The recently introduced XRPL AMM feature has a functionality that helps burn XRP tokens when market participants create new AMMs.
The XRP Ledger (XRPL) has taken another step toward a deflationary model with the introduction of its Automated Market Maker (AMM) feature. While this functionality primarily looks to provide liquidity, it also has a built-in mechanism that burns XRP tokens, contributing to its scarcity.
How the XRPL AMM Feature Burns XRP
In a recent post on X, Panos Mekras, a key figure in the XRP community and co-founder of Anodos Finance, highlighted the deflationary impact of the AMM feature.
Did you know? When a new AMM pool is created on XRPL, 2 XRP is burned.
Instead of the standard minimum transaction cost of 0.00001 XRP, “AMMCreate” must destroy at least the incremental owner reserve amount, currently 2 XRP. This is the same special transaction cost as…
— Panos 🔼{X} (@panosmek) April 6, 2024
He explained that the creation of a new AMM instance on the XRPL leads to the burning of 2 XRP. This burn rate is considerably higher than the standard minimum transaction cost, which is a mere fraction of an XRP. The rationale behind this increased cost is to prevent spam on the ledger.
The AMM feature’s introduction is a response to the growing DeFi landscape, where Automated Market Makers have become a cornerstone. Unlike traditional trading systems, AMMs on the XRPL are designed to work in harmony with the existing decentralized exchange, offering users the best of both worlds.
The XRPL AMM comes with a fee auction mechanism, allowing liquidity providers to bid for reduced fees, thus incentivizing participation. Ripple CTO David Schwartz recently called attention to this as an avenue through which market participants could burn LP tokens.
However, the AMM feature’s deflationary impact is an added advantage. Responding to Mekras, Lee Harrow, another active member of the XRP community, inquired about the implications of this feature, suggesting that it enhances scarcity for XRP total supply is capped at 100 billion tokens.
XRP Inherently Deflationary
Mekras confirmed this, stating that XRP is inherently deflationary, with no more than 100 billion tokens ever to be created and over 12 million already burned. Data from XRPScan confirms that the XRPL has burned exactly 12.311 million XRP since inception. This figure was 11 million last April.
Correct. XRP is deflationary by default. No more than 100b will ever exist, and over 12m has already been burned.
— Panos 🔼{X} (@panosmek) April 6, 2024
XRP’s deflationary nature is a result of its design. Each transaction on the XRPL incurs a fee, which is subsequently burned, reducing the total supply over time. This mechanism is originally intended to combat spam transactions, but it could also support the asset’s value by creating scarcity.
The recent disclosures have been met with enthusiasm from the community. With over 193 AMMs established in less than three weeks since the feature went live, the XRPL ecosystem is fast gaining traction. The creation of more AMMs could equally bolster liquidity and help with XRP burns.
