Liquidity Bootstrapping Pool (LBP)
- 1.A team should be able to build liquidity without large amounts of upfront capital
- 2.A team should be able to create a treasury to fit their desired risk profile and funding goals
- 3.The distribution of tokens and liquidity provision should be decoupled from token price changes. In other words, differently from bonding curves, tokens should be distributed even if their unit price stays constant.
- Price discovery. The price of the token starts relatively high and drops based on a pre-configured price decay curve that can be resisted by buying pressure from LBP participants. Anyone can buy into or sell out of the LBP freely at any time, so price truly regulates itself.
- Open and permissionless participation. No whitelists, hard caps, or listing requirements. There is no minimum or maximum allocation. LBP participants choose how much they want to buy.
- Fair distribution. LBPs flip the first-come-first-serve launch model on its head. It's no longer a race where the first bot in or the transaction with the highest gas fee wins. Get your token into the hands of as many people as possible in a fair way that disincentivizes front-runners and whales getting better rates than smaller participants.
- Capital efficiency. The initial price of the project's token in the LBP can be magnified by up to 99 times relative to the collateral deposited along with it. Additionally, the collateral can be fully retrieved at the end of the LBP unless the project's tokens already exist outside of the LBP, in which case someone could decide to sell into the LBP.
LBP allows a fully customizable token distribution mechanic that gives teams more control and flexibility.
LBP is a tool designed for crypto projects to generate liquidity from a small amount of seed capital.
Unlike in the Uniswap model, where the two pair/assets in a fundraising pool must have the exact weight (50% to 50%), the weight in the Balancer’s LBP can be programmed to change over time. For example, the initial weighting of two assets during an auction could be 90% to 10%, meaning 90% of token A versus 10% of Token B. But over time, the weighting may be set to change to 60%to 10% — 60% of token A versus 40% of token B.
And it is not just the weighting ratio that changes. The price shifts as well, as users trade tokens throughout the auction, buying and selling multiple times if they see fit to do so.
The graph below illustrates how price can possibly change during an auction:
There is no fixed rule when it comes to price action. However, in the LBP model, the token of the platform raising funds usually starts with a higher price, and over time, it gradually drops because of the change of the weights between the two assets.
Assuming one buys the token until the pool time runs out, there is a theoretically continuous fall-down curve under the condition. However, every time someone makes a trade, the price will spike. (See the dashed blue lines in the image.)
This pricing model is grounded in game theory and makes it so that no one knows the best timing to buy in, not even whales. No one can foresee the final price of an auction. It could be much lower than at the beginning. Or the opposite.
Instead, investors should conduct proper research on the project and make reasonable assumptions regarding the token evaluation and trade only when the price reaches their target. Naturally, it is possible that the price rises too fast compared to one’s expectations, as other traders jump on the bandwagon, and may never return to the point a specific trader was waiting for to enter the market.
This does not mean users are out of the game, because, unlike direct token sales, investors can buy as well as sell the tokens in the pool. If a user buys at a lower price, he/she can sell the tokens back to the pool if the price rises. There is no limit to the transactions that can be made, it only costs gas and swap fees. (The swap fees are set prior to the start.)
This further highlights the need to continually consider whether to adapt one’s strategy.