An XRP community figure and prominent financial advisor identifies an attractive passive income opportunity with the upcoming XRP Ledger (XRPL) AMM.
Panos Mekras, a well-known financial advisor and founder of DigitalGen, recently highlighted an attractive way for XRP community members to take advantage upcoming XRPL Automated Market Maker (AMM) for passive income.
Mekras has this opportunity in a recent post
Today we’re going to talk about the importance of on-chain liquidity and why everyone should participate in the upcoming #XRPL AMM – #XLS30! 🧵1/22 pic.twitter.com/6oC5JH2XYf
— Panos 🔺 {X} 🪝 (@panosmek) August 30, 2023
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A passive income opportunity
He began by drawing attention to the meaning of liquidity in the chain and the role of AMMs. Mekras emphasized that liquidity, one of the most important parts of a market, is crucial in determining asset prices.
Hence, liquidity pools play a crucial role in decentralized finance as they help to provide sufficient liquidity. According to him, they act as the backbone of decentralized exchanges, including AMMs.
A liquidity pool is a pool of funds locked into a smart contract. Its purpose is trading and providing liquidity to decentralized exchanges, allowing users to exchange tokens.
Liquidity pools are nothing without Liquidity Providers (LPs). LPs deposit funds into these liquidity pools to contribute to liquidity and earn a share of the pools’ trading fees. In doing so, they establish a market and earn money at the same time.
Mekras underlined that XRP Community members could take over the role of LPs. He emphasized the crucial role of LPs in the ecosystem. This is an attractive passive income opportunity due to the prospect of generating income through trading fees.
Ephemeral Loss
While the income generating strategy seems attractive, most traders shy away from being LPs due to the concept of Impermanent Loss (IL). However, Mekras explained why IL might not be as terrible as it is thought to be.
A temporary loss occurs when the value of assets in a liquidity pool changes over time, causing the pool’s value to differ from what the value of the assets would be if the assets were simply held. This happens when the prices of the tokens in the pool move away from their original ratio.
While this was perceived as a setback, Mekras clarified that IL can be part of an effective strategy. For example, LPs can leverage IL as an automated dollar cost averaging (DCA) approach.
By providing liquidity for an XRP/stablecoin pair, liquidity providers can accumulate more XRP in the face of price fluctuations.
The general fear of price increases, Mekras resorted to diagrams to support his claims. Even as XRP surges 200% to 600%, IL remains manageable, with much of this being offset by earned fees.
He showed that IL remains negligible as long as the relative prices of the assets in a liquidity pool pair stay within a 50% range of the entry point.
In addition, he emphasized the importance of the uniqueness of the XRPL Continuous auction mechanism. This concept enhances the AMM experience by distributing winning bid amounts to LPs, reducing the risk of temporary losses.
Mekras confidently predicted that pairs like XRP/USD and XRP/BTC have the potential to generate significant income and fees for LPs.
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Disclaimer: This content is for informational purposes only and should not be considered financial advice. The views expressed in this article may represent the personal opinion of the author and do not reflect the opinion of The Crypto Basic. Readers are advised to conduct thorough research before making any investment decisions. The Crypto Basic accepts no liability for any financial loss.
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