Balancer LBPs and the Akita Inu Saga
Balancer LBPs: How to sell a token that does not have deep liquidity without negatively impacting its value.
In 2021, Vitalik Buterin received a large number of dog tokens. On May 12th, 2021, he sent 49 trillion Akita Inu tokens ($AKITA) he received to Gitcoin’s multisig wallet. Vitalik received numerous tokens in the past from founders of various meme coins, who aimed to promote their projects through him. Previously, he ignored unsolicited airdrops, but in this case, he decided to donate them to charities, one of which was Gitcoin.
Gitcoin offers grants to fund open-source projects and public goods. At the time, the tokens were worth around $5M. However, the Gitcoin community faced a difficult problem after receiving the tokens. They had to decide whether to sell despite potentially high slippage or hold the tokens. Gitcoin had to create a strategy that allowed them to benefit from the $AKITA tokens without negatively impacting the token price.
Even if the Gitcoin community decided to sell the tokens, there needed to be more market depth to sell without causing the price to plummet.
Alex Van de Sande (@avsa), who was working at Balancer at that time, wrote a proposal on the Gitcoin forum to create a promising strategy for both the Akita and the Gitcoin communities.
Enter Balancer LBPs
Balancer Liquidity Bootstrap Pools (LBPs) are pools that allow for dynamic adjustment of token weights over time.
LBPs typically consist of two types of tokens: a “project token” that is being sold and a “reserve token” which is usually a stablecoin or WETH. Initially, the project token has a much higher weight compared to the reserve token, with a ratio as high as 99% to 1%. This leads to a high initial price for the project token and provides an opportunity to sell it for up to 100x the value of its seed funds.
The high initial weight of the project token allows for a starting price that is greater than the expected market value, which will gradually decrease until it reaches a price equilibrium. This self-adjusting pricing mechanism is why LBPs are used for fair token launches. They give everyone an equal opportunity to participate and eliminate incentives for bots or whales to buy early and manipulate the price.
Fjord Foundry is a platform for Fair Launch Auctions (FLAs) — a simple crowdfunding mechanism that enables projects and ideas from across the world to raise money from individuals without barriers to entry. Fjord makes it easy to create and use Balancer LBPs through their intuitive user interface.
What Happened?
Gitcoin locked the dog coins in a Balancer Liquidity Bootstrapping Pool (99% AKITA — 1% WETH) created through the Fjord Foundry platform. This strategy required very little capital and created a market for AKITA. The pool was programmed to slowly invert ratios over one year to a pool that is 99% WETH-1% AKITA. The gradual sale of AKITA created selling pressure that was slow and predictable. This increased the liquidity of the token. Also, the pool generated additional revenue from swap fees (0.5%) for swaps conducted through the pool.
LBPs differ from other pools because they can maintain a gradual token weighting decrease until they reach their target. This means that the pool sells AKITA but also buys AKITA for ETH to sustain this declining ratio.
The Result
On the 19th of December 2022, Gitcoin’s Akita LBP ended. 23,437,196,448,684.83 $AKITA tokens were released, and 3,812.98 WETH was accrued. Using Balancer’s LBP, Gitcoin slowly turned a large donation of Akita into almost 4M ETH. This conversion happened without dumping the AKITA token, creating a win-win situation for the Akita and the Gitcoin communities.
“Previously to conduct a large token divestment one would need to spend time and resources to find an OTC deal or sell directly into a liquidity pool, potentially hurting the token’s community in the process. Gitcoin’s AKITA divestment conducted through Fjord Foundry has proven that an LBP is a powerful alternative solution. The divestment LBP was set up through our UI in a matter of minutes and proved that LBPs are very effective at pushing an existing market to gradually absorb a large token distribution over time while maximizing returns for the seller as well as mitigating the sale’s effect on the token’s community.” — Ri, Product Lead at Fjord Foundry
Closing Thoughts
The Gitcoin LBP shows how easy it is for projects launching LBPs on Balancer Protocol to sell a token without negatively impacting its value and break records. It is also a display of a much more fundamental element of how permissionless protocols enable people to coordinate around a shared purpose. LBPs are a platform for fair token launches. Projects are substantially better funded and their governance tokens are better distributed amongst the community. As a result, the tokens remain in the hands of those interested in the project long-term.
To learn more about how you can build your own LBP on Balancer, check out the documentation at https://docs.balancer.fi/.
About Balancer
Balancer’s mission is to accelerate innovation in DeFi by providing access to secure infrastructure for liquidity applications. As a core building block of DeFi, Balancer Protocol is community-driven, reliable, open-source, and permissionless. Build on Balancer to create new, innovative types of pools and financial dApps.
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About Fjord Foundry
Fjord Foundry empowers project teams to openly and fairly bootstrap an engaged community through Balancer Liquidity Bootstrapping Pools (LBPs), offering an intuitive user interface for LBPs.
This article is for informational and educational purposes only. It should not be construed as investment or trading advice or a solicitation or recommendation to buy, sell, or hold any digital assets. Transactions on the blockchain are speculative. Carefully consider and accept all risks before taking action.
