The concept of an XRP "supply shock" has been a frequent topic of discussion, but two analysts suggest that many investors misunderstand its true meaning and implications. Phil Kwok, co-founder of EasyA, and veteran Bitcoin investor Pumpius have elaborated on the mechanics of a supply shock and how XRP's current stable price might conceal underlying structural pressures.
DeFi: The Initial Catalyst for Supply Reduction
Phil Kwok posits that a genuine supply shock originates when XRP is permanently removed from the open market, identifying decentralized finance (DeFi) as a primary driver of this process. He explains that DeFi applications lock XRP into systems from which it cannot be easily returned to exchanges. This includes mechanisms like liquidity pools, lending markets, collateral systems, and staking incentives, all of which gradually absorb tokens and decrease the liquid supply available for trading. Kwok emphasizes the significance of DeFi layers on the XRPL, stating that as these ecosystems expand, more XRP becomes locked, initiating a structural squeeze on supply.
Spot ETF Demand Depletes Exchange Inventories
Pumpius extends this analysis by detailing various real-world mechanisms that extract XRP from circulation, with spot Exchange Traded Funds (ETFs) being a prominent example. He highlights that every XRP spot ETF must acquire actual XRP tokens, rather than futures or synthetic exposures. This direct market purchase by ETF issuers reduces the available liquid supply on exchanges. As these products attract investment inflows, they steadily diminish the inventory of XRP. Pumpius clarifies that for a supply shock to materialize, this absorption rate must outpace the introduction of new tokens into circulation. Recent data indicates that XRP ETFs have already acquired $906 million worth of XRP, with inflows exceeding $850 million in a single week, effectively removing nearly 500 million XRP from public supply through these vehicles alone.
Institutional Holdings Reduce Tradable XRP
Pumpius further points out that entities such as banks, asset managers, settlement providers, and custodians typically do not engage in active XRP trading. Instead, they hold XRP for purposes such as payment rails, corporate settlement processes, or long-term treasury reserves. Once institutions take custody of XRP, these tokens are effectively taken out of the circulating pool, residing in cold storage or operational accounts rather than on trading platforms. This practice represents another method that progressively tightens liquidity. Moreover, as an increasing number of companies adopt XRPL corridors for cross-border settlements, their treasuries will begin to hold XRP as working capital, further diminishing the actively traded supply.
Controlled Escrow Limits New Supply Introduction
The disciplined approach to Ripple's escrow also plays a role in limiting new supply. Pumpius notes that Ripple has no incentive to flood the market with new tokens, and any unused XRP is systematically returned to escrow. This controlled release schedule effectively caps the net new supply entering the market.
Utility Layers Permanently Absorb XRP
Beyond investor demand, on-chain utility presents another significant avenue for long-term XRP absorption. Pumpius cites several examples where XRP is permanently integrated into functional systems:
- •Tokenized funds
- •Stablecoins, such as RLUSD
- •Liquidity pools and automated market makers
- •Payment corridors
- •Identity layers
- •Enterprise settlement rails
Each of these systems requires XRP for operation, leading to tokens being locked rather than traded. This is where the growth of DeFi, tokenization, and infrastructure development collectively contributes to supply tightening. As zero-knowledge identity systems are implemented on the XRPL, more XRP will be utilized for identity verification and proof systems. These tokens remain within functional systems, removed from trading markets. Pumpius describes this as a "structural" lock-up that further reduces the long-term available supply.
Implications for XRP Price
The combined effect of these forces—ETF demand, institutional custody, DeFi lock-ups, corporate financial flows, escrow management, and expanding utility—gradually depletes exchange inventories. Over-the-counter (OTC) desks become less liquid, and overall market liquidity thins. Consequently, buyers are compelled to compete for a shrinking pool of available XRP, which can lead to a sharp revaluation of its price. Pumpius observes that supply shocks are not typically announced; they develop gradually and often imperceptibly, revealing themselves abruptly through significant upward price movements. Both analysts suggest that the current period of market quietude for XRP is not indicative of weakness but rather represents the building pressure preceding a recalibration of XRP's value within the system.