How Upstream’s Market Pools Empower Issuers and Investors

By Vanessa Malone

At Upstream, we’re committed to empowering issuers and investors with innovative tools that enhance market liquidity and create fair trading opportunities. One of these helpful tools, called Market Pools (MPs), is our cutting-edge approach to automated liquidity management within Upstream’s blockchain-powered market. Market Pools support trading in stocks, other equities, and real-world assets, so that investors may confidently buy or sell across a diverse range of assets that are listed on Upstream.

How does liquidity work on traditional vs blockchain-powered markets?

Before we get into Market Pools, it’s important to note how liquidity works on a traditional stock exchange, which is typically facilitated through middlemen called market makers.

Liquidity refers to how simply an asset can be bought and sold, or how easily an asset can be converted into cash without a significant loss in value. ¹

Centralized exchanges often rely on market makers, professional traders or financial institutions, to provide liquidity for trading pairs using an automated system that ensures buy and sell orders are matched accordingly. These entities create multiple bid-ask orders to match the orders of retail traders.

Unlike centralized exchanges, decentralized exchanges (DEXs) are built to replace intermediary processes involving human intervention with smart-contracts, or code that executes automatically between parties after all pre-determined criteria are met. This autonomy allows for investor-driven markets like Upstream, which initiates trades directly. This autonomy also supports innovative liquidity tools like Market Pools.

What are Market Pools?

Market Pools are accessible under the Investor tab in the Upstream app. Each Market Pool consists of two assets: a security (ticker) and U.S. Dollars. These are deposited by traders, to act as a counterparty for buy and sell orders. An Upstream user with an MP balance of securities and US Dollars may remove their securities and U.S. Dollars from an MP at any time. Market Pools have liquidity and transparency, discoverable pricing for all participants.

On Upstream, trading liquidity is traditionally provided through a limit order book, where buyers and sellers place orders that are organized by price. Market Pools are another way to provide liquidity within the order book.

How do Market Pools work?

Here’s a breakdown of how MPs function:

  • Liquidity Provision: Any Upstream user with securities and US Dollars can contribute to an MP and withdraw their assets at any time.
  • Dynamic Balances: The assets you deposit will fluctuate based on trades executed with the MP as a counterparty. For instance, you might withdraw “more shares and less money” or vice versa, depending on trading activity.
  • Ownership & Control: Assets deposited into MPs remain owned by contributors but are subject to liens to prevent short selling, double-selling or double-spending.

Why should I contribute to a Market Pool?

MP contributors earn fees on trades executed with their liquidity. For every transaction, contributors receive 0.16% of the trade value, distributed proportionally based on their share of the pool. For example:

  • If you’re the sole contributor to an MP and a $101 trade is executed, you earn $1.616.
  • If you provide 40% of the liquidity in the same scenario, you earn $0.646.

Accrued fees are conveniently displayed under the My Pools screen in the Upstream app.

What are the benefits of Market Pools?

For issuers, MPs ensure consistent liquidity and fair pricing, boosting confidence in your securities. For investors, they create opportunities to earn fees while supporting a liquid market. Together, we believe MPs enhance the trading experience by fostering a dynamic and transparent marketplace.

Are there any risks to participating in a Market Pool?

What is Impermanent Loss?

Impermanent Loss (IL) is when the price of the securities in a Market Pool diverges from the original price when the MP deposit was made. This happens while one side of the liquidity position rises, resulting in a reduction of the other liquidity position’s value.

During each trade, an amount of either shares or money is moved inside the MP smart contract for an amount of the other side of the MP pair such that the constant product (k), (x)*(y)=(k), is maintained.

The share price may or may not return to the price you provided liquidity at. If it doesn’t return to the original price that you provided, this is considered Impermanent Loss, although the MP contributor will have more shares and less money in the MP contribution.

How do I evaluate the price my trade would get when a Market Pool is the counterparty?

It is important to evaluate the liquidity available in a Market Pool before trading. An MP with low liquidity may not give the trader a satisfactory price.

To evaluate the liquidity available in a liquidity pool, visit the Upstream market data service at https://trader.upstream.exchange/marketdata and search for the ticker symbol of the security you would like to trade.

If you want to buy shares, then add the amount of money you wish to spend buying shares to the market data “Cash Vol.” value and then divide the market data “CPF” value by this number to get the number of shares that the MP will sell for this amount of money.

  • E.g. Share Vol. = 10,000, Cash Vol. = $10,000 and CPF = 100.0m; potential buy of $100 worth of shares; add $100 to $10,000, $10,100 and then divide 100.0m by $10,100, 99.01 shares. $100, plus the 1% Upstream exchange fee, $101, buys 99.01 shares.

If you want to sell shares, then add the number of shares you wish to sell to the market data “Share Vol.” value, and then divide the market data “CPF” value by this number to get the amount of money that the MP will pay for this number of shares.

  • E.g. Share Vol. = 10,000, Cash Vol. = $10,000 and CPF = 100.0m; potential sell of 100 shares; add 100 to 10,000, 10,100 and then divide 100.0m by 10,100, $99.01. Selling 100 shares gets $99.01 minus 1% Upstream exchange fee, $98.02.

Ready to dive in?

Whether you’re an issuer looking to increase trading activity or an investor seeking to diversify income streams, Upstream’s Market Pools provide a powerful solution that you can explore.

Stay connected to hear about upcoming opportunities for traders on Upstream. Issuers interested in listing on Upstream can get started here. Investors (non-U.S.) can download Upstream on iOS or Android.

Sources: 1 Investopedia

Disclaimers:

U.S. persons may not deposit, buy, or sell securities on Upstream. Anyone may buy and sell Collectibles on Upstream.

This communication shall not constitute an offer to sell securities or the solicitation of an offer to buy securities in any jurisdiction where such offer or solicitation is not permitted. Collectibles have no royalties, equity ownership, or dividends. Collectibles are for utility, collection, redemption, or display purposes only. Anyone may buy and sell Collectibles on Upstream. All orders for sale are non-solicited by Upstream and a user’s decision to trade securities must be based on their own investment judgment.

Upstream is a MERJ Exchange market. MERJ Exchange is a licensed Securities Exchange, an affiliate of the World Federation of Exchanges, a National Numbering Agency, and a member of ANNA. MERJ is regulated in the Seychelles by the Financial Services Authority, https://fsaseychelles.sc/, an associate member of the International Association of Securities Commissions (IOSCO). MERJ supports global issuers of traditional and digital securities through the entire asset life cycle from issuance to trading, clearing, settlement, and registry. It operates a fair and transparent marketplace in line with international best practices and principles of operations of financial markets. Upstream does not endorse or recommend any public or private securities bought or sold on its app. Upstream does not offer investment advice or recommendations of any kind. All services offered by Upstream are intended for self-directed clients who make their own investment decisions without aid or assistance from Upstream. All customers are subject to the rules and regulations of their jurisdiction. By accessing the site or app, you agree to be bound by its terms of use and privacy policy. Company and security listings on Upstream are only suitable for investors who are familiar with and willing to accept the high risk associated with speculative investments, often in early and development-stage companies. U.S. persons may not deposit, buy, or sell securities on Upstream. There can be no assurance the valuation of any particular company’s securities is accurate or in agreement with the market or industry comparative valuations. Investors must be able to afford market volatility and afford the loss of their investment. Companies listed on Upstream are subject to significant ongoing corporate obligations including, but not limited to disclosure, filings, and notification requirements, as well as compliance with applicable quantitative and qualitative listing standards.

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