What is a Liquidity Bootstrapping Pool (LBP)?

Balancer is a decentralized exchange (DEX) that mainly provides two services, decentralized trading and liquidity pools. The Liquidity Bootstrapping Pool (LBP) occupies a special place among the latter asit allows platforms to issue tokens.

It is a tool designed for crypto projects to generate liquidity from a small amount of seed capital.

However, unlike in the Uniswap model, where the two pair/assets in a fundraising pool must have the exact weight (50% to 50%), the weight in the Balancer’s LBP can be programmed to change over time. For example, the initial weighting of two assets during an auction could be 90% to 10%, meaning 90% of token A versus 10% of Token B. But over time, the weighting may be set to change to 60%to 10% — 60% of token A versus 40% of token B.

And it is not just the weighting ratio that changes. The price shifts as well, as users trade tokens throughout the auction, buying and selling multiple times if they see fit to do so.

The graph below illustrates how price can change during an auction:

There is no fixed rule when it comes to price action. However, in the Balancer LBP model, the token of the platform raising funds usually starts with a higher price, and over time, it gradually drops because of the change of the weights between the two assets.

Assuming one buys the token until the pool time runs out, there is a theoretically continuous fall-down curve under the condition. However, every time someone makes a trade, the price will spike. (See the dashed blue lines in the image.)

This pricing model is grounded in game theory and makes it so that no one knows the best timing to buy in, not even whales. No one can foresee the final price of an auction. It could be much lower than at the beginning. Or the opposite.

Instead, investors should conduct proper research on the project and make reasonable assumptions regarding the token evaluation and trade only when the price reaches their target. Naturally, it is possible that the price rises too fast compared to one’s expectations, as other traders jump on the bandwagon, and may never return to the point a specific trader was waiting for to enter the market.

This does not mean users are out of the game, because, unlike direct token sales, investors can buy as well as sell the tokens in the pool. If a user buys at a lower price, he/she can sell the tokens back to the pool if the price rises. There is no limit to the transactions that can be made, it only costs gas and swap fees. (The swap fees are set prior to the start.)

This further highlights the need to continually consider whether to adapt one’s strategy.

It is important to know that the weightings are manually set prior to the start of the pool and cannot be adjusted as the auction is live. Let us look at Illuvium, a gaming project that used Balancer’s LBP on Ethereum, as an example.

Before the LBP kicked off, Illuvium set these parameters for its LBP auction:

As you can see, their team distributed 1 million tokens within 7 days with initial weights set at 2% to 98%, and finally closing at 40%-60%.

Currently, Balancer operates on three main nets — Ethereum, Polygon, and Arbitrum — while the official friendly fork of Balancer on Avalanche is of course Hexagon Finance.

Since Avalanche C-chain is EVM-compatible, users only need to switch their Metamask web wallets to the right network and have a small amount of AVAX token to cover gas fees. Which, by the way, are currently much cheaper than on Ethereum.

Although the model is very different, in practical terms the steps required to participate in a sale are very similar to the traditional Uniswap system. The protocol is 100% decentralized and permissionless, all users have to do is connect their wallets and choose the correct asset.

We believe the LBP is one of the best mechanisms to find a rational price and guard against sketchy FOMO projects, avoid irrational purchases, and literally the best way to win the odds against whales and bots!

As always, please do your own research and get in touch with the project you are interested in before you decide to trade.

Enjoy the LBP!