Ripple’s Chief Technology Officer (CTO), David Schwartz, has spoken out about the process of burning liquidity provider (LP) tokens in the XRP Ledger (XRPL) automated market makers (AMM). AMMs are smart contracts that provide liquidity in XRP Ledger’s decentralized exchange, and LP tokens are received by liquidity providers who deposit assets into an AMM.
Ripple engineer Neil Hartner recently highlighted an important aspect of AMM accounts on XRPL, noting that these accounts have the “DepositAuth flag” enabled, meaning that no one can send XRP or token payments to these accounts. This flag is a deposit authorization setting in the XRP Ledger that prevents transfers from strangers. Consequently, AMM accounts cannot receive token airdrops from issuers.
In response to Hartner’s comment, a user speculated about how XRP burns occur in an effort to “burn” LP tokens. David Schwartz joined the conversation, explaining the proper method to burn LP tokens. He suggested that LP tokens can be burned by overpaying in the slot auction, as this ensures the accuracy of the pool’s valuation.
Schwartz’s suggestion was acknowledged by Hartner, who agreed that simply sending the tokens to a burner account would only burn a portion of the pool’s assets. The conversation sheds light on the intricacies of burning LP tokens and the importance of properly valuing the liquidity pool.