LGO Token Buy Back Mechanism

Frédéric Montagnon
Jan 17 · 7 min read

Introduction

LGO Group has been created on the promise of building trust in the cryptocurrency ecosystem.

ICO participants who bought LGO tokens entrusted us with creating a company which is fair and secure by design. It is only normal that the dynamics with which the LGO tokens get exchanged and priced follow these values.

One utility of the LGO token is to pay for transaction fees. A part of the tokens collected will be burnt, which will reduce the whole supply available in the market. More precisely, we will implement a transparent and verified mechanism that destroys 25% of all LGO’s paid as a transaction fee.

We have also decided to let people pay their transaction fees in other currencies, like USD. In this case, a portion of the collected fees will be used to buy-back and burn LGO tokens.

Allowing clients to pay their transaction fees in any currency will lower the barrier to entry into our ecosystem. The buy-back and burning of the tokens will provide the same value to token holders. In short: more trading activity leads to more use of the LGO tokens. This benefits the entire ecosystem.

A number of cryptocurrency projects are buying back their tokens in the open market. Many of them are doing it in a completely opaque way: volumes and prices at which the token is purchased are not declared by the project, front running is not prevented, and no one is able to check if the purchase volumes are accurate. In addition, some projects use the buyback of the tokens to manipulate the exchange rate of their tokens, at the expense of token holders.

We have designed a fair and transparent way to buy back the LGO token based on the trading activity. This process, described in more detail below, defines a transparent and public price of buyback for all token holders, which will be published on LGO Exchange once the platform goes live.

LGO Token Buy Back Mechanism

In traditional financial markets, people typically invest in company stocks as a way to speculate on the firm’s future performance. Successful companies generate profits which are translated through the distribution to these stock owners.

Discounting the value of the expected future dividends is a way to link the good financial health of a company with the price of its share. For crypto companies, paying a dividend becomes an issue. Regulators, in general, consider tokens which pay dividends to be a security. Having securities means stricter rules and regulation and in turn, higher expenses.

Many publicly traded businesses utilize some of their profits to repurchase shares of their stock. This simply means that a company chooses to buy back some of its own stock (typically on the open market), with the help of a financial institution as an intermediary. In the world of digital assets, the net impact of reducing the circulating supply is magnified by the process in which the firm can burn the tokens which are purchased. If it isn’t done properly, it can permanently destroy part of the supply.

The goal of our process is to decrease the available supply of the LGO token, which will benefit existing token holders. More specifically, it should decrease the elasticity of the price with respect to the demand. This means that an increase in demand will have more impact on the underlying price.

The token buyback & burn mechanism process has been used by the digital community as a marketing tool to provide early investors with incentives to allocate capital for their business. However, this process has received criticism regarding transparency, execution and fairness. Overall, many predecessors have not provided sufficient information about their buyback program. In line with our core values — a secure, compliant and transparent digital asset trading platform — we are working on a systematic buyback mechanism, available and tradeable by existing LGO token holders(Holders will be subject to due diligence reviews on LGO Exchange prior to receiving access to the platform.).

In order to understand how the buy back process will work at LGO, we will use the following notations:

The relationship between the circulating supply left at time t+1 after buying back and burning a dollarized CFt, t+1 is equivalent to the tokens purchased at pt+1*:

Our objective is to use a buyback premium price which keeps the impact on the circulating supply constant across the different periods [t-1, t], [t, t+1] etc.

A decrease in supply should correspond to an equivalent increase in the price:

One would notice that it is equivalent of keeping the market capitalisation constant between t and t+1:

which exactly corresponds to:

Coming back from (2) and using (1), we get:

which eventually yields:

The buyback mechanism would only attract traders if the premium limit price is above the market offer. If that applies, then the following would occur:

Stated this way, the buyback program at time t becomes a so-called “fixed tender offer” at a premium price determined just above.

By establishing a set price, the firm is able to control the number of tokens it can buy if the tender offer is completely subscribed. However, this prevents any competition amongst the sellers.

In a Dutch auction, the seller establishes the tender price. The firm announces minimum and maximum prices and invites token holders to tender at any price with the range. At the end of the auction, the lowest price which enables the firm to acquire the announced number of shares is determined from token holders’ offers. This is paid to all offers at and above that clearing price. If the clearing price elicits more shares than are sought (because of a mass of offers at that price), then a pro-rata fraction of all qualifying shares is accepted. This unique price-setting feature of the Dutch auction allows the firm to exploit heterogeneity among shareholder offers by retiring shares held by those investors willing to part with them most cheaply. Another consideration in privileging an auction rather than a fixed tender offer is its dynamic interaction with the primary market: sellers can adjust their offers depending on the live market price fluctuations.

There are different scenarios which may arise from this mechanism. For example, if the auction is undersubscribed, it means that the firm was not able to buy as many tokens as it originally planned. The remaining cash will be allocated to the next auction, as well as the transaction fees collected in the next period. These factors should increase the limit premium price. This feature adds another layer of price discovery. While one auction may be undersubscribed because sellers think the bid price is too low, buyers can adjust their bids higher for the next auction.

The price relationship defined by (3) then becomes:

If the Dutch auction is oversubscribed, the limit premium price and the subsequent higher price may be too high for the different sellers’ valuations. Therefore, we need to include a function which takes the oversubscription rate and provides a cheaper limit premium price for the next period.

If we note pt*, realized the price in [offert; pt*] at which the auction went out, we will need a function discount of the oversubscription rate in [100%, +∞] or [1, +∞ ] that brings pt*, realized down to pt*, discounted such as:

Such discount function could be, noting r the oversubscription rate, r≥1, and k a control parameter:

One can check the limit behaviour:

Finally, given an initial price pt*, the firm is able to determine the maximum premium price for the auction as:

With:

Knowing that:

Conclusion

The buy back mechanism will be implemented at LGO Exchange. We will provide future communications for the go-live date and when the platform will be ready to support the token buy back.

LGO Group’s mission is to build confidence in all stages of a crypto-asset’s life: from creation to sale, promotion, acquisition, storage, and use.

Our ambition is global. We want to enable large financial institutions the ability to trade cryptocurrencies with complete confidence and trust while providing retail investors with an identical secure framework.

LGO Group

Building the next generation of financial exchanges.

Frédéric Montagnon

Written by

French entrepreneur. CEO @ LGO Group.

LGO Group

LGO Group

Building the next generation of financial exchanges.