XRPL Feature Spotlight: The Power of Auto-Bridging
Tags: xrpl, blockchain, cryptocurrency, web3
Published: 2024-04-03 17:29:57

In the world of on-chain finance, liquidity is key! The XRP Ledger (XRPL) was built for DeFi use cases to enable a seamless flow of value transfer across multiple currencies or assets. However, in order to achieve efficient cross-asset transactions, it required solving the challenge of fragmented liquidity pools. In some cases, asset pairs involving less commonly used assets lacked direct liquidity to enable efficient exchange. It's like having Euros in the United States, but not being able to find a currency exchange to get USD.

This led to the inception of the auto-bridging feature on the [XRPL decentralized exchange (DEX)](https://xrpl.org/docs/concepts/tokens/decentralized-exchange/). The XRPL DEX is built directly into the protocol providing on-chain liquidity for numerous currency pairs. Native functionality such as [auto-bridging](https://xrpl.org/docs/concepts/tokens/decentralized-exchange/autobridging/) allows asset transfers to the XRPL to access the DEX’s existing liquidity to create synthetic order books for assets. 

## **Auto-bridging: XRP as the native and universal bridge currency on the XRPL**

While not new to the XRPL, auto-bridging is a unique feature on the DEX that utilizes XRP as the native currency to facilitate trades between any two assets on the Ledger. As the native currency on XRPL, XRP inherently is counterparty free. Auto-bridging capitalizes on this by automatically considering XRP as a bridge currency to find the most efficient trading route across assets. 

One of the key use cases for auto-bridging is enabling efficient trading of stablecoins on the XRPL. Stablecoins, which are designed to minimize volatility by being pegged to a stable asset like the US dollar, are crucial for many DeFi applications. 

Hypothetically, let's say you want to buy a EUR stablecoin using a USD stablecoin, but there isn't a large direct market between the two. Auto-bridging allows your trade to tap into liquidity from other markets by automatically finding the most efficient path for your trade, which could leverage XRP or other assets as bridge currencies. For example, depending on the market dynamics when you want to make the transaction, the feature could execute your USD-EUR trade by first converting USD to XRP, and then XRP to EUR. 

Auto-bridging also enables market makers on the XRPL's DEX to more easily scale their activity. By providing liquidity for N XRP pairs, market makers can effectively serve liquidity for the order of N^2 pairs through the synthetic combinations created by auto-bridging. If they take advantage of that technique to make markets, they can scale to cover more currency combinations on the DEX.

## **Synergies with the AMM**

Auto-bridging works in conjunction with the [XRPL's Automated Market Maker (AMM) function that just went live on XRPL mainnet](https://dev.to/ripplexdev/xls-30-live-on-mainnet-amm-integration-on-xrp-ledger-is-here-4ac4). When an AMM trade occurs on the XRPL, it can create new trading offers that are compatible with the auto-bridging feature. This means that the auto-bridging function can take into account these newly created offers when processing trades.

The interaction between AMMs and auto-bridging is complementary, with each function supporting the other. The presence of AMMs on the XRPL can potentially increase the number of trading offers available for auto-bridging to consider. Conversely, the auto-bridging feature can help AMMs by providing access to a wider range of liquidity across the network.

As more assets and applications are added to the XRPL, and with the growing use of AMMs, auto-bridging will play an important role in supporting the overall functionality and interoperability of the ecosystem. The synergy between these two features showcases the unique design of the XRPL in enabling a composable and efficient DeFi environment.

## **Optimizing Liquidity Across the Ecosystem**

Auto-bridging is a powerful innovation that addresses a key challenge in decentralized trading– the lack of liquidity in many asset pairs. As blockchain technology enables the tokenization of an increasingly diverse range of assets, the number of tradable asset pairs grows exponentially. This leads to an operational challenge in managing liquidity across all these pairs and combinations, resulting in fragmented liquidity pools. This innovative feature helps to optimize liquidity across the entire ecosystem, making decentralized trading more efficient and accessible.

Auto-bridging solves this issue by enabling XRP to serve as an automatic bridge currency  between any two assets on the XRP Ledger, regardless of the direct liquidity between them.

As more assets and applications are added to the XRPL and the introduction of AMMs, auto-bridging will play a role in ensuring a liquid and an efficient market. It showcases the unique strengths of the XRPL in enabling a truly interoperable and composable DeFi ecosystem.