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Ripple CTO Clears Up Critical AMM Misconception

Author: Content Editor
Ripple CTO David Schwartz addressed a conversation about Automated Market Maker (AMM) liquidity and the implications of liquidity provider (LP) tokens. The discussion focused on whether locking LP tokens in blackholed accounts means burning them and whether burning them would distribute value to other LP token holders. Schwartz clarified that burning LP tokens would actually allow the liquidity deposited to be withdrawn by others, and the only way to keep the liquidity in the pool is to blackhole the LP tokens. He also highlighted that fees earned by the AMM become increased liquidity for the AMM, and while the economics of whether this will increase the value of the issued token are complicated, a larger AMM is generally better for the token. AMMs provide liquidity in the XRP Ledger's decentralized exchange, and liquidity providers earn LP tokens in return for depositing assets into the AMM. Liquidity providers can redeem their LP tokens for a share of the AMM pool's assets, including any fees received. The size of the AMM pool affects the exchange rates and trading fees generate passive income for liquidity providers.

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