Unlocking the Misconceptions: A Conversation with Ripple’s Chief Technology Officer on XRP Valuation and AMMs

Ripple CTO Breaks Down XRP Valuation Linked to Payments

Tomiwabold Olajide

In a recent conversation with our team, Ripple’s Chief Technology Officer (CTO), David Schwartz, cleared up a critical misconception about automated market makers (AMMs). Specifically, the misconception centers around how AMMs affect the valuation of assets like XRP.

For those new to cryptocurrency, an AMM is a decentralized exchange mechanism that allows for continuous trading between two assets at an exchange rate set by a formula. AMMs are often called “decentralized exchanges” or DEXs. In Ripple’s case, it utilizes this technology in its liquidity pool, allowing users to make trades between XRP and other assets.

To start, AMMs create an opportunity for market participants to gain passive income through the provision of liquidity. Those who deposit assets into an AMM are called liquidity providers. As a reward, liquidity providers earn LP tokens from the AMM. These LP tokens can be redeemed for a share of the AMM pool’s assets, including any fees received.

In essence, AMMs incentivize users to provide liquidity to the market in exchange for these fee-sharing rewards and other benefits like increased exposure for their deposited assets.

Now, let’s delve into the misconception surrounding the valuation impact. One common error is that AMMs always prioritize the asset with the highest demand over others. However, this isn’t entirely accurate.

According to Ripple CTO David Schwartz, the formula used by AMMs does not prioritize one asset over another solely based on demand. Instead, it considers the overall balance of assets within the pool.

An AMM determines its exchange rate based on the balance of assets in the pool. When there is a larger sum of an asset in the pool, the exchange rate given for that asset generally becomes better.

Source: u.today