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In a recent post, Ripple CTO, David Schwartz, Explained Automated Market Makers (AMMs) – An important component in the Decentralized Finance (DeFi) framework, and their trading strategies for profit.
Schwartz says that the AMM thrives when an asset is volatile, but does not change much in its price direction. Schwartz further explained that an asset whose volatility exceeds its long-term trend will have a positive average percentage movement. However, if the longer term trend is negative, it will move the average slightly lower and vice versa.
Ripple CTO, Creating a trading strategy is not difficult
According to the Ripple CTO, it is not difficult to build a trading strategy tracking the average percentage movement of an asset.
He further explained that the trading strategy of AMM is advanced as compared to a simple trading strategy and focuses on price movement.
Schwartz, however, added a disclaimer at the end of his analysis. He added that the AMM trading strategy only works for an AMM between an asset that has a fixed price and one whose price is volatile enough to move away from its long-term trend.
Furthermore, they believe that although the AMM works even when the asset does not meet the stated conditions, their behavior is different. From their analysis, a notable divergence would only occur with long-term negative price movement that exceeds volatility.
Crypto enthusiasts react to analysis
to react Schwartz’s amm analysis, molly elmore asked if XRP would be a fixed-price asset paired with every other asset on the XRP ledger (XRPL).
In reply, Schwartz said That AMM is not exclusive to XRP and can work between any asset pair. However, if both assets are volatile then the trading strategies will be different mathematically.
Citing the BTC/XRP pair as a reference, Schwartz said that although both assets are volatile, the pair remains very bullish.
He also said that if you Bullish on XRP and BTCInvesting in an XRP/USD AMM means holding a lot of USD that can go up.
Specifically, if the bullish sentiment holds true, holding shares of the XRP/BTC AMM has more upside momentum for XRP and BTC.
Schwartz continued his analysis, saying that an XRP/USD AMM is the worst-case scenario (no volatility and no market making) if the price of XRP and BTC doubles. Yield of about 40%.
In comparison, the worst case scenario for an XRP/BTC AMM is 100% yield, On the other hand, Schwartz said that if you sense of urgency It is wrong.
If both XRP and BTC decline by 50%, the worst case loss is 50%, while for an XRP/USD AMM, the worst case loss is around 30%. So they believe that XRP USD is more secure while XRP/BTC is volatile. Schwartz said that his analysis seemed complicated and further explained in a tweet.
He added that AMMs charge trading fees, and volatility causes people to trade with AMMs. Therefore, AMMs convert volatility into fees.
Featured image from Pixabay and Chart from Tradingview.com
