Distribute Your ERC20 Token with Liquidity Bootstrapping Pools

LBP (Liquidity Bootstrapping Pools) are pools consisting of 2–4 tokens that can dynamically change the token weightings over time (e.g 1/99 to 99/1 for TokenA/TokenB). The programmatic adjusting of weights over time facilitates the lowering of the price slowly. Therefore, LBPs elongate the price discovery period and enable participants to wait for the price they think is fair to buy at.

The pool owner selects the starting and end weights of the tokens and has the ability to pause swaps. LBPs can be used to launch new tokens with a relatively small amount of capital, allowing broad token distribution, fair price discovery, and minimized volatility.

TL;DR:

• LBPs can dynamically change over time the token weightings (e.g 1/99 to 99/1 for TokenA/TokenB)
• Used to launch new tokens with a relatively small amount of capital
• LBPs allow broad token distribution, fair price discovery, and minimized volatility
• LBPs often start with intentionally high prices and decrease over time

How do LBPs work?

To understand LBPs, one first needs to know about the Dutch Auction. The Dutch Auction is an auction where the price of an item starts high and reduces over time. Once the price gets low enough, the buyers start to buy. The Balancer’s liquidity bootstrapping pools combines the thinking behind a Dutch Auction with the AMM (Automated Market Making) pricing model.

LBPs often start with intentionally HIGH prices and decrease over time. This strategy strongly disincentivizes whales, bots, front-running and speculation. When LBPs are used for early-stage tokens, this can help increase how widespread the token distribution is.

Because of the flexible weightings, projects can bootstrap liquidity with little investment. For example, a project can start a pool with a 90/10 TokenA/TokenB, and set up a pool controller to programmatically change the ratio over a period of time. At the end of the period the ratios invert. As weighting adjusts throughout the sale, retail investors get the chance to take part in the project sale at a fair price. In contrast, when using traditional 50/50 initial DEX offerings (IDOs), they suffer from increased prices caused by whales and bots.

A unique feature of LBPs is that they aim to keep a constant ratio at all times to reach its target, be it 10%, 20%, or 90%. An LBP will both sell and buy TokenA for TokenB to keep the target ratio.

Case Study — Radicle

Radicle is a decentralized code collaboration network built on open protocols. It enables developers to collaborate on code without relying on trusted intermediaries. The project also has an associated token, the RAD token.

In February 2021, the initial sale of the RAD token was done using Balancer’s LBP. The pool consisted of two tokens, the RAD token and USDC as the collateral token. The initial weights were 92.5%RAD / 7.5%USDC. Over the course of two days the weights shifted to a 50%RAD / 50%USDC.

The sale was a success, raising 24.73M USDC by selling 51% (1.9M) of the provided RAD tokens. The LBP enabled a fair distribution of the RAD token to a total of 1859 ETH addresses over only two days. After the sale was over, the Radicle community decided to unpause the LBP and leave it running. This essentially transformed the pool into a normal 50/50 DEX pool. The pool continues to provide liquidity for the RAD token and earn fees for the liquidity providers.

Closing Thoughts

LBPs support pause and weight change rights. By removing the weight change rights, the pool can be transformed into a smart treasury or the equivalent of a WeightedPool. LBPs significantly reduce initial capital requirements for launching a token and enable downward price discovery. Additionally, 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.