The market maker and liquidity pools are technically two separate features and it is possible to interact with one without the other. In order to create a spot market price (the price you see quoted in the stock market when you use your brokerage account), there needs to be an entity that is constantly buying and selling that stock. This is called market-making and is typically done by a company. They make a profit on every trade by buying and selling the same stocks at different prices (the spread).

For regulatory reasons, Lofty cannot provide this market-making service ourselves. As a result, the best alternative is to use components of “decentralized finance (DeFi)” to do this. The DeFi approach works very similar to the traditional market-making approach. But, instead of a single party or company, the market-making is conducted by an Algorithm. Instead of the market-maker providing the funding for market-making, the Algorithm relies on random people on the internet to provide funding through the “liquidity pools”.

By staking assets into the liquidity pool, you’re effectively lending assets you own (property ownership, USDC, or both) to the algorithm. The algorithm will then use the USDC funds to purchase property tokens and sell the property tokens in exchange for USDC by directly trading with users who initiate “market orders” instead of “limit orders”. Instead of a spread, the algorithm will charge a fee on top of the standard Lofty trading fee.

This fee is the revenue it earns for market-making, which is then passed on to people who have lent assets to the liquidity pools, allowing them to earn a yield for lending out their assets—this is where the APR values are derived from. For the first time, one can provide liquidity for the trading of real world assets as opposed to assets that derive value from purely digital means and speculation.

As a result, one can interact exclusively with the PMM by only buying and selling property tokens through “market orders”, without ever staking (lending) their assets. Conversely, one can also exclusively provide liquidity by lending out their assets through staking and never actually interact with the PMM through “market orders”. It’s extremely flexible and your interactions with the new features are opt-in only. Traditional limit orders will still exist at at launch and the PMM won’t interact with those orders by design. In a future iteration, the PMM will directly be able to trade against open limit orders.

All fees charged by the PMM will be displayed on the order page when a user goes to confirm the trade. All lending yields will be displayed on their respective liquidity pools. There can be a penalty (sometimes large, on a sliding scale) if one tries to un-stake or withdraw liquidity when there is already an imbalance of liquidity in the pool. The penalty is paid out as rewards to other people who’ve lent assets to the pool as an incentive to not remove their liquidity. The last person in a pool receives substantial amounts of additional rewards and yield. This helps prevent capital flight leading to volatile asset prices. It’s one of the main risks of staking/lending out your assets with traditional AMM (Automated Market Maker) architectures.

Staking property tokens allows you to receive rent for the property and still receive yield from staking, thus potentially boosting your overall returns, but your ownership in the property will fluctuate as your assets in the pool may be bought and sold over time, so your rental returns will also fluctuate along with your ownership. In an extreme scenario, you may temporarily only be earning yield from lending your assets and none from rental income. In the opposite end of that extreme scenario, you may receive nearly all of your rental income plus any yield from lending, thus allowing your overall return to be higher than what’s historically been possible by investing in a rental property alone. Whether you’re comfortable to increase your risk in exchange for increased reward is entirely up to you.

There is code in the smart-contracts to enforce the max staking of 20% of a property’s circulating token supply in the pool, so it will be first come first serve. If a pool is already full, you can attempt a deposit in the future when someone else removes their property tokens from the pool. There is no limit to the quantity of USDC that can be staked in a pool. Users buying and selling through the “market” order will also see slippage if they make a large order relative to the supply in the pool. This means that their order volume was so large that it will “move” the market-price from that single order. As a result, it’s important to be aware that you may not receive the same quoted price per token if your order is large enough to encounter slippage.