The XRP Ledger auctions discounted trading on its own pools

Turning arbitrage pressure into an auction

In most automated market maker designs, a price gap between the pool and external markets is a gift to arbitrage traders. They pocket the difference while liquidity providers absorb the loss. The XRP Ledger takes a different approach.

When the price of an AMM's assets shifts significantly in external markets, traders can use arbitrage to profit off the pool, which can result in a loss for liquidity providers. The XRPL's auction mechanism is intended to return more of that value to liquidity providers and more quickly bring the AMM's prices back into balance with external markets.

The XRP Ledger's AMM design includes an auction slot. A liquidity provider can bid LP tokens to claim that slot and receive a discount on the trading fee for a 24-hour period. The amount of a winning bid is returned to the AMM, decreasing the outstanding balance of LP tokens. That reduction in supply is a direct benefit to remaining holders.

How the slot works in practice

No more than one account can hold the auction slot at a time, but as the successful bidder you can name up to four additional accounts to receive the discount. If the slot is currently occupied, you must outbid the current slot holder to displace them. If someone displaces you, you get a percentage of your bid back, based on how much time remains.

The continuous auction mechanism allows arbitrageurs to bid to capture price discrepancies at a discount, with trading advantages auctioned off in 24-hour periods. Proceeds from each auction are partially refunded to the prior slot holder and partially burned, effectively reducing impermanent loss for liquidity providers.

Each AMM also gives its liquidity providers the power to vote on its fees, in proportion to the number of LP tokens they hold. To vote, a liquidity provider sends an AMMVote transaction, after which the AMM recalculates its fee as a weighted average of the latest votes.

The design represents a meaningful structural departure from conventional AMM models, embedding fee competition and value redistribution directly into the protocol layer rather than leaving it to external mechanisms.

Sources
XRP Ledger Docs: Automated Market Makers
XRP Ledger Docs: AMMBid Transaction