Ripple CTO David Schwartz has provided insight into the process of burning liquidity provider (LP) tokens in XRP Ledger (XRPL) automated market makers (AMM).
Before delving further, it might be essential to understand the role of AMMs and LP tokens.
Automated market makers (AMMs) are smart contracts that provide liquidity in XRP Ledger’s decentralized exchange. Those who deposit assets into an AMM are known as liquidity providers (LPs) and receive “LP tokens” from the AMM.
An AMM holds two different assets: at most one of these can be XRP and one or both can be tokens. Each AMM allows users to swap between these assets at an exchange rate determined by a formula.
What happened?
Neil Hartner, a senior staff software engineer at Ripple, shared an important insight on AMM accounts on XRP Ledger.
Hartner pointed out that AMM accounts on XRPL have the “DepositAuth flag” enabled, which means no one can send XRP or token payments to these accounts. It emphasizes the importance of avoiding accidental payments while also implying that an AMM account can never receive token airdrops from issuers.
The “DepositAuth flag” mentioned by Hartner refers to deposit authorization, which is an optional account setting in XRP Ledger. When enabled, deposit authorization prevents all transfers from strangers, including those of XRP and tokens.
You can burn LP tokens by overpaying in the slot auction. You should do it this way because you want to ensure the pool valuation is correct.
— David “JoelKatz” Schwartz (@JoelKatz) April 7, 2024
Hartner’s post drew several responses, including one from an X user who speculated on how XRP burns occur in a bid by projects to “burn” LP tokens.
David Schwartz, the Ripple CTO and one of the original developers of XRP Ledger, joined the conversation, outlining the proper way to burn LP tokens.
“You can burn LP tokens by overpaying in the slot auction. You should do it this way because you want to ensure the pool valuation is correct,” Schwartz wrote.
The Ripple CTO’s suggestion was taken note of and Hartner concurred, stating that sending the tokens to a burner account will only burn a portion of the pool’s assets.
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