The post Ripple CTO Reveals Secret AMM Trading Strategy: Get A 41% ROI On Your XRP! appeared first on Coinpedia Fintech News
In a recent series of tweets, David Schwartz, the CTO of Ripple, presented a comprehensive, yet simplified, perspective on the trading strategy adopted by Automated Market Makers (AMMs), helping investors and enthusiasts to better understand this complex subject matter.
Demystifying Price Volatility and Average Percentage Movement
Schwartz began his explanation with a hypothetical asset characterized by high volatility and a lack of significant long-term trend. This asset sees fluctuating price excursions followed by returns, such as a movement from $100 to $110 and back to $100, or a drop from $100 to $90 before returning to $100.
The CTO elucidated on a critical aspect: the average percentage movement is positive. An increase from $100 to $110 presents a +10% movement, but the subsequent drop from $110 to $100 is -9.1%. Inversely, a decrease from $100 to $90 is -10%, but the subsequent rise from $90 to $100 results in +11.1%.
“If you have an asset whose volatility exceeds its long-term trend, the average percentage movement will be positive,” Schwartz wrote. “If the long-term trend is negative, that just reduces the average somewhat. If the long-term trend is positive, that increases it somewhat.”
The AMM’s Trading Strategy
Schwartz then proceeded to explore how these dynamics relate to AMMs’ trading strategy. He suggested a straightforward trading strategy wherein an investor buys a certain amount of a stock and then continues to buy or sell the stock to keep the value of the holdings constant. This approach is believed to track the average percentage movement of the stock.
Though the trading strategy implemented by an AMM is more complex, Schwartz asserted it shares the same fundamental principle. He explained, “The trading strategy an AMM implements, though more complex than that simple one, also has this property of harvesting volatility.”
The Impact of Volatility and Fees on AMMs
Importantly, Schwartz also addressed the role of volatility and fees in AMMs’ performance. He noted that the analysis he presented primarily applies to AMMs between a fixed-price asset and a volatile asset, where the latter’s price fluctuations override its long-term trend. “AMMs work even when those constraints aren’t met, but their behavior is different,” he tweeted. “Generally it’s still pretty good as long as there isn’t a long-term negative price movement that exceeds the volatility.”
In his final remarks, Schwartz further simplified the relationship between volatility, fees, and AMMs. He tweeted, “1) AMMs charge fees when they trade. 2) Volatility causes people to trade with the AMM. 3) Thus AMMs turn volatility into fees.”
In a significant addition to his discussion, Schwartz mentioned, “The strategy is immutable, but you can remove your funds at any time. The worst-case behavior is the square root of the movement.” Explaining this further, he stated, “So if XRP doubles, your worst-case return should be +41% (square root of two, minus one).”
Also Read – Top Reasons Why XRP Price Is Flourishing Despite The SEC Lawsuit