The XRP Ledger (XRPL) could soon receive an upgrade, the highly-anticipated XLS-30d amendment, which would introduce a built-in automated market maker (AMM) trading platform into the ledger, allowing $XRP token holders to earn income on-chain.
An AMM is a platform that allows for cryptocurrency trading in a permissionless way using liquidity pools, rather than traditional order books. Liquidity pools are shared pools of two or more tokens supplied by users that are used for trades. The prices of tokens within the pool are determined through the use of blockchain oracles.
One of the main advantages of AMMs is that they eliminate the need for intermediaries and order books, which reduces transaction costs and delays. AMMs also enable high liquidity and low slippage, as users can always trade with the pool regardless of the market conditions.
Investors who add tokens to liquidity pools receive a share of the fees collected from each trade, but the revenue comes with the risk of impermanent loss. Impermanent loss occurs when price fluctuations alter the ratio of the tokens within the pool, meaning token providers could be better off if they simply held the tokens in their wallets.
The loss is considered to be impermanent because the ratio of tokens can be restored, in which case the token provider would be gaining the fees collected over time. An AMM on the XRP Ledger would mean XRP token holders could earn fees from trades on the AMM.
An AMM on the XRP Ledger would also allow the chains users to convert to other assets seamlessly on-chain, while also significantly boosting the liquidity of XRP itself as liquidity providers earn yield through liquidity pools.
The amendment is notably still not live on the XRP Ledger, but is expected to be launched on September 11. After the amendment is live, validators would still need to vote on the deployment of an AMM.
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