Emily Walker
David Schwartz, the CTO of Ripple, has shared insights regarding the projected trading scenario for the upcoming stablecoin RLUSD on the XRP Ledger. He pointed out that RLUSD could initially see significantly inflated prices, potentially reaching as high as $1,200, despite the stablecoin’s aim to maintain a $1 value. Schwartz attributed this phenomenon to early supply constraints, speculative interest, and the inherent market dynamics associated with stablecoins.
Potential for RLUSD to Reach $1,200
Responding to discussions in the community around an image indicating an RLUSD price of $1,200 in the Xaman wallet, Schwartz acknowledged that such a valuation could theoretically occur. He explained that “initially, there may be supply shortages right after RLUSD launches, which could lead to inflated prices.” He added that certain buyers might be willing to pay $1,200 for even the smallest fraction of RLUSD, possibly motivated by the desire to hold the very first unit. “Tools will reflect the highest price someone is willing to pay, even if it’s merely a small amount,” he noted.
Despite this potential for dramatic spikes, Schwartz insisted that “the price will ultimately return close to $1 once the supply normalizes.” He indicated that those seeking to acquire RLUSD at high prices may soon find such valuations to be temporary. “If someone wishes to spend a large sum for a tiny portion of RLUSD early on, that’s possible. However, they should not expect the price to maintain itself above $1 for long, as the market will quickly adjust,” he said.
This initial volatility is attributed to stablecoins’ underlying minting and burning processes. The minting of RLUSD involves creating new assets when demand increases, while burning refers to removing assets from circulation when demand declines. These mechanisms maintain the intended $1 peg but may lag behind actual trading dynamics, especially at launch, which could create significant initial price irregularities due to mismatched supply and demand.
Schwartz’s comments are consistent with observations he made during the Emergence conference in Prague, where he humorously mentioned potential “odd failure scenarios” during a stablecoin launch that could lead individuals to pay disproportionately high amounts just to be among the first to own RLUSD.
One hypothetical scenario discussed involved someone opting to pay $3 instead of $1 simply for the distinction of being an original RLUSD holder. While this amount is far less than the $1,200, it serves to illustrate how initial pricing anomalies could mislead buyers into thinking of the stablecoin as a speculative investment rather than as a stable currency.
“Naturally, the price would fall back from $3 to $1 once enough minting occurs,” Schwartz elaborated, highlighting the essential role of arbitrageurs in this context. These traders capitalize on significant deviations from the $1 peg by buying at a discount or selling at a premium, effectively bringing the price back to the target level.
Schwartz also urged caution against “FOMO-ing” into a stablecoin, stating, “This is not a chance for quick wealth accumulation.” Ripple’s Software Engineer Neil Hartner recalled that during its initial automated market maker phase, GateHub’s USDC was frequently priced above $2, especially during weekends when GateHub’s minting and burning functions were unavailable.
There are a lot of weird failure scenarios you might not think of when launching a stablecoin
@JoelKatz in Prague about 10 days ago. $RLUSD to the moon!
Funny stuff in this crypto space. pic.twitter.com/z71gwIJcL2—
Crypto Eri
Carpe Diem (@sentosumosaba) December 15, 2024
A crucial lesson from this situation is that stablecoins often depend on a specific entity or protocol for their minting and redemption processes. Interruptions to these operations, or constraints on liquidity outside regular hours, can lead to prices deviating from the $1 peg on certain exchanges.
Hartner pointed to Circle’s USDC depegging event in March 2023 to underscore this point. “Price discrepancies can occur if minting and burning processes aren’t continuously available. This was evident when USDC lost its peg over a weekend in March 2023 due to panic and Circle’s limited liquidity outside business hours,” Hartner explained.
One community member, Khaled Elawadi.XRP, questioned how the halting of minting or burning could disrupt the stablecoin’s value if redemptions for fiat remain at $1. He suggested there should be a consistent buy and sell price on exchanges.
Responding, Hartner clarified that the peg relies not on a universal algorithmic system but rather on the actions of traders. “You don’t simply withdraw stablecoins from exchanges; you trade them for fiat with other market participants,” he elaborated. If more stablecoins are being sold than buyers ready to purchase at $1, prices may drop on that particular exchange until traders or liquidity providers intervene.
At the time of reporting, XRP was priced at $2.40.
