The world of decentralized finance (DeFi) continues to evolve, and the XRP Ledger (XRPL) is preparing to take a significant leap forward. David Schwartz, Chief Technology Officer at Ripple, recently shed light on how XRP holders could soon earn passive income through the upcoming Automated Market Maker (AMM) feature on the XRPL.
In a series of posts on X (formerly Twitter), Schwartz clarified misconceptions, explained technical mechanisms, and outlined real-world benefits for users who choose to participate in liquidity pools. This development marks a pivotal moment for the XRPL ecosystem, potentially unlocking new utility for XRP beyond payments and remittances.
Understanding the XRPL Automated Market Maker (AMM)
At its core, an AMM is a decentralized system that enables trading between digital assets without traditional order books. Panos Mekras, co-founder of Anodos Finance, compared the XRPL AMM to a self-running market stall—prices adjust automatically based on supply and demand dynamics rather than human intervention.
This means trades execute seamlessly, liquidity remains available 24/7, and users can interact with pools without relying on counterparties. The system uses mathematical formulas—specifically, invariant-based pricing models—to maintain balance across assets in a pool.
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When users deposit assets into an AMM pool—such as XRP and a stablecoin like USD—they become liquidity providers (LPs). In return, they receive liquidity tokens, which represent their share of the pool. These tokens are crucial because they track ownership and accrue value over time as trading fees are generated.
How XRP Holders Can Earn Passive Income
Schwartz emphasized that one of the most exciting aspects of the XRPL AMM is its potential to generate yield from volatility—a concept that may seem counterintuitive at first.
Even if the price of XRP ends where it started, frequent price swings can result in net gains for liquidity providers due to fee accumulation from traders arbitraging price differences.
To illustrate, Schwartz provided a simplified example:
- A user deposits 2 XRP and **$1** (total value: $2) into an XRP/USD pool.
- XRP drops from $0.50 to $0.40, then rebounds back to $0.50.
- The pool charges a 0.5% spread on trades.
During the dip, the value of the LP’s position temporarily drops to $1.79**, reflecting impermanent loss. But when the price recovers, the accumulated fees push the final value to **$2.0007—a small but positive return, despite no net change in XRP’s market price.
This demonstrates how volatility isn’t just risk—it can be a source of yield in well-designed AMMs.
“Unless there's a bug or flaw in the AMM implementation, it is supposed to be impossible for a particular invariant to be broken. By the (admittedly weird) standard of that invariant, it is not supposed to be possible to lose.”
— David Schwartz, Ripple CTO
Key Benefits and Risks of XRPL AMMs
Advantages
- Yield from fee collection: Every trade in the pool generates fees distributed proportionally to LPs.
- Volatility conversion: Price fluctuations can lead to gains through repeated arbitrage cycles.
- No broken invariant (if bug-free): The mathematical model ensures that under normal conditions, value cannot be lost according to the defined metric.
- Reduced exposure during downturns: If one asset in the pair loses value, LPs may still retain more value than if they held both assets directly.
Potential Challenges
- Impermanent loss: When prices move significantly, LPs may end up with less value than if they had simply held their assets.
- Lower upside during rallies: Compared to holding XRP outright, LPs may see reduced gains during strong upward price movements.
- No guaranteed returns: Yield depends entirely on trading volume and volatility.
- Multi-asset exposure: Users must be comfortable holding both assets in the pool (e.g., XRP and USD).
- Counterparty and smart contract risk: While minimal on XRPL due to its design, bugs or exploits could theoretically lead to losses.
Schwartz was clear: while the system is designed to minimize downside, it does not eliminate risk entirely.
Current Status: XLS-30D Amendment Nears Activation
The implementation of AMMs on XRPL hinges on the approval of the XLS-30D amendment. As of recent updates, validator support has reached 62%, with 22 validators voting "Yea." The threshold for activation is 80%, meaning broader consensus is still needed.
Once activated, developers and DeFi platforms will be able to deploy AMM pools natively on the ledger—opening doors for:
- Native stablecoin-XRP pools
- Cross-currency liquidity markets
- Institutional-grade DeFi applications
This upgrade aligns with Ripple’s broader vision of making XRPL a hub for efficient, scalable, and secure financial transactions.
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Frequently Asked Questions (FAQ)
Can I lose money by providing liquidity on XRPL AMM?
Yes, while the system protects against certain types of losses via its invariant model, you can still experience impermanent loss if asset prices move dramatically. Additionally, if one asset in your pool drops sharply in value, your overall portfolio value may decline.
Do I need technical knowledge to use XRPL AMMs?
Not necessarily. While understanding how AMMs work helps make informed decisions, user-friendly wallets and interfaces will likely abstract much of the complexity. Think of it like staking—simple to use once integrated into mainstream apps.
Will I earn passive income even if XRP’s price doesn’t change?
Yes—this is one of the most unique aspects. Even if XRP starts and ends at the same price, frequent small trades driven by volatility can generate fees that increase your token value over time.
How are liquidity tokens valued?
The value is derived from the square root of the product of the two assets in the pool, divided by the number of liquidity tokens owned. It's a mathematical way to ensure fair distribution and growth based on participation.
Is there counterparty risk in XRPL AMMs?
Minimal. Unlike centralized platforms, XRPL AMMs operate on-chain without intermediaries. However, risks include potential bugs in code or unexpected behavior during extreme market conditions.
When will XRPL AMMs go live?
There's no fixed date yet. The XLS-30D amendment needs 80% validator approval before activation. With current support at 62%, it could take weeks or months depending on validator engagement.
Final Thoughts
The introduction of AMMs to the XRP Ledger represents more than just a technical upgrade—it's a gateway to decentralized yield generation for millions of XRP holders worldwide. With David Schwartz’s clear explanations, the community now has a better understanding of how this system works and what it means for passive income potential.
While risks exist—as with any DeFi product—the opportunity to earn returns from everyday market movements adds a compelling new dimension to owning XRP.
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As validator support grows and developer tools mature, we’re likely approaching a new era for XRPL: one where holding XRP isn’t just about speculation or utility, but also about participation and reward.