complexity of their strategies, are designed to harvest volatility. In Schwartz's explanation, if an asset's volatility outweighs its long-term trend, the average percentage movement will be positive. This is because movements typically reflect a deviation in price followed by a return.

As per Schwartz, a rudimentary trading strategy could involve buying a certain amount of a stock and then continuously buying or selling the stock to maintain the value of holdings constant. Such a strategy reflects the average percentage movement of the stock.

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Even though the trading strategy implemented by an AMM is more intricate, it also shares this feature. Schwartz also emphasized that the principle applies mainly when an AMM is between a fixed-price asset and a volatile asset where the volatility surpasses the long-term trend.

Responding to user inquiries about the availability of this function to retail holders of XRP, another user hinted that the functionality will be proposed for voting soon and is integrated into the network layer.

Schwartz chimed in to explain that the AMM's strategy is unchangeable, but users can withdraw their funds whenever they want. He further explained that if XRP doubles in price, the worst-case return should be a gain of 41%.

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