On March 2, an XRP Ledger validator issued a warning to XRP holders about the use of yield strategies to earn returns. He warned about the custody and counterparty risks associated with them.
The token holders are now deploying their tokens to decentralized finance (DeFi) applications at a faster rate. This comes amid continued market volatility.
Validator Vet said many investors are pursuing potential returns from their token yields without taking the time to research where the yields originate. The warning follows increased adoption and integration of XRP into both wrapped and staked structures.
Questions About Custody
X user @JamesDula82 asked about who has control over the tokens held in deposits by yield platforms, referencing the custodial role of Xaman and Upshift. He also wondered if it was the wallet or some other third-party protocol that was holding the users’ assets.
In response, Vet referenced documentation related to the custodial roles of these companies. But he still emphasized that investors should read all the fine print. They should understand the terms of each platform before they commit funds to a particular yield strategy.
Vet used the analogy of making a transaction without understanding what you are agreeing to do to describe unchecked deposits into a yield program. Some commenters recommended that investors diversify their investments across multiple yield programs to minimize the level of exposure to any one specific program.
Developers of the XRPL have also proposed a side chain for derivatives trading, including options and leveraged trading. This would enable additional financial functions to exist within the ledger.
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Flare Increases Access to XRP DeFi
According to X user XFinanceBull, more than 107 million FXRP are currently locked on Flare. The integration of Flare and Xaman makes it possible to access the token’s DeFi vaults through a single transaction. Users do not have to bridge the assets off-chain first.
Regarding this activity, Flare CEO Hugo Philion reported that over three million tokens were bridged onto the Flare network within a 24-hour window. Currently, the total amount of FXRP available to be unlocked in the Flare network exceeds 114 million tokens.
Token Yield Revives Risk Debate
Industry commentators previously cautioned investors regarding high-yielding products for this coin. This followed a series of major failures of lending programs. The commentators argued that transparent custody and adequate insurance coverage were far more important to investors than the headline-grabbing returns provided by such products.
As shown in CoinGlass data, the token’s open interest is approximately $2.15 billion, decreasing by 3.4% in the last 24 hours. However, long positions are still prevalent. Additionally, funding rates are positive.
This indicates a number of traders are using leverage to support their long positions in the coin’s perpetual market. Recent liquidations also indicate that long positions are responsible for the majority of the forced closures in the derivatives market for this token.
Source: CoinGlass
Usually, staked and wrapped XRP will require the use of smart contracts, bridges, and other external parties to operate. The proposed derivatives layer is expected to provide liquidity and margin for investors. It will also create leverage and margin calls in addition to the custody risks that already exist.
This token is transforming from a single-spot product to a multi-product DeFi asset. This allows long-term holders to generate revenue through both yield and derivatives. At the same time, it is changing the overall risk profile of the asset compared to spot holdings that are self-custodied.
Why This Matters
XRP’s evolution into a yield and derivatives-based DeFi asset is increasing its utility and creating new forms of risk, including layered custody, leverage, and counterparty risk.
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