Ripple’s Chief Technology Officer, David Schwartz, has outlined three reasons investors should not hold XRP in an Automated Market Maker (AMM). He made this clear in a tweet, responding to a question about what percentage of his XRP holdings he is willing to use in the AMM after its launch.
Schwartz noted that he would commit between 1/3 and 1/4 of his XRP to the AMM. After providing the estimate, he shared three reasons XRP holders should not keep their tokens in the AMM.
Ripple CTO Warns On XRP AMM
Generally, an AMM is a decentralized exchange that implements specific mathematical algorithms to deduce the price of traded cryptocurrencies. With this tool, traders can seamlessly interact and trade their digital assets directly with a liquidity pool without a central authority.
The Ripple CTO mentioned exposure to other digital assets aside from XRP as one of the risks. He explained that AMMs are designed to provide liquidity for multiple assets, which means that if one asset in the pool experiences a significant price movement, it can affect the value of all the other assets in the pool, including XRP.
This exposure to other assets can be particularly problematic for investors who hold XRP for the long term, as they may not want to be exposed to the price volatility of other assets.
Another risk associated with holding XRP on the AMM is an implementation bug. Schwartz explained that because AMMs are built on complex smart contracts, there is always a risk of bugs or vulnerabilities in the code. If a bug exists, it could result in the loss of funds for investors.
Schwartz emphasized that while AMMs can be useful for trading tokens, they are not without risks. As such, investors should thoroughly research and understand the potential risks before deciding whether to hold XRP in the AMM.
Related Reading: USDC Minting And Redemption Backlog Almost Cleared By Circle
Lastly, Schwartz sees lesser chances of making significant gains by holding XRP in the AMM, which he considers a risk. He explained that while AMMs can provide liquidity for XRP and other tokens, they may not always result in significant price gains for XRP.
This is because the AMM only serves as a channel to buy and sell XRP in response to price changes. So, whether or not the price of XRP increases, it does not affect the value held in the AMM.
XRP is currently seeing some upside as the crypto market is recovering. The altcoin is trading at a price of $0.482, up 5.59% in the last 24 hours.
Featured image from Pixabay and chart from Tradingview