What is a Liquidity Bootstrapping Pool (LBP)?
As you may know, on the 17th May, JustCarbon is releasing an initial 5 million JustCarbon Governance Tokens (JCGs) to the public via an auction on the Copper Launch platform. The mechanism behind the auction is known as a Liquidity Bootstrapping Pool (LBP) and is a unique function of the Balancer network.
Traditionally, Initial Coin Offerings (ICOs) were held as ‘batch auctions’. Buyers registered to gain access to a whitelist and bought a block of coins based on a fixed value decided by the project developers. This process raised a number of issues.
Issues with batch token auctions
The first big problem with batch auctions is that they preference whales who buy a large number of tokens, shutting out the smaller players. This caused an unfair distribution of tokens which, in the case of governance tokens, could lead to the capture of a platform by a small number of token holders.
The aim of DAOs is to distribute and democratise ownership of digital platforms. The more people involved who are invested in the idea, the stronger the governance of the DAO. The idea being, that a group will always, on balance, act in the best interests of the organisation.
Concentrating governance tokens in the hands of a minority could, on the other hand, lead to many of the same issues currently facing the carbon credit market ─ obscure pricing mechanisms, profiteering and an unwillingness to evolve.
Secondly, batch auctions do not allow for natural price discovery. All tokens are sold at a fixed price. And, since whales tend to buy large quantities, they could then resell those tokens for an inflated price.
What’s more, once tokens hit exchanges, the price can fluctuate wildly, putting off those who want to be involved in the platform governance and encouraging even more speculation. Prices will always fluctuate, of course, but big swings are unhelpful when it comes to governance tokens.
Benefits of Liquidity Bootstrapping Pools (LBPs)
Liquidity Bootstrapping Pools (LBPs) combine auctions with liquidity pools ─ a way of a community providing token liquidity ─ into one token sale mechanism. LBPs bring a number of important benefits, especially for the launch of governance tokens.
Price discovery
Project developers launching an LBP will usually set the initial price fair high to disincentivise bots and snipers. The price then drops based on a pre-configured decay curve. This decay in price can be resisted through buying pressure. The more tokens people buy, the more resistance and the higher the price.
Participants of LBPs can also sell their tokens at any time, just like a traditional auction, allowing the token price to regulate itself. This allows LBPs to test the upper and lower price limits, helping to determine a fair value for the token and minimise price fluctuations when the token reaches exchanges.
Fair distribution
LBPs disincentivise front-runners ─ those buying early to push up the price before dumping and causing the price to plummet ─ and snipers ─ bots designed to scoop up initial supply. They also ensure a fairer distribution of tokens by discouraging whales from immediately buying most of the tokens.
This is achieved by setting the initial price high and allowing the price to decrease along a fixed curve over time. Front-runners, snipers and early whales, therefore, pay more while those more patient can buy tokens at a fairer value.
As such, buying is encouraged throughout the auction and is accessible to all. This is particularly important for governance tokens since the whole point of democratisation is to ensure as many people as possible can be involved.
Open and permissionless participation
Since the auction is free and fair, there are no whitelists, hard caps, or listing requirements for LBPs. Buyers can choose how many tokens they want to buy and at what price. They can enter and exit their positions at any time. And there is no minimum or maximum allocation.
Capital efficiency
The initial LBP ratio does not have to be 50:50, unlike traditional liquidity pools. This means project developers can leverage their tokens to raise more capital to support the project.
Take JustCarbon, for example. We are setting our initial liquidity to 97:3 (JCG/USDC) and will work their way towards 70:30 as people purchase JCGs for USDC. This allows us to raise essential capital to fund the project, in the form of USDC, while ensuring as many people as possible get involved in the governance of the JustCarbon DAO as possible.
If you’d like to get involved in the JustCarbon LBP auction on the 17th ─ 19th of May 2022, check out our simple how-to guide to get started.
