Is This 1 Sign a Problem for XRP?

It's well known that XRP (CRYPTO: XRP) has a loyal army of evangelist investors promoting the coin's virtues. But for every highly motivated group of holders, there's liable to be those with sharp criticisms and other ideas about why buying the coin is a big mistake. And, frequently enough, the critics get it right in the end.

With that possibility in mind, there's one metric in particular that's become a bit of a talking point among those who would prefer to be short selling XRP rather than buying or holding it. Is it an actual problem that holders should consider, or a red herring?

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The numbers look pretty dire here

There are a lot of decentralized finance (DeFi) projects in the cryptocurrency sector. Whether it's sourcing opportunities for peer-to-peer loans, generating a yield from staking, or simply trading on a decentralized exchange (DEX), DeFi is a major component of most of the biggest chains.

Traffic on a chain's decentralized exchanges is thus an important metric for investors evaluating whether to make an investment in the main coin of the chain. If something fundamental like a crypto exchange isn't getting much in the way of volume, it's significantly less likely that there's enough capital flowing around on a chain to make for a decent return for investors. And that's the problem that some investors are saying applies to XRP and its ledger.

According to DeFiLlama, a crypto data aggregator, as of March 25 the 24-hour trading volume across all the DEXes on XRP's chain was a scant $57,593, with its volume over the preceding seven days totaling just $338,136. For the sake of comparison, in total XRP's 24-hour volume was close to $2.7 billion.

There are no bones about it: The DEX volume on XRP's ledger is indeed abysmally low. Practically nobody is transacting, and certainly no large players. It is unlikely that there is even enough volume to support accurate price discovery for most or all of the assets being traded. There does not appear to be any concerted efforts to change these issues.

The most obvious reason for this is that XRP's chain does not natively support basic functionalities that exchanges need, like leverage, market orders, and stop orders. While it may be possible to develop workarounds to those limitations, it is hard to imagine how that would result in a smooth trading experience for those who decided to interact with exchanges on the chain in the first place. In other words, there would likely need to be a substantial technology upgrade to XRP's ledger to address the weakness of its decentralized exchanges.

So it looks as though the critics have scored a point here. But is that point really relevant to the investment thesis for buying this coin?

The case for buying this coin remains strong

The mission of XRP is not to be a blockchain where DeFi projects can blossom. Its target users are not DeFi investors or developers. And, while exchanges can technically exist on its chain and serve a niche purpose, it isn't even intended to be a facilitator of token swaps.

XRP exists to facilitate cross-border money transfers between financial institutions. It appeals to those institutions by offering them a much cheaper, faster way to make those transfers compared to the older methods they currently use. Beyond that, it offers banks and their peers a low-hassle way of tracking and trading their real-world assets by putting them onto its blockchain. Thus far, it is broadly successful at doing what it sets out to do on those fronts.

Financial institutions aren't going to need to interact with a decentralized exchange to accomplish their goals using XRP. They won't miss the absence of those exchanges, either. Nor will they need to interact with DeFi systems generally, as for compliance reasons, as well as for the sake of more convenience, they are already deeply integrated with centralized financial systems.

Therefore, XRP's nascent DEX volume is not a reason to avoid buying the coin whatsoever, at least not in the context of the chain's ambitions and competitive positioning today. It isn't a problem at all. Keep holding your coins, and if you were thinking about buying more, understand that there's no new risk or roadblock here.

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends XRP. The Motley Fool has a disclosure policy.