Ripple CTO Schwartz Breaks Down AMM’s Trading Strategy

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Alex Dovb­nya

Rip­ple CTO David Schwartz took to social media to break down the com­plex­i­ty of auto­mat­ed mar­ket mak­ers’ (AMMs) trad­ing strategy

Rip­ple CTO David Schwartz took to Twit­ter on June 1 to offer an expla­na­tion of auto­mat­ed mar­ket mak­ers’ (AMMs) trad­ing strat­e­gy in lay­man’s terms.

Schwartz ini­tial­ly tweet­ed a descrip­tion of the trad­ing mod­el, which essen­tial­ly turns volatil­i­ty into prof­it. The CTO under­scored how AMMs, despite the com­plex­i­ty of their strate­gies, are designed to har­vest volatil­i­ty. In Schwartz’s expla­na­tion, if an asset’s volatil­i­ty out­weighs its long-term trend, the aver­age per­cent­age move­ment will be pos­i­tive. This is because move­ments typ­i­cal­ly reflect a devi­a­tion in price fol­lowed by a return.

As per Schwartz, a rudi­men­ta­ry trad­ing strat­e­gy could involve buy­ing a cer­tain amount of a stock and then con­tin­u­ous­ly buy­ing or sell­ing the stock to main­tain the val­ue of hold­ings con­stant. Such a strat­e­gy reflects the aver­age per­cent­age move­ment of the stock.

Even though the trad­ing strat­e­gy imple­ment­ed by an AMM is more intri­cate, it also shares this fea­ture. Schwartz also empha­sized that the prin­ci­ple applies main­ly when an AMM is between a fixed-price asset and a volatile asset where the volatil­i­ty sur­pass­es the long-term trend.

Respond­ing to user inquiries about the avail­abil­i­ty of this func­tion to retail hold­ers of XRP, anoth­er user hint­ed that the func­tion­al­i­ty will be pro­posed for vot­ing soon and is inte­grat­ed into the net­work layer.

Schwartz chimed in to explain that the AMM’s strat­e­gy is unchange­able, but users can with­draw their funds when­ev­er they want. He fur­ther explained that if XRP dou­bles in price, the worst-case return should be a gain of 41%.

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