One of the original developers of the XRPL and current Ripple CTO, David Schwartz, has revealed a novel trading method used by the brand-new XRPL Automated Market Maker [AMM].
The ledger’s AMM, which was introduced earlier this year, sparked community discussion about several of its core features. One of which includes ‘Continuous auctions’.
Two things are occurring, according to Schwartz. Selling “arbitrage slots” for LP tokens is how the auction process works. The number of assets the pool’s current LP tokens represent increases as a result of the destruction of those LP tokens.
The pool charges a spread when it offers liquidity while also carrying out a trading strategy. As a result, the pools grow in size, increasing the value that each LP token can be swapped for.
He also disclosed that a volatility harvesting approach is used in the trading process. It purchases when prices are low and sells when they are high and works similarly to multi-exchange strategies to arbitrage price differences over space.
When asked if it could be used in the stock market, Schwartz said that he had run some simulations and found that it performed remarkably well for stocks with high volatility.
But when confronted with persistent trends, he observed, its performance suffers. “The more of a consistent trend you put in, the less well it does”, he added.
Unlike a typical market maker, AMMs employ smart contracts to define the price of digital assets and provide liquidity and are known as Liquidity Pools.
Any entity can become a liquidity provider as long as it meets the requirements encoded into the smart contract.
XRPL’s Unique AMM Features
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.
In July last year, blockchain firm Ripple announced a Uniswap-rivalling AMM named the 0030 XLS-30d, on the XRPL network, which was touted to bring enormous DeFi potential to the blockchain.