Liquidity Bootstrapping Pools

Dear Friends and fellow Ludwigs,

Creation is the heartbeat of life, the rumbling rhythm of progress driving us onwards. Without it, life would be but a benign and tedious affair, void of the excitement of creativity.

In no other space is creation as prevalent as it is in DeFi. Every day hundreds, if not thousands, of new tokens explode into existence. When a promising new coin emerges, it confronts one of the most significant obstacles in its journey: the Initial Launch. Today we will explore one of the fairest and most efficient launch methods available — Liquidity Bootstrapping Pools.

DeFi Dilemma

The initial token distribution is a fundamental step in the life cycle of any new coin. An optimal start would see tokens placed into the hands of a large number of dedicated community members with minimal capital expenditure for the founding team. As the crypto world has matured more and more token launch options have become available, each with its own assortment of nuances and quirks.

One such option is an Initial Exchange Offering (IEO), whereby the sale of tokens is conducted by a centralized exchange (e.g. Binance or Coinbase). However, this goes against the fundamental principle of decentralization and often requires teams to pay up to 7 figures in upfront costs!

A popular alternative is the Initial Decentralised Exchange Offering (IDO). Here the initial tokens are added to a liquidity pool, split in a 50/50 ratio with a base asset, and made available for participants to swap into. The method remedies the centralization concern seen in an IEO but, although slightly reduced, still requires significant upfront capital.

In a bid to overcome these shortcomings, the giga-brains over at Balancer put their minds to work and devised a new method… Liquidity Bootstrapping Pools!

LBP Overview

Liquidity Bootstrapping Pools (LBPs) are pools that dynamically change their token weighting in order to facilitate fair price discovery of a newly launched token.

The pools use custom automated market marker (AMM) logic created by Balancer known as Weighted Math, which allows liquidity pools to be configured with up to 8 tokens in any desired weighting.

In the case of LBPs time dependent weightings are utilized. This means that over a set period of time, the weightings transition from an initial state to an end state. For example, at the launch of $BEETS, the BEETS/USDC pool transitioned from a 95/5 weighting to an 80/20 weighting over a period of 24 hours.

Typically, weighting is heavily skewed towards the launch token. This means that the launch token price will start high and as the weighting shifts towards the base token the price will decrease.

The method leads to several significant benefits:

• Fair and Open Launch
• Price Discovery
• Capital Efficiency
• Permissionless

Fair and Open

In a more traditional token launch, bots and whales will routinely front-run the average user, buying up large portions of liquidity from the get-go. A move that overinflates token prices and creates a volatile environment with poor token distribution.

LBPs look to counter this convention. With a heavy initial weighting towards the launched token, the price often starts far higher than it will eventually settle. This, in turn, disincentivizes bots and whales from scooping up liquidity early and provides regular traders a fairer chance to buy in on their own terms. This approach levels the playing field and promotes fairer access for all participants.

Price Discovery

As the weighting shifts further in favor of the base asset, the price of the launch token decreases. Throughout this shifting process, participants have the freedom to buy and sell according to their preferences.

The ongoing change in weighting creates a consistent downward (sell) pressure on the price of the asset with the decreasing share, whilst the paired asset experiences buying pressure. This interplay, combined with modest trading volume, allows the price to find a generally agreed-upon market price and allows users to buy in at a price they deem fair.

To illustrate this dynamic let’s explore the example below, depicting the $OATH launch LBP.

With an initial weighting that heavily favors the launch token, the price starts at a high level. As the weights progressively shift in favor of the base asset, the price of $OATH begins to decline. Eventually, the price reaches a point below what the market collectively deems fair, triggering a surge in buying pressure that forces the prices back up. As an equilibrium is found the price begins to settle. This organic process allows for fair price discovery, with buyers paying what they deem to be fair.

Capital Efficiency

By leveraging highly skewed weighting, the LBP offers teams the advantage of requiring significantly smaller upfront capital compared to traditional launches. Say the LBP is starting with a 95/5 TOKEN/USDC weighting, the team now only needs to supply 5% USDC as opposed to the 50% that would be required in a 50/50 pool.

Once again, $BEETS demonstrates a prime example of this mechanic at play. During its LBP the team provided an initial sum of just $43,000 of USDC and within 22 hours more than $1,000,000 was deposited into the pool.

Additionally, the start-up capital can now be fully retrieved after the LBP ends. As the weighting evolves and new token holders contribute additional USDC in exchange for tokens, the initial capital becomes a smaller proportion of the total pool liquidity. As a result, it can be safely removed while maintaining the pool’s functionality and liquidity.

Permissionless

In line with the underlying values of DeFi, the LBP is a truly permissionless way of launching a new token.

From a protocol standpoint, the LBP eliminates the need for third-party approval or costly listing fees typically associated with IEOs. By leveraging smart contracts, the LBP ensures transparency and reliability, eliminating the potential interference of a meddling third party.

For participants, the LBP levels the playing field. There are no whitelists or minimum allocation requirements, allowing anyone to freely engage in the launch process. This inclusive approach empowers individuals to participate based on their own preferences and terms, ensuring equal opportunity for all.

Outro

And breathhh… You made it Maestro!

So what have we learned?

LBPs revolutionize the token launch process in DeFi. With their fair and open approach, LBPs level the playing field and promote price discovery, while requiring significantly smaller upfront capital compared to traditional launches.

What’s more, LBPs embody the principles of decentralization and openness, allowing anyone to freely engage in the launch process. As DeFi continues to evolve, LBPs stand as a testament to the innovative and inclusive nature of decentralized finance.

With LOVE,

BEET X