A ripple in the Ripple ecosystem caught attention this week as Ripple USD (RLUSD) temporarily broke its 1:1 peg with the U.S. dollar. The stablecoin, designed to maintain a consistent value, experienced an unexpected surge, briefly trading at $1.04 – a 4% increase that raised eyebrows across the XRP community.
The event did not go unnoticed, even if it was short-lived. Ripple’s Chief Technology Officer David Schwartz, explained that this was because of the dynamics of the XRP/RLUSD market. He said that this unusual event probably happened because of a thin market structure, where a sudden increase in XRP’s price can affect RLUSD valuations.
RLUSD, which was launched in December 2024, is Ripple’s stablecoin initiative, which is backed 1:1 by reserves held. It operates on the XRP Ledger and Ethereum, and it is designed to provide liquidity and support for Ripple’s financial ecosystem.
But the fact that it is linked to XRP’s movements shows how tricky stablecoin behaviour can be in volatile environments.
My bet is that it’s looking at a thin XRP/RLUSD market only. When the price of XRP goes up, it will temporarily drag the price of RLUSD up with it until offers on that market can re-adjust. (And vice-versa if XRP’s price goes down.)
— David “JoelKatz” Schwartz (@JoelKatz) January 16, 2025
Solution?
Meanwhile, the XRP Ledger community is getting ready to vote on creating an Automated Market Maker (AMM) pool for XRP/RLUSD. AMMs rely on liquidity pools to make decentralized trading possible, so they could be really important in dealing with problems like this.
AMMs use something called an “algorithmic pricing model” to keep liquidity going, so they can stop prices from going up and down too quickly.
But it is not a quick fix. The vote is set for two weeks from now, so the market will have to manage without this mechanism for the time being. But the proposed AMM pool is seen as a step toward making the stablecoin’s performance better when things are changing rapidly.
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