The prospect of generating passive income with XRP has recently taken center stage in the cryptocurrency community, thanks to new insights from David Schwartz, Chief Technology Officer (CTO) at Ripple. As excitement builds around the upcoming Automated Market Maker (AMM) upgrade to the XRP Ledger (XRPL), Schwartz has stepped in to clarify how investors can—and cannot—earn returns through this innovative feature.
With the AMM amendment now securing the necessary validator consensus, it’s set to go live on the XRPL by March 22, 2025. This milestone marks a transformative moment for decentralized finance (DeFi) on the network, opening doors for liquidity provision, enhanced trading efficiency, and new yield opportunities. However, as enthusiasm grows, so does the need for clarity.
Understanding the XRPL AMM and Passive Income Potential
At its core, the XRPL AMM introduces automated liquidity pools that allow users to trade assets directly on the ledger without relying solely on order books. While this brings efficiency and accessibility, a common misconception has emerged: that simply holding XRP will generate passive income once the AMM is live.
This is not the case.
As clarified by prominent XRPL DUNL validator "Vet," earning yield requires active participation. Investors must become liquidity providers (LPs) by depositing their XRP into an AMM pool—typically paired with another asset like a stablecoin (e.g., XRP/USD). In return, they receive liquidity pool tokens representing their share of the pool and earn a portion of the trading fees generated.
"The upcoming AMM would not provide passive income for XRP investors just for 'holding' their tokens."
— Vet, XRPL DUNL Validator
This distinction is crucial. Holding XRP in a wallet yields no returns under the AMM model. Only those who allocate capital to liquidity pools stand to benefit financially—and even then, there are risks involved.
Ripple CTO Explains Key Differences from Staking
David Schwartz, widely known in the community as JoelKatz, emphasized that earning passive income via the XRPL AMM operates differently than traditional staking mechanisms seen in proof-of-stake blockchains.
"Yes, but the mechanic is different from things like staking. To get passive income from XRP with the AMM, you have to trade your XRP for claims against the AMM pools. While they hold XRP and you can reclaim XRP on demand, you are not guaranteed to get as much out as you put in."
— David "JoelKatz" Schwartz, Ripple CTO
In staking, users often lock tokens to support network security and receive predictable rewards. In contrast, AMM-based income comes from facilitating trades—and carries exposure to impermanent loss, a phenomenon where the value of deposited assets changes relative to each other while in the pool.
For example:
- If you deposit XRP and USD into a balanced pool and XRP's price drops significantly during your participation, the pool rebalances automatically.
- You’ll end up with more XRP and less USD when you withdraw.
- Even if you receive more XRP units, their total fiat value may be lower than your initial deposit.
Schwartz further explained that whether this outcome represents a gain or loss depends on how users define value:
"It comes down to how you define value and what you compare the AMM to. For example, if XRP goes down in price a lot but you get out slightly more XRP than you put in, did you get back more or less value?"
— David Schwartz
This reframing invites a shift in perspective—especially for long-term believers in XRP.
Impermanent Loss: Risk or Strategic Advantage?
Panos Mekras, a well-known figure in the XRP community, highlighted that impermanent loss isn't inherently negative. For investors bullish on XRP’s future price appreciation, receiving more XRP units during a market downturn could actually be beneficial.
Imagine depositing into an XRP/USD pool when XRP trades at $1. Later, if the price crashes to $0.50 while your funds are in the pool, automated rebalancing increases your XRP holdings. When you exit, you might receive more XRP than you originally deposited—even if its USD value is temporarily lower.
This dynamic mirrors a Dollar-Cost Averaging (DCA) strategy: buying more assets as prices fall. For committed holders, this mechanism effectively accumulates additional XRP at discounted rates—all while earning trading fees.
👉 Learn how automated strategies like DCA can enhance your digital asset portfolio over time.
Is Liquidity Provision Truly “Passive”?
Another debate sparked by Schwartz’s comments centers on terminology: can providing liquidity truly be considered “passive income”?
Pseudonymous analyst WrathofKahneman argues yes—with caveats:
"I think it's fine to call the XRPL AMM passive income; the whole point is to turn over XRP to the machine for trading. If REITs & rentals are considered passive, surely a LP is, too? The important point is that participants are not guaranteed profit."
— WrathofKahneman
Indeed, once capital is deposited into an AMM pool, returns accrue automatically through transaction fees. There’s no need for constant monitoring or active trading—making it functionally passive in nature. However, unlike fixed-income instruments or dividend stocks, there is no guarantee of profit, and price volatility introduces financial risk.
Key Takeaways:
- Providing liquidity ≠ holding tokens.
- Earnings come from trading fees, not staking rewards.
- Impermanent loss is real but context-dependent.
- Long-term XRP believers may benefit from increased token accumulation during downturns.
Frequently Asked Questions (FAQ)
Q: Can I earn passive income with XRP just by holding it?
A: No. Simply holding XRP in your wallet will not generate returns through the AMM. You must actively provide liquidity by depositing XRP into an AMM pool.
Q: What is impermanent loss?
A: Impermanent loss occurs when the value of assets in a liquidity pool changes relative to each other. If one asset drops in price, LPs may receive more units of that asset upon withdrawal—but with potentially lower overall value.
Q: Is being a liquidity provider risky?
A: Yes. While LPs earn trading fees, they face market risk due to price fluctuations. Those uncomfortable with volatility should carefully assess their risk tolerance before participating.
Q: Does Ripple guarantee returns for AMM participants?
A: No. Ripple does not guarantee profits for liquidity providers. Returns depend on trading volume, asset performance, and market conditions.
Q: When will the XRPL AMM go live?
A: The AMM amendment has reached validator consensus and is expected to activate on the XRPL by March 22, 2025.
Q: How is AMM different from staking?
A: Staking typically offers fixed or predictable rewards for securing a network. AMM rewards come from decentralized trading fees and are influenced by market dynamics and liquidity behavior.
👉 Stay ahead of major blockchain upgrades and maximize your participation in next-gen DeFi ecosystems.
Final Thoughts
The integration of AMMs into the XRP Ledger represents a pivotal advancement in XRPL’s evolution toward a full-featured DeFi platform. While it opens new avenues for generating passive income with XRP, it also demands a deeper understanding of decentralized finance mechanics.
As David Schwartz and other experts have made clear: there is no free lunch. Passive income through liquidity provision involves trade-offs—between risk and reward, quantity and value, short-term losses and long-term gains.
For informed investors, the XRPL AMM isn’t just about earning fees—it’s about strategic engagement with a growing ecosystem. Whether viewed as yield generation or automated asset accumulation, its potential lies in how users choose to leverage it.
Disclaimer: This content is for informational purposes only and should not be construed as financial advice. The views expressed are based on public commentary and analysis and do not reflect any official endorsement. Always conduct independent research before making investment decisions.