Ripple’s newly launched stablecoin, RLUSD, has generated significant buzz within the XRP community, especially after securing regulatory approval from the New York Department of Financial Services (NYDFS). The stablecoin’s debut on four exchange partners has further piqued interest, but some market participants have raised concerns about potential price volatility. To clarify, prominent XRPL validator Vet has explained how RLUSD’s design ensures it will always maintain its $1 peg, debunking misconceptions about its price fluctuations.
RLUSD’s Stability Mechanism Explained
Vet recently addressed the confusion surrounding RLUSD on social media, explaining the mechanics that keep the stablecoin tethered to the dollar. Central to this is Ripple’s minting and redemption process.
WHY is it that $RLUSD will always come back to a $1?🤔
— Vet (@Vet_X0) December 16, 2024
If 1 RLUSD is trading for $589 then everyone will mint with Ripple – RLUSD for a 1-1 dollar conversion and sell RLUSD, the sell pressure will be huge until RLUSD is trading close to $1.
Opposite. If 1 RLUSD is trading for…
Vet pointed out that if RLUSD were to trade above $1, for instance, at $589, institutions could mint RLUSD at a 1:1 dollar conversion rate from Ripple, sell it at a higher price, and generate profits. This would create sell pressure, which would naturally drive the price back to the $1 peg.
Conversely, if RLUSD were to fall below $1, say to $0.589, buyers would immediately purchase it at a discount, redeeming it for $1 from Ripple. This buying pressure would push the price back up to $1, maintaining its stability. This self-correcting mechanism ensures that RLUSD’s price remains anchored to the dollar, barring any disruptions to Ripple’s minting and redemption process. This design is critical, especially given the high-profile depegging issues experienced by other stablecoins like TerraUSD (UST).
Also Read: Ripple’s RLUSD Stablecoin Launch, What It Means for XRP’s Future and the Stablecoin Market
RLUSD’s Role in Boosting XRP Liquidity
In addition to maintaining price stability, Ripple’s RLUSD is expected to significantly enhance liquidity on the XRPL network. According to Ripple CTO David Schwartz, RLUSD will help expand the use cases for both RLUSD and XRP, boosting on-chain liquidity. This development positions XRP as an even more viable bridge currency, enabling seamless value transfers across different assets.
Since the idea of $RLUSD many months ago to launch in a matter of hours, I’ve been looking forward to more use cases realized on the XRPL and more liquidity on-chain with a trusted stablecoin like RLUSD. Countless opportunities are here for devs and users who want the benefits of… https://t.co/3D5FGWuXkr
— David "JoelKatz" Schwartz (@JoelKatz) December 16, 2024
XRP community figure WrathofKahneman (WOK) also highlighted RLUSD’s potential, noting that its increased liquidity will make XRP more functional, especially in bridging between assets. As more currencies are integrated into the XRPL, this functionality will only grow, further cementing XRP’s role in liquidity provision.
While RLUSD’s launch may lead to short-term market movements in XRP’s price, these fluctuations will reflect market sentiment rather than the direct impact of RLUSD’s use. As of now, XRP is trading at $2.57, marking a 7.33% increase in the last 24 hours.
Ripple’s RLUSD stablecoin, with its self-correcting price mechanism, will not only remain pegged to the dollar but also contribute to enhanced liquidity on the XRPL. This makes RLUSD a reliable stablecoin and a valuable asset for XRP, creating new opportunities for liquidity and bridging within the ecosystem.
Disclaimer: The information in this article is for general purposes only and does not constitute financial advice. The author’s views are personal and may not reflect the views of Chain Affairs. Before making any investment decisions, you should always conduct your own research. Chain Affairs is not responsible for any financial losses.
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