Passive Income with XRP, Ripple CTO Provides Clarity (2024)

David Schwartz, Ripple’s CTO, recently clarified the prospect of generating passive income with XRP in the upcoming XRP Ledger (XRPL) AMM.

Schwartz’s comments came in response to a disclaimer presented by prominent XRPL DUNL validator Vet. Notably, there have been reports of the numerous benefits that the upcoming AMM could bring to the XRPL community, including the opportunity to earn passive income.

Important Disclaimer

As the AMM amendment secures the minimum validator consensus threshold again, Vet deemed it necessary to comment on this prospect. According to him, the upcoming AMM would not provide passive income for XRP investors just for “holding” their tokens.

He emphasized that investors would need to provide liquidity by handing out their XRP tokens to any AMM instance. These XRP tokens would be available as liquidity for market participants looking to trade on the AMM.

Notably, Vet’s disclosure aimed to debunk claims that XRP investors could secure passive income by holding their XRP tokens instead of depositing them in liquidity pools. In response, a proponent questioned whetherbeing a liquidity provider does not present passive income opportunities.

Ripple CTO Provides Clarification

The Ripple CTO chimed in, clarifying that while investors could earn passive income from simply providing liquidity, the mechanics involved with the AMM’s passive income opportunity are not the same as what market participants witness with traditional staking.

Yes, but the mechanic is different from things like staking. To get passive income from XRP with the AMM, you have to trade your XRP for claims against the AMM pools. While they hold XRP and you can reclaim XRP on demand, you are not guaranteed to get as much out as you put in.

— David "JoelKatz" Schwartz (@JoelKatz) March 9, 2024

According to Schwartz, When it comes to passive income generation, different mechanisms come into play, and they operate in different ways. In the case of XRP, if you want to generate passive income using the AMM (Automated Market Maker) system, you would need to trade your XRP for claims against the AMM pools. While you can reclaim XRP on demand, the amount that you get back may not necessarily be the same as what you put in. In other words, this process involves a level of risk, and you should be aware of it before proceeding. The AMM operates under a different mechanic than staking, so it’s important to understand the differences between the two if you’re considering generating passive income from XRP.

Another proponent sought clarification, citing Schwartz’s previous comments, in which he assured that users would always get back what they put into the liquidity pools. Responding to this, the Ripple CTO clarified that it depends on what the individual defines as value.

It comes down to how you define value and what you compare the AMM to. For example, if XRP goes down in price a lot but you get out slightly more XRP than you put in, did you get back more or less value?

— David "JoelKatz" Schwartz (@JoelKatz) March 10, 2024

Notably, while market participants could get back more XRP than they invested into the liquidity pool if XRP’s value collapsed when their assets were in the pool, they would receive less worth for XRP despite getting more quantity of XRP. This is the concept of impermanent loss.

Earning Passive Income with the XRPL AMM

Panos Mekras, an industry pundit and prominent XRP community figure, commented on the Ripple CTO’s latest remarks. Mekras noted that this challenges the conventional notion that impermanent loss is always negative.

What this basically means is that impermanent loss doesn't always have to be perceived as a loss. If you provide liquidity to an XRP/USD pool, for example, and XRP price crashes then you will have more XRP and less USD than what you initially deposited to the pool. Is that a… https://t.co/OtQS2kV2ya

— Panos 🔼{X} (@panosmek) March 10, 2024

Using the example of an XRP/USD pool, he explained that if XRP’s value drops, liquidity providers end up with more XRP and less USD than their initial deposit. Mekras proposed that for those prioritizing XRP, this could be viewed as a win akin to an automated Dollar-Cost Averaging (DCA) strategy.

Moreover, pseudonymous industry commentator WrathofKahneman stressed that being a liquidity provider for the AMM is indeed a passive income opportunity. Nonetheless, he pointed out that, unlike other passive income opportunities, providing liquidity does not guarantee profit.

I think it's fine to call the XRPL AMM passive income; the whole point is to turn over XRP to the machine for trading. If REITs & rentals are considered passive, surely a LP is, too?

The important point is that participants are not guaranteed profit.

— WrathofKahneman (@WKahneman) March 10, 2024

It bears mentioning that these conversations have re-entered the XRP community amid recent developments. Notably, the AMM amendment has now secured validator consensus again and is expected to go live on the XRPL by March 22.