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XRP Convert arbitrage pressure into auctions
In most automated market maker designs, the spread between the pool price and the external market is no different than a gift from the arbitrage trader. They earn the difference, while liquidity providers bear the loss. XRP ledgers adopt different ideas.
When the asset prices of automatic market makers (AMM) change significantly in external markets, arbitrageurs can profit from it, but this often results in losses to liquidity providers. XRPL's auction mechanism is designed to return more value to liquidity providers and more quickly bring AMM's price back into balance with external markets.
The AMM design of the XRP ledger contains an auction seat. Liquidity providers can bid for the seat by bidding LP tokens and enjoy a discounted transaction fee within 24 hours. The winning bid amount will be returned to AMM, thereby reducing the total amount of LP tokens in circulation. This reduction in supply directly benefits residual holders.
Actual operation of auction seats
Only one account can hold the auction seat at a time. However, as the winning bidder, you can designate up to four additional accounts to also enjoy the discount. If the current seat is already occupied, you must bid higher than the current holder to replace it. If someone replaces you, you will receive a partial refund of your bid pro-rata based on the time remaining.
This continuous auction mechanism allows arbitrageurs to bid at discounted prices to capture price differences, and the trading advantage is auctioned on a 24-hour cycle. Part of the proceeds from each auction will be returned to the previous seat holder, and the rest will be destroyed, effectively reducing volatile losses to liquidity providers.
Each AMM also allows its liquidity provider to vote on transaction fees based on the number of LP tokens it holds. When voting, the liquidity provider sends an AMMVote transaction, and AMM will then recalculate the fee based on the weighted average of the latest voting.
This design represents a significant structural difference from the traditional AMM model, embedding fee competition and value redistribution directly into the protocol layer rather than relying on external mechanisms.
(Source information has been concealed)
