An Evaluation of the XRP Ledger AMM

‍Automated Market Maker (AMM)

An AMM is a decentralised exchange (DEX) mechanism that allows digital assets to be traded automatically using liquidity pools rather than a traditional market of buyers and sellers. In most existing DeFi platforms, AMMs are implemented as smart contracts on blockchains like Ethereum. These smart contracts hold liquidity pools of two or more tokens and set prices according to a mathematical formula.

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In contrast, the proposed XRPL's AMM will be integrated directly at the ledger’s consensus layer and protocol level, promising higher efficiency and lower costs by taking advantage of native transaction speed. This consensus layer and protocol-level implementation on XRPL distinguishes it from smart contract-based AMMs by potentially offering faster transactions and reduced fees, which is particularly beneficial for DeFi applications.

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AMMs at the Consensus Layer and Protocol Level vs Smart Contracts-Based AMMs

The research titled "Automated Market Maker on the XRP Ledger" by Firas Dahi, Walter Hernandez, Yebo Feng, Jiahua Xu, Aanchal Malhotra, and Paolo Tasca, from University College London, Exponential Science Foundation, Nanyan Technological University, and Ripple Labs Inc., compares XRPL-AMM's performance with established AMMs like Uniswap, demonstrating XRPL-AMM’s potential for greater efficiency in various areas including slippage reduction, price synchronisation speed, and operational efficiency. These results seem to originate from the XRPL-AMM’s implementation at the consensus layer and protocol level, which may allow it to leverage XRPL's efficient transaction capabilities. Additionally, from the testing results, the XRPL-AMM seems to benefit from introducing a Continuous Auction Mechanism to encourage arbitrage for better price synchronisation with external markets.

Considering the lack of existing AMMs implemented at the consensus layer and protocol level, the XRPL-AMM contributes to the growing DeFi field by offering a potentially efficient alternative to current AMMs. Moreover, the work of Firas Dahi, Walter Hernandez, Yebo Feng, Jiahua Xu, Aanchal Malhotra, and Paolo Tasca may represent inaugural research in testing and comparing consensus layer and protocol-level AMMs, while encouraging further research in XRPL-based DeFi ecosystems.