Ripple’s upcoming project is creating an Uniswap-rivalling Automated Market Maker [AMM] on the XRPL network. Dubbed the 0030 XLS-30d, as per a Github release, the proposal seeks to add AMM, which is touted to bring enormous DeFi potential to the blockchain. Typically, a market maker helps provide liquidity for trading pairs on centralized exchanges.
However, DEXs do not support additional intermediate processes [order matching systems or custodial infrastructures]. Instead, these are replaced by autonomous protocols like AMMs, where users can initiate trades directly from non-custodial wallets. These protocols use smart contracts to define the price of digital assets and provide liquidity and are known as Liquidity Pools. Examples of AMMs include Uniswap, Balancer, and Curve.
As for AMMs, any entity can become a liquidity provider as long as it meets the requirements encoded into the smart contract. To ensure the ratio of assets in liquidity pools remains balanced and to eliminate price discrepancies of pooled assets, AMMs use preset mathematical equations. Uniswap and many other DeFi exchange protocols use a simple x*y=k equation. Where x represents the value of asset A, y denotes the value of asset B, and k is a constant.
During large orders in AMMs, a large number of tokens are removed or added to a pool, creating huge discrepancies between the asset’s price in the pool and its market price, thus providing an arbitrage opportunity. Here, the price difference allows a trader to buy and sell an asset in different markets to generate a profit.
Ripple’s team, however, noted that arbitrageurs generally wait for their profit to be more than the trading fees they would incur, which the former say reduces liquidity and slows down price discovery.
The Special Factor That Would Set Ripple Apart
In order to increase liquidity and pool-supplier profits while allowing arbitrage to remain profitable, Ripple is considering geometric mean market makers [GM3] as a native XRPL feature.
According to the Github discussions, they are working on a function that would continuously auction off zero-fee trading slots for arbitrageurs and give these earnings to liquidity providers, speeding up arbitrage because “there is no trading fee eating up potent profits.”
Proclaiming that XRPL AMM would be a ‘liquidity monster’, the expert stated that the proposal is still under discussion and needs to be first tested and voted through.