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How Lofty's AMM is Different From Other AMM's
How Lofty's AMM is Different From Other AMM's

Learn how our AMM is different than other existing AMM's.

Max Ball avatar
Written by Max Ball
Updated over a week ago

Lofty's AMM is custom built for real world assets.

For the first time in history, you can now stake USDC against real U.S. properties and lend your property tokens for additional return.

Lofty's AMM is actually a PMM (Proactive Market Maker).

Traditional AMMs guarantee liquidity at any price on the price curve. As a result, if there is only $50 USDC in a pool, it might price property tokens at $1.

PMM's, on the other hand, concentrate liquidity at a specific section of the price curve (lower volatility), but won't guarantee there is liquidity at any price. This means that if there is only $50 USDC in the pool, the PMM may price property tokens at $35. Then, after it buys a single token, the PMM is out of funds until more people stake or until more people buy property tokens from the pool.

The PMM and liquidity pools work on incentives. If 20% of token holders in a property are looking to sell, this drains a large amount of USDC liquidity and generates very high fees. This in turn boosts yield relative to the amount staked. Naturally, people in general will choose to deploy funds in pools with the highest yield for their assets. This means the pools that have the highest sale volume will likely attract the most amount of liquidity. The opposite is actually true. If a property is performing well and everybody wants to buy and nobody wants to sell, the yield on USDC staking for this pool will be extremely low (possibly lower than risk-free rate), leading to very low interest in new USDC staking. The incentives work together to drive liquidity where it's most needed.

The PMM we're building is more sophisticated than your standard constant product or sum AMMs that you would see in most DEX's and seeks to take the market making process from traditional stock markets, which is much more efficient and presents lower volatility, and turn it into an AMM with a decentralized liquidity pool.

  • You can stake one sided in the pool (without taking on leverage), so you do not have to always stake both sides.

  • Lower volatility relative to traditional constant product AMMs, especially during edge case conditions.

  • There is a very interesting mechanism where there is a penalty for staking assets and then immediately trying to un-stake them. The penalty fees are paid as profits to everyone else who remain staked in the pool. This disincentivizes short-term flipping and people trying to mess or manipulate the pool, but also prevents mass panic withdrawals too, because the more people withdraw to imbalance the pool, the higher the penalty fees, which means whoever decides to stay, will receive all the penalty fees as rewards. There is not always a penalty fee if the pools is already balanced, or if your withdrawal action will actually help put it into balance.

  • The risk of permanent loss is inherently lowered compared to other AMM's, because the idea of a real, physical property going to zero is very low. There is always the land value and every property has insurance coverage. In the event that a property is liquidated on the open market, the proceeds will be distributed to owners as well as stakers (on the USDC side) if the PMM has bought tokens in the pool, which has drained the USDC liquidity.

These are just a few of the interesting qualities that you don't see too often in AMMs on other platforms. Lofty has also added our own customization on top of the PMM framework to make it even more suitable for real world assets.

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