Balancer Protocol
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Balancer Protocol

Balancer Facilitates Record-High Liquidity Bootstrapping Pool For HydraDX

How a Polkadot project executed the most successful LBP yet on Balancer

Introduction

A successful fair token launch optimally distributes initial tokens and bootstraps liquidity while deploying limited capital. It’s the objective of any serious protocol launch today.

Balancer’s Liquidity Bootstrapping Pools (LBPs) are designed to enable projects to achieve a fair launch in a permissionless way, without requiring deep pockets or complex setups by the founding team.

In this article, we review the recently successful LBP launch of HydraDX — a new cross-chain liquidity protocol operating as a Polkadot parachain.

We will examine what aspects of the LBP helped the Hydra team achieve a fair launch, the speed bumps that were hit along the way, and what we’re doing to make this experience better in the future.

LBP Primer

A Liquidity Bootstrapping Pool (LBP) is an adjustable Balancer AMM designed for initial distribution and price discovery of new assets.

AMMs are heralded as the liquidity providers of first resort, but a simple 50/50 pool weighting is not ideal for bootstrapping new projects.

LBPs leverage a dynamic weighting that shifts throughout the pool’s lifespan, creating a constant sell pressure on the token which drops its price if there is no demand.

The result is that whales are disincentivized from buying all the tokens at once at launch, giving more buyers a chance to catch the token at a fair price. Another important result is that it is not as expensive for the founding team to provide the initial liquidity necessary to facilitate the pool.

An LBP allows projects to create meaningful liquidity and distribution at launch in a capital-efficient way.

For more information on the benefits of LBPs and the juicy details on how they’re achieved (along with examples!), read our other piece — “Building Liquidity into Token Distribution”.

The HydraDX Sale

This is what an optimal token distribution should look like!

Even though HydraDX runs on Polkadot, they chose to run their token distribution on the Ethereum blockchain because of how useful Balancer’s liquidity bootstrapping pools are.

They created an ERC-20 version of their HDX token (xHDX), which will later be used to mint HDX on Polkadot.

HydraDX’s LBP ran for 3 days — from Feb 8 to Feb 11 (block 11817007 to 11836793).
It was paired with DAI and the pool weight shifted from a 92.5%/7.5% xHDX/DAI weighting to 17.5/82.5% xHDX/DAI over the course of 3 days.

The dynamic pool weight shift visualized

The result was a smashing success — they managed to sell 87% of the tokens!

This is a significant number because due to the shifting weight and limited supply, the price increases rapidly and would have approached infinity once the final tokens were relinquished. It is impossible to sell 100% of all tokens.

These mechanics and the programmed price drop were reflected in the price chart of xHDX throughout the LBP:

The price initially started dipping down when nobody was buying, but due to the tremendous buy pressure later on it kept a steady upward trajectory for the remainder of the sale with a sharp peak toward the end.

There was a very high demand for xHDX

Despite the strong demand, the price action was relatively smooth. xHDX’s lowest price was $0.032 and its highest peaked at $0.084 — a 162.5% increase which is not small by any means but would have been significantly different was the sale ran on another type of pool — e.g a Uniswap IDO.

The LBP did $48.3M in swap volume over the course of the sale. The team collected a total of 22.9M DAI, 430k of which was directly from swap fees.

The amazing thing is that the team needed to deposit just 1.2M DAI along with the 500M xHDX to facilitate this sale. Compared to a 50/50 AMM, this is 91% less DAI. In the latter case, they would have had to deposit 14.8M DAI.

Hiccups

As an evolving protocol, not everything was perfect. There were a couple of problems that made this sale more challenging.

It is important for the longevity of the protocol to recognize, admit and examine these issues, so that we (the community) can have a clear understanding of what needs to be improved upon, prioritized, and avoided in the future.

Gas

You can’t talk DeFi in 2021 without mentioning Gas, as prices have skyrocketed. Unfortunately for the xHDX community, they picked a very congested period for their sale:

The 50th percentile gas price for the last month. Source: DuneAnalytics

Because of the high gas prices across the board on the Ethereum blockchain, the average price for a swap at the time was around $70.

The Polkadot community, used to low fees, was understandably disappointed by this.

Failed Transactions

To make matters worse, a significant number (20%) of transactions failed — meaning high gas fees were spent for no reason. A total of 8805 transactions were made with 1780 of them failing.

The reason for the failure was the UI — Balancer has a configured slippage tolerance (of 0.5%) which once crossed aborts the transaction so as to not cost the buyer unwanted slippage.
Because of the high demand in the sale, this slippage threshold was frequently exceeded.

Interference

Due to the permissionless nature of blockchains, there is always the risk of unwanted actors interfering with a sale.

Shortly after the pool was deployed, some people purchased xHDX tokens from the LBP and created their own xHDX/WETH pool in Balancer to compete with the original.

This ended badly for the LPs of that pool as xHDX tokens were frozen at the smart contract level by HydraDX (which in all fairness was advertised prior to the sale). The LPs could still withdraw their WETH but their xHDX was stuck forever. Due to the nature of the pool weightings, the amount of WETH withdrawable by LPs declined rapidly as the fastest ones managed to withdraw first.

Additionally, a bot managed to front-run the sale by buying right after the contract was deployed and before the HydraDX team could disable swaps on it (which was done just one block after).

Fortunately for the team this did not raise the price by too much — 5% above the originally planned starting price ($0.0296–>$0.0312).

Next Steps

Most of the issues encountered here are already known and actively worked upon.

While Balancer is admittedly high on gas usage, it is worth mentioning that the absurd fees were amplified by Ethereum’s price being at an all-time high. The network was congested enough to record high gas fees as well.

Additionally, the failed transaction hindrance due to slippage could have been avoided by better user education.

Regardless, our product should be easy to use and not require expert knowledge of the ecosystem to operate effectively. It should also be gas efficient so that our users don’t need to rely on a confluence of factors to have reasonable fees.

Fortunately, Balancer V2 fixes these issues by:

  • dramatically reducing the gas fees
  • UX revamp — building Balancer’s GUI from scratch while incorporating successful best practices from peer DeFi projects
  • emphasis on user education, particularly around the “novice user” case

As Balancer is ever-evolving, we will continue to keep a close eye on how people are using our product, incorporate feedback and enhance the experience of DeFi. Our goal continues toward making Balancer the most secure, flexible, capital/gas efficient, and innovative AMM out there.

Meanwhile, we hope you are as excited as we are for Balancer V2, which is scheduled to launch this March!

Summary

In today’s crypto market project founders are searching for more ways to bootstrap liquidity for their new tokens in an easy, fair and capital-efficient way.

Balancer’s Liquidity Bootstrapping Pools offer projects a clear way to achieve optimal distribution of their token by giving the average community member an easy way to enter the token at a fair price without fear of front-runners snatching it up before he can.

As evident by HydraDX’s successful sale, LBPs allow teams to effectively distribute their token in a capital-efficient way while protecting against front runners and massive price spikes that would be the case with any other AMM — the result of which is even distribution of the token to the community.

While the LBP achieved its goals, there were some obstacles that made the sale less efficient than it had to be. As Balancer V2 is expected to solve most of these problems, the team continues to be heads down working on shipping the improvements this March.

We are excited to continue helping new projects make use of LBPs and watch them grow healthily afterward!

Follow Balancer

Consider yourself invited to join our fast-growing community on any of the following mediums:
Twitter | Discord | Website | Dashboard

Resources

If you are interested in learning more about Balancer, we recommend any of the following resources:

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Balancer Protocol allows for automated portfolio management, turning the concept of an index fund on its head: instead of paying fees to portfolio managers, you collect fees from traders who rebalance your portfolio by following arbitrage opportunities.

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Stanislav Kozlovski

Stanislav Kozlovski

A generally curious individual — software engineer, mediterranean dweller, regular gym-goer, coffee lover and DeFi (Balancer) contributor.

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