In a series of enlightening tweets on June 1, Ripple’s CTO David Schwartz shed light on the trading strategy employed by automated market makers (AMMs) using language that even laymen could understand.
Schwartz’s explanation centered around AMMs’ ability to transform volatility into profits. Despite the intricate nature of their strategies, AMMs are designed to capitalize on volatility, according to Schwartz.
In his breakdown, Schwartz highlighted that if the volatility of an asset outweighs its long-term trend, the average percentage movement tends to be positive. This is because price movements usually involve a deviation followed by a return.
To illustrate this point, Schwartz presented a basic trading strategy involving purchasing a specific amount of stock and continually buying or selling it to maintain the constant value of holdings. Such a strategy reflects the stock’s average percentage movement.
Although AMM’s trading strategy is more complex, it shares this characteristic. Schwartz emphasized that this principle is particularly applicable when an AMM operates between a fixed-price asset and a volatile asset with volatility surpassing the long-term trend.
Addressing queries about the availability of this function to retail holders of XRP, one user hinted that the feature will be proposed for voting soon and integrated into the network layer.
Schwartz chimed in, clarifying that while the AMM’s strategy is unchangeable, users can withdraw their funds at any time. Additionally, he explained that if the price of XRP doubles, the worst-case return should still yield a gain of 41%.
Also Read: XRP Holders on Edge as Ripple Lawyer Leaves Amid SEC Lawsuit
This insightful explanation from Ripple’s CTO provides a glimpse into the inner workings of AMMs and their ability to leverage volatility for profitable trading.
