Loaf Liquidity Provider
What is the Loaf Liquidity Provider?
The Loaf Liquidity Provider (LLP) is a vertically integrated market maker that is purpose built to provide liquidity to the physical assets listed on Loaf Markets.
LLP can be broken down into three components:
- The Fair Value Engine (FVE)
- The Market Making Engine (MME)
- The Risk Management System (RMS)
The fair value engine
The FVE produces a live fair value estimate for every listed asset in real-time, which the Market Making Engine quotes around. The estimate combines market action with a proprietary pricing model built for assets that have never had a live price: hedonic features and fundamentals read against decades of comparable sales, macro conditions, real-time news.
The market making engine
The MME quotes firm, two-sided prices on every listed market throughout the trading day. Its strategies were built specifically for markets with no reference price, no hedging venue, and no trading history. It is designed to remain present on both sides of the book in conditions that would drive a conventional desk out.
The risk management system
LLP uses proprietary in-house algorithmic strategies to manage its positions, price the risk it carries and optimise long-term yield, all in balance with its mandate to provide continuous liquidity.
With no conventional venue to hedge in, LLP carries real exposure to every asset it quotes, with conviction grounded in its pricing model. The system also prices in each asset’s Dynamic Coupon: the carry for holding the asset changes as its price fluctuates from its most recent public property valuation.
Making markets where no price exists
Loaf’s assets have no external market. There is no reference price to quote from and no external venue to hedge in. Every previous approach to on-chain liquidity assumes at least one of those exists. LLP is built for the case where neither does: it computes its own fair value, and it creates liquidity rather than sourcing it.
Because no hedge venue exists, LLP does not hedge externally. Inventory is managed through novel strategies built on conviction and the carry on the Dynamic Coupon.
What this means for traders
Depth to trade against from day 0. Every listed market carries a standing two-sided quote throughout the trading day. For an asset class that has historically taken months to enter and exit, the position is seconds away in either direction.
An open book. Any participant may quote, trade, and compete with LLP, including running their own valuations against it. Disagreement is the point.
How the LLP is funded
LLP trades with Loaf’s own capital. Like any market making system, LLP can lose money on its positions. Position limits, capital sizing, and the Reserve Fund are designed so that quoting continues through adverse dislocations.
The LLP vault
Coming soon: a vault through which users will be able to deposit alongside LLP and share in its market making returns and yield from carry. Details will be published ahead of its launch.
Custody and segregation
Users hold their own assets. Tokens settle on-chain to the user’s own wallet. LLP has no access to user funds. Its trading capital, the Reserve Fund, and user assets are segregated at all times.