The XRP Ledger (XRPL) continues to expand its decentralized finance (DeFi) capabilities, with its recently introduced automated market maker (AMM) functionality gaining traction among traders and liquidity providers. While much of the attention has been on boosting liquidity and earning passive income, a new perspective has emerged which is XRPL AMMs as a hedging tool for XRP investors.
According to Panos Mekras, co-founder of Anodos Finance, a software provider focused on XRPL, providing liquidity to an XRP/stablecoin pair could serve as a strategic way to hedge against XRP’s volatility. This insight follows the recent AMM clawback amendment approval by XRPL validators, which allowed the inclusion of regulated stablecoins like Ripple stablecoin (RLUSD) in XRPL liquidity pools.
How XRPL AMMs can help hedge XRP volatility
One of the biggest concerns for liquidity providers in AMMs is impermanent loss. For the uninitiated, impermanent loss is a phenomenon where price fluctuations create imbalances in liquidity pools, leading to temporary losses. However, Mekras suggests that this “loss” could actually be leveraged as a hedging strategy.
For instance, in an XRP/RLUSD liquidity pool, participants deposit both XRP and RLUSD. If XRP’s price rises, the liquidity provider will withdraw more RLUSD and less XRP than initially deposited. Conversely, if XRP’s price drops, they will receive more XRP and less RLUSD. He wrote: “Providing liquidity to an XRP/stablecoin pair gives you less exposure to XRP’s upside, but also less exposure to XRP’s downside.”
Mekras argues that this dynamic can work in favour of XRP proponents thus:
- If they believe in XRP’s long-term growth but want short-term stability, the AMM pool can balance exposure, reducing the impact of price swings.
- If XRP’s price plummets, the pool provides more XRP, which long-term holders might see as an opportunity akin to an automated dollar-cost averaging (DCA) strategy.
Read also: Grayscale, CoinShares join XRP ETF race amid XRP price decline
Rising adoption of RLUSD liquidity pools
Since the AMM clawback amendment went live, adoption of RLUSD-based AMM pools has surged. According to XPMarket data, at least 68 RLUSD liquidity pools have launched within the last five days at the time of writing.
The most popular pair, XRP/RLUSD, has already attracted over $1.4 million in liquidity as of Tuesday, with more than 280,500 XRP and nearly 719,000 RLUSD worth approximately $713,000 locked in the pool.
Beyond the promise of liquidity and passive income, the potential for hedging investments could make XRPL AMMs even more attractive to traders looking for strategic exposure to XRP. Accordingly, the use of AMMs as a risk management tool may become a key talking point among crypto market participants as XRPL’s DeFi ecosystem grows.
Read also: Ripple and Ondo Finance to Deploy Tokenized US Treasury Fund on XRP Ledger
Ndianabasi Tom A Petroleum Engineering degree holder, Ndianabasi’s interest since 2018 has been studying the ever-growing field of blockchain and cryptocurrency, keenly evaluating the innovation, exploration, and expansion of this field locally and globally. The founder of Nitadel a media platform, Ndianabasi has been a Writer at Crypto Asset Buyer (CAB) since 2021. When he is not drilling resources in the blockchain and cryptocurrency field, Ndianabasi is singing, reading, watching crime movies, or playing football.
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