The Chief Technology Officer (CTO) of Ripple, David Schwartz, recently disclosed a new method of burning liquidity provider (LP) tokens for any automated market maker (AMM) on the XRP Ledger (XRPL).
The concept of incinerating LP tokens has gained significant attention since the introduction of native AMM functionality on the XRPL. In less than three weeks since the launch of AMM functionality, there are now 193 AMMs operating on the XRPL.
One key factor in the discussions about burning LP tokens is the DepositAuth flag on XRPL AMM accounts. This security feature prevents unauthorized transfers to an account, including XRP and other tokens. Essentially, only pre-approved accounts can send funds, or the account itself must initiate a transaction to receive funds.
Neil Hartner, a senior Software Engineer at Ripple, highlighted the presence of the DepositAuth flag on AMM accounts, which prevents the transfer of XRP or any tokens to these accounts. Consequently, AMM accounts cannot receive token airdrops from issuers.
The discovery of this restriction raised questions about whether it also applies to the transfer of LP tokens to AMM accounts. TheShillVerse, an XRPL validator, suggested that this mechanism could be an ideal way to burn LP tokens.
LP tokens represent a user’s contribution to liquidity in an AMM. When a participant deposits assets to provide liquidity to a pool, they receive LP tokens that represent their share of the pool. These tokens can be used to reclaim the initial investment and any accrued fees or rewards.
TheShillVerse’s suggestion sparked further interest, leading Hartner to test the transfer of LP tokens to AMM accounts in a testnet experiment. However, deposit permissions prevented the transaction from being completed.
This prompted TheShillVerse to question the implications for projects that claim to burn LP tokens. It was speculated that these projects would need to retain the tokens in a wallet and make the wallet inaccessible, potentially resulting in the loss of the tokens.
To address the community’s curiosity, Ripple CTO David Schwartz outlined an alternative method for burning LP tokens. He explained that overpayment in slot auctions, where LPs bid for trading fee discounts, could effectively remove LP tokens from circulation and maintain the pool’s valuation.
Hartner agreed with Schwartz’s explanation, noting that transferring LP tokens to a burn account would remove a portion of the assets from the liquidity pool. However, he pointed out that this action would not increase the share of the remaining providers in the pool’s assets, making the process somewhat futile.
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