The XRPL AMM feature, which was recently introduced, has a unique capability that contributes to the burning of XRP tokens when market participants create new AMMs.
The XRP Ledger (XRPL) has taken a significant step towards adopting a deflationary model with the introduction of its Automated Market Maker (AMM) feature. While the primary purpose of this feature is to provide liquidity, it also incorporates a built-in mechanism that burns XRP tokens, ultimately contributing to the scarcity of the cryptocurrency.
In a recent article on X, Panos Mekras, a prominent figure in the XRP community and co-founder of Anodos Finance, shed light on the deflationary impact of the AMM feature. He explained that the creation of a new AMM instance on the XRPL results in the burning of 2 XRP tokens. This burn rate is significantly higher than the standard minimum transaction cost, which is only a fraction of an XRP token. The rationale behind this increased cost is to deter spam on the XRPL.
The introduction of the AMM feature is a response to the growing popularity of Decentralized Finance (DeFi), where Automated Market Makers have become a crucial component. Unlike traditional trading systems, AMMs on the XRPL are designed to work in tandem with the existing decentralized exchange, offering users the advantages of both systems.
The XRPL AMM incorporates a fee auction mechanism that allows liquidity providers to bid for reduced fees, thereby incentivizing their participation. Ripple CTO David Schwartz has recently highlighted this as an avenue for market participants to burn LP tokens.
However, the deflationary impact of the AMM feature is an additional advantage. In response to Mekras, Lee Harrow, another active member of the XRP community, inquired about the implications of this feature, suggesting that it enhances the scarcity of XRP, as the total supply of XRP is capped at 100 billion tokens.
Mekras confirmed this observation, stating that XRP is inherently deflationary, with a maximum of 100 billion tokens ever to be created and over 12 million tokens already burned. Data from XRPScan verifies that the XRPL has burned exactly 12.311 million XRP tokens since its inception, with this figure increasing from 11 million last April.
The deflationary nature of XRP is a result of its design. Each transaction on the XRPL incurs a fee, which is subsequently burned, gradually reducing the total supply over time. While this mechanism was originally intended to combat spam transactions, it also has the potential to support the value of the asset by creating scarcity.
The recent revelations have been met with enthusiasm from the XRP community. Within less than three weeks since the launch of the feature, over 193 AMMs have been established, indicating a rapid growth of the XRPL ecosystem. The creation of more AMMs could further enhance liquidity and contribute to the burning of XRP tokens.
Disclaimer: This article is solely for informational purposes and should not be construed as financial advice. The views expressed in this article are the author’s personal opinions and do not reflect the opinion of The Crypto Basic. Readers are strongly advised to conduct their own research before making any investment decisions. The Crypto Basic is not liable for any financial losses incurred.
The XRPL AMM Feature: How it Facilitates XRP Burning