Ripple’s Chief Technology Officer (CTO), David Schwartz, recently took to Twitter to provide a simplified explanation of automated market makers’ (AMMs) trading strategy. To make it more accessible, Schwartz broke down the complex workings of AMMs and highlighted their focus on harnessing volatility for profit.
According to Schwartz, when an asset’s volatility outweighs its long-term trend, the average percentage movement tends to be positive. This is because price movements typically involve a temporary price deviation followed by a correction. To illustrate this concept, Schwartz presented a basic trading strategy involving the continuous buying or selling of a stock to maintain the value of holdings constant. This strategy aligns with the average percentage movement of the stock.
While AMMs employ more intricate trading strategies, they share this fundamental feature. Schwartz emphasized that this principle primarily applies when an AMM interacts with a fixed-price and volatile asset, with the volatility surpassing the long-term trend.
In response to users’ inquiries regarding this function’s availability for retail holders of XRP, one user hinted that the functionality would soon be proposed for voting and integrated into the network layer. Schwartz clarified that the AMM’s strategy remains unchanged, but users can withdraw their funds anytime.
Moreover, Schwartz shed light on the potential gains for XRP holders, explaining that if the price of XRP doubles, the worst-case scenario would still yield a gain of 41%.
It’s worth noting that David Schwartz’s explanation on Twitter aims to make the concept of AMM trading strategies more accessible to a wider audience. This approach allows individuals to understand better the workings of AMMs and the potential benefits they offer in volatile markets.
