Behind the Scenes of the XRPL DEX

If liquidity is the lifeblood of crypto, then the decentralized exchange (DEX) is the beating heart at the center of the XRP Ledger (XRPL)—pumping fast, low-cost and expansive liquidity throughout the network.

The world’s first established decentralized exchange, the XRPL DEX enables anyone on the ledger to directly and efficiently buy, sell or trade any asset—including stablecoins, XRP, other digital assets and physical units of value like gold—without using an intermediary such as a bank or other financial institution.

Powerful Matching Engine

In the simplest of terms, the XRPL DEX is a central limit order book.

Sellers set prices for assets, buyers issue purchase orders, and the DEX matches the two to finalize transactions. Because there is no central party, all orders are treated equally and fairly, giving every participant the same rate, thus, the same opportunity.

But the DEX also has a superpower: its ability to automatically find a currency or token pair—either directly or by using the XRP Ledger’s native XRP as a bridge currency—at the lowest possible price. For example, if someone issues a non-fungible token (NFT) for sale in U.S. dollars (USD) but the buyer wants to purchase it using Korean won (KRW), the DEX automatically charts the least expensive trading path between the two currencies—for example, from KRW to XRP and then to USD.

This capability is rooted in two core features of the DEX: pathfinding and auto-bridging.

As the name implies, pathfinding is the ability to hop between currency pairs with the most liquidity—essentially finding a path from the seller to the buyer—through the exchange from the unit of value on one end of the transaction to the other. This also provides a powerful cross-currency payment capability where XRPL users can pay with any asset, deliver any asset to the recipient and use combinations of paths to provide a better exchange rate.

Auto-bridging is the use of XRP as an intermediary to connect the order books of two different currencies or tokens at the lowest cost. This is useful when executing an exchange in which one currency pair does not have enough liquidity to transact at competitive rates.

Key Benefits of the XRPL DEX

Most other ledgers lack a built-in decentralized exchange, making the symbiotic relationship between the DEX and XRPL both rare and powerful. Users and developers alike gain from the combined advantages of the XRPL DEX when executing transactions, managing decentralized finance (DeFi) applications and more.

In particular, the DEX benefits from the XRPL’s inherent advantages of speed, cost and sustainability. Transactions are executed within 3-5 seconds at a high throughput (1,500 transactions per second) and at only a few cents per transaction—placing and matching orders on the DEX can be executed in seconds and at low costs as well. The use of order books to provide high liquidity is only practical due to these low costs, low latency and high throughput.

The XRPL is also carbon-neutral and uses a validation and security algorithm called Federated Consensus which is more energy-efficient than proof-of-work blockchains. This removes the possibility of Miner Extractable Value (MEV) due to the consensus mechanism. Moreover, XRP Ledger uses a shuffle algorithm to create a deterministic, pseudo-randomly ordered list of transactions, thus it is difficult for participants to front-run transactions.

Crucially, the XRPL creates its own virtuous circle of liquidity by allowing anyone to issue a token. An increasing number of tokens representing currencies, valuable metals and more all translate into more available assets for trading on the XRPL’s native DEX. In turn, the more than 5,400 tokens traded or issued on the XRPL DEX to-date helps to increase the overall utility of the DEX, leading to the issuance of even more tokens.

Beyond its ease of use and custom tokenization advantages, developers also benefit from a robust and active community within the overall XRPL ecosystem.

How to Access the XRPL DEX

With the XRPL DEX, users can exchange tokens for XRP or other tokens*, with minimal fees. Getting started is simple: users need only connect their XRP wallet—whether a “hot” wallet like XUMM or a “cold” wallet like Ledger—to the XRPL DEX.

Interested traders can find XRPL gateways that support their assets or create their own gateway. Current gateways -- businesses that provide a means for moving value in and out of the XRP Ledger and to the XRPL DEX -- include Sologenic, onXRP, and GateHub, as well as a number of other direct integrations.

The Future of the DEX

Ripple, as one contributor to the XRPL developer community, continues to introduce feature and performance enhancements to the DEX. Currently, Ripple engineers are designing a proposal for a native automated market maker (AMM) that would allow for fast, low-cost token swaps and lower impermanent loss through a novel auction mechanism. A unique AMM implementation could also allow those who provide liquidity for AMMs to yield a large share of the profits that are normally taken by arbitrageurs—in addition to returns earned from trading fees. If implemented, liquidity providers and traders alike can benefit from more customizable orders, better pricing by liquidity aggregation across different DEXes and a better user experience.^*

Ultimately, these changes could help the XRPL leapfrog other DEXes and enhance the enormous advantages the XRPL DEX already offers to traders, liquidity providers and developers. But whether today or tomorrow, the DEX will always deliver on the promise of fast, affordable liquidity.

Developers should review the appropriate documentation to learn how to begin building on top of the DEX.

^{* Subject to applicable laws and regulations}