XRP has entered a new phase, as it starts to experience a self-reinforcing liquidity compression cycle. According to Stern Drew, XRP is becoming the first digital asset to create a liquidity compression flywheel. This process, driven by market mechanics, reduces XRP’s liquid supply and could significantly affect its price once the cycle reaches full speed.
How the Liquidity Compression Flywheel Works
The first stage of this cycle begins with regulated exchange-traded funds (ETFs) absorbing XRP at a steady pace. These funds remove XRP from the circulating supply, holding the tokens long-term and reducing market liquidity. With fewer XRP available on the open market, the first phase of float reduction begins, tightening the supply.
In the next phase, as more XRP moves into ETFs, the inventory on exchanges decreases, leading to lower exchange reserves. This scarcity of XRP on exchanges causes thinner sell walls, making the asset’s price more responsive to demand. With less supply available, XRP becomes more efficient in reacting to price movements.
The Role of RLUSD and ZK Infrastructure in Driving Demand
Ripple’s regulated stablecoin, RLUSD, adds another layer to the liquidity cycle. By facilitating seamless on-chain liquidity flows, RLUSD creates continuous demand for XRP as it moves through settlement transactions. This real-world utility, driven by banks and enterprises, generates predictable demand pressures that are unrelated to speculation.
Furthermore, Drew highlighted that the integration of Zero Knowledge (ZK) identity protocols unlocks enterprise-level utility for XRP. With these ZK layers, financial institutions can verify identities and ensure compliance while maintaining privacy. XRP’s role as the settlement rail for ZK-verified actions further enhances its use in regulated, high-value financial transactions.
Institutional Custody and the Final Stage
The final phase of the liquidity compression cycle involves institutional custody. As more banks and asset managers hold XRP in regulated custody, the circulating supply shrinks even further. This limited supply drives up the price, as institutional demand and reduced liquidity create upward pressure on XRP’s value.
By combining reduced supply, real-world utility, and institutional adoption, Stern Drew notes that XRP’s liquidity flywheel is set to drive significant price movement once it reaches full speed.