XRP Ledger (XRPL) AMM Misconceptions Cleared By Market Analyst

Anodos Finance co-founder Panos Mekras took to X recently to debunk some of the misconceptions about XRP Ledger (XRPL) Automated Market Maker (AMM) which went live at the beginning of this year.

Addressing Impermanent Loss Confusion

It appears that there has been confusion as to whether users of the XRPL AMM would have to provide XRP as liquidity. Noteworthy, these misconceptions come amidst some technical challenges that XRPL AMM has been experiencing.

Mekras explained to his followers that providing liquidity should be taken as a separate income strategy which would not require users to add the XRP tokens that they plan on holding.

“As a liquidity provider, you care about income and fees earned by the trading activity. It’s better if you don’t care if you end up with more on one side and less on the other. Total profit is what matters,” the Anodos Finance executive added.

On confusions about impermanent losses, He continued by saying these losses, a financial risk that could occur when an investor provides liquidity to a XRP Ledger AMM platform in a Decentralized Finance (DeFi) ecosystem, can either be good or bad. To put this in perspective, Mekras mentioned that there are certain scenarios where these impermanent losses are for the benefit of the user.

I still see some confusion and misconceptions on XRPL's AMM. Let's clarify:
1. You don't have to provide XRP.
2. Providing liquidity should be seen as a separate income strategy and not add assets you intend to hold. As a liquidity provider, you care about income and fees earned…

— Panos 🔼{X} (@panosmek) April 27, 2024

Oftentimes, the losses are triggered by a couple of events including price volatility which could also cause a temporary decrease in value. As part of the misconceptions that he addressed, Mekras highlighted that there is no staking or earning with XRP tokens. This implies that users can only provide their assets to the AMM and get rewarded for doing so.

XRP Ledger (XRPL) AMM Pools Have Varying Risks

It is worth noting that all XRP Ledger (XRPL) AMM pools are designed differently and therefore, have different degrees of risks. 

Mekras tried to explain this market outlook in his X post, citing some cryptocurrency assets with varying risk levels. According to him, users are exposed to minimal risk when they provide liquidity into a stablecoin pair like USD/EUR.

However, investment in pools with two volatile digital assets are likely to have higher levels of risks. He listed XRP/XLM as a pair that falls into this latter category. 

Meanwhile, the XRPL AMM has welcomed a new amendment  ‘fixAMMOverflowOffer.’ The “fixAMMOverflowOffer” clause resolves the container overflow glitch revealed after the start of the launch of the AMM engine. 

This fix and the clarification offered by Mekras might put XRPL AMM in a better light among potential users.