Ripple CTO Explains RLUSD Anomaly; AMM Pool Proposed to Improve Stability

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This week, there was a noticeable fluctuation in Ripple‘s ecosystem as the Ripple USD (RLUSD) momentarily deviated from its 1:1 parity with the US dollar. This stablecoin, intended to preserve a steady worth, encountered an unforeseen spike, causing it to be traded at $1.04 – a 4% rise that sparked curiosity among XRP community members.

The incident didn’t slip by without observation, despite its brief duration. David Schwartz, the Chief Technology Officer at Ripple, offered an explanation for this. He suggested that the unique event likely occurred due to the specific characteristics of the XRP/USD market. In this market, a sudden price change in XRP can influence the valuation of RLUSD (Ripple USD), given the thin nature of the market structure.

Launched in December 2024, RLUSD – a project by Ripple – serves as their stablecoin endeavor. This initiative is backed equally by reserves held. It functions on both the XRP Ledger and Ethereum networks, providing liquidity and support for Ripple’s financial system.

However, the correlation between its fluctuations and those of XRP illustrate the complexity involved when dealing with stablecoins within unpredictable market conditions.

It seems likely that the correlation between XRP and RLUSD is tightly linked due to a relatively small market for both. When the value of XRP increases, there might be a temporary rise in the value of RLUSD as well, until the supply-demand balance can readjust. This pattern would reverse if the price of XRP decreases.

— David “JoelKatz” Schwartz (@JoelKatz) January 16, 2025

Solution?

Currently, the XRP Ledger community is preparing to cast their votes on establishing an Automated Market Maker (AMM) liquidity pool for XRP/RLUSD. AMMs function by utilizing shared liquidity pools to facilitate decentralized trading, which could prove crucial in addressing issues like these.

Automated Market Makers (AMMs) employ a method known as dynamic pricing algorithms to maintain a steady flow of liquidity. This allows them to prevent extreme fluctuations in prices that might occur too rapidly.

However, this isn’t an immediate solution. The vote is scheduled for two weeks down the line, which means the market must operate without this mechanism temporarily. Yet, the suggested Automated Market Maker (AMM) pool is viewed as a progression toward improving the stablecoin’s performance during times of rapid change.

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2025-01-17 19:10