If you’re curious about how our liquidity pools work in more detail, you can always refer to our learn center here.
But in general you can think of these liquidity pools as vaults that exist on the blockchain. They take in two types of deposits, one being the actual ownership of a property, denoted by their representative tokens (the base tokens), while the other being USDC (USD but on the blockchain, the quote tokens).
When a user on Lofty’s platform makes trades on a property using the “market” order type, they trade with the proactive-market-maker (PMM), which is just an algorithm that mimics a market-maker. When a user sells ownership in a property, the PMM will borrow USDC from the liquidity pool and use that to complete the sell order for the user. In the reverse scenario, when a user purchases tokens using the “market” order type, the PMM will borrow property tokens to complete the buy order with the user.
The upside for users interacting with Lofty’s real estate platform is they get to buy and sell real estate without needing to wait for a traditional counterparty, making their transactions instantaneous. Consistent, instant liquidity for real estate has never existed before in human history, but it’s now possible and has upgraded the real estate purchase/sale experience to be on par with buying a share of Apple or Tesla stock on your phone.
Anyone can interact (deposit/stake) with these liquidity pools on Lofty at https://amm.lofty.ai and every property has its own unique pool.
The benefit to real estate investors is obviously—instant liquidity for real estate transactions. For Lofty, we can provide this unique value proposition without using any of our own capital to provide market-making services, which is great for us and allows this to be highly scalable alongside the consistent number of new listings being added to our marketplace each month. But what’s in it for the people who deposit/stake in these liquidity pools?
People who stake receive compensation in the form of rewards from the pool. When users trade on Lofty with market orders, they pay an additional fee to access instant liquidity. This fee is passed on wholly as rewards to stakers in the pool.
As a result, the rewards are generated from trading fees (a real world business activity) and the more trading volume a property has, the higher the rewards for that property’s liquidity pool.
Just like any legitimate financial mechanism, there is no such thing as free lunch—meaning there are risks to staking and interacting with the liquidity pools.
The first risk is known as impermanent loss. This is most easily illustrated through an example. Imagine you’ve staked 1,000.00 USDC into a pool, and that’s all the funds available in the pool. Then someone sells some real estate using a market order for 200.00 USDC. The PMM will have borrowed 200.00 USDC from the pool to make the transaction. Now, there are only 800.00 USDC left in the pool. What happens if you want to withdraw your entire principal? You physically cannot anymore until the pool is rebalanced, because the best you can do is take out the remaining 800.00 USDC.
A pool relies on both buy orders and sell orders to balance. If people only purchase a property, but never sell, then the base tokens will have a shortage. If people only sell, and no one buys, then the quote tokens will have a shortage. There are two ways to correct this imbalance; the first method is when people make more orders on the other side of the trade and the second is when more staking is done for the side of the pool that has a shortage.