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The Ripple ecosystem is no stranger to innovation, but a recent event has added urgency to upcoming developments. Ripple USD (RLUSD), Ripple’s stablecoin launched in December 2024, unexpectedly strayed from its 1:1 peg to the U.S. dollar. Briefly trading with a 4% deviation, this unusual behavior has sparked questions about its stability and the way forward.
RLUSD is designed to be stable and liquid. It operates on the XRP Ledger and Ethereum. It is backed 1:1 by reserves, but its recent deviation has shown how closely its behavior is tied to XRP’s movements. This highlights the challenges of maintaining a stablecoin in volatile conditions, even one built to be resilient.
Amid this, the XRP Ledger community is preparing for a critical vote to introduce an Automated Market Maker (AMM) pool for the XRP/RLUSD pair. These AMMs, powered by liquidity pools and algorithmic pricing models, are designed to smooth out price fluctuations and ensure consistent liquidity. The move could be a key step in stabilizing RLUSD, but not without risks.
Risks
One of the most prominent voices in the XRP community, known by the nickname “Vet”, has issued a cautionary warning about the potential downsides of participating in the AMM as a liquidity provider.
In about a week we’ll see the XRP / RLUSD Automated Market Maker Pool being created.
I want you to be careful if you race to provide liquidity. Impermanent loss is a factor you need to count in!!
Anyone using the pool to swap assets instead is ok 👍
— Vet (@Vet_X0) January 23, 2025
Vet stressed the importance of understanding impermanent loss, a phenomenon where changes in the price ratio of pooled assets can result in lower returns compared to simply holding those assets. This is a known risk for liquidity providers in AMMs and could catch newcomers off guard if they are not prepared.
For those who use the pool to swap assets rather than provide liquidity, the risks are far less significant. Once the pool is active, liquidity in the RLUSD/XRP market is expected to improve significantly, creating a more stable exchange rate.
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