Capturing speculative trade as value for token holders with liquidity captor

A huge token launch with high prices sounds good in practice but can hurt the protocol in the long term. Bluejay is launching our tokens with a liquidity captor, a mechanism to protect our early supporters and capitalise the protocol while defending ourselves from speculative traders and pump and dump schemes.

With the liquidity captor, it means that early supporters are protected from price speculations and can sell their tokens into a fat liquidity pool with lower slippage!

Here’s what you need to know about the liquidity captor.

Problem

Initial euphoria may set unrealistic price expectations early, early supporters often see a “crash” before long term value is generated and reflected in price action.

New protocols often face the challenge of having speculative traders bidding prices skyhigh during launch. Often the “pump-and-dump” results in huge winnings for the few speculative traders while leaving a trail of victims while they plan to raid the next token launch. This not only sets unrealistic expectations on price early in a projects life, but also destroys value in the process as many early supporters of the project are left scarred.

Price of BLU can be sent skyhigh with larger swaps

Since Bluejay is launching our token in a whitelist sale with only 1M tokens, at a price of $5 per token, and with a liquidity pool of $100k on Uniswap, it is easy for the token price to reach unsustainable levels really quickly due to a supply squeeze.

It will only take $50k of BLU purchase to send prices of BLU tokens to $20, and $200k of token purchase can send prices to $125!

Capturing excess demand as liquidity

The key idea behind the liquidity captor is to allow the protocol to sell excess BLU tokens into the liquidity pool to meet the excess demand and then immediately market-make at the new price level to thicken liquidity.

Effects of having liquidity captor after large amount of buy pressure

For illustration, in the scenario that the market has made a purchase of $200k worth of BLU, the protocol can capture the excess demand and increase the total liquidity on the pool while keeping price volatility low.

Liquidity captor allow everyone to profit instead of the first few sellers

Comparing both scenarios, we can see that without the liquidity captor, excessive value would be lost to the first seller and that decreases exponentially. This creates a rush to be the first few sellers while everyone else will be left to “hold the bags”.

In comparison, the second scenario with the liquidity captor allows the price to be more stable regardless of the order of selling, thus reducing the pressure to be the first sellers.

Profits are redistributed to all BLU holders when treasury grows in size

In addition to greater price stability, the protocol’s treasury has also increased in value as it was issued more liquidity provider tokens from the pool when adding liquidity.

That means ALL the BLU token holders have increased value from their stakes of the treasury, even without doing anything!

In summary, the introduction of the liquidity captor will have the effect of:

• Preventing a single user from profiteering from the demand while “rugging” the rest
• Reducing slippage cost when buying or selling for all users
• Increasing the size of protocol’s treasury
• Allow all BLU token holders to accrue value passively

Going into Specifics

Effect of each liquidity capture transaction is limited by the maximum price impact

The liquidity captor has a few built in parameters that allows it to capture the excess demand as liquidity while minimising price impact on each run. The parameters are:

• min price — minimum price where the liquidity captor is allowed to perform a swap. This means that when prices are below this level, the liquidity captor will definitely not sell more tokens into the market.
• max price impact — a ratio that defines the maximum price impact that the liquidity captor can have in a fixed period of time. This allow the market to still move if the demand far exceeds the supply even with the liquidity captor
• period — minimum period of time to wait between swapping on the market

The initial parameters for the liquidity captor will be set to allow it to capture liquidity when prices are above $25 (5x of launch price) with a maximum price impact of 20%, and is only allowed to run at most once an hour.

This set of parameters will be live during the period from when the whitelist sale is enabled to right before the BLU token is launched and available to all public via bonding. A governance decision can be made to adjust these parameters at any point in time.

About Bluejay Finance

Bluejay Finance are working towards building the new financial infrastructure for Southeast Asia, via a range of locally denominated stablecoins. We believe that DeFi can be responsible, sustainable, and transparent, with the power to bring opportunity and inclusion to a region where so many people are unbanked or underbanked. As we approach the launch on MainNet, and our token generation event, we wanted to take those principles and discuss our plans around the liquidity captor mechanism.

Acknowledgement

The liquidity captor is inspired by Joel Monegro’s article on “Stop Burning Tokens — Buyback And Make Instead”. The original idea discusses the buyback-and-make model as an automatic buyback machine, a token issuance pool and liquidity provider.