Balancer Liquidity Bootstrapping Pool 101
Our mission at Polygen is to build a launchpad that supports a fair and efficient price discovery mechanism to align real world value to a project token and optimise capital allocation to projects. We therefore decided to distribute project tokens on Polygen as a Fair Launch Offering (“FLO”) utilising an application of Balancers Liquidity Bootstrapping Pool (“LBP”).
What is Balancer Protocol
Before we explain how Balancer’s Liquidity Bootstrapping Pools work, let’s briefly introduce Balancer Protocol as a ‘software’ for simplicity purposes. Balancer is an open-source protocol, automated portfolio manager, and liquidity provider. Built on the Ethereum blockchain, Balancer offers new solutions to the problems present on traditional and centralized exchanges. Designed for ease of use, Balancer Protocol allows for trustless and permissionless trading of ERC-20 tokens.
What is a LBP?
The main use case for Balancer’s Liquidity Bootstrapping Pools is to give Projects the ability to launch a token with low capital investment. This is achieved by setting up a two-token pool comprised of a collateral token and the project’s native token. What we appreciate about Balancer’s LBP system is that you can actually control the weight of each asset in the pool as well as the transaction fee which is charged by the pool.
This is highly beneficial for the investor who has full control of an asset’s weight, [an asset can be as heavy as 95/5] — and drastically reduces impermanent loss and therefore classifying it as very low risk. By the end of a sale, the asset’s weight will gradually favor the collateral coin. Another key advantage — pools can be created to include a variety of assets all at different weights. The ‘pool token’ that represents a specific pool can then be traded on a token exchange.
Please also bear in mind the risk of impermanent loss when it comes to Liquidity pools, which you can read about here.
Token Auction Strategy — Fair Launch Opportunity (FLO)
Because the fair auction, price and distribution of project tokens is a high priority for us, we chose to implement something similar to the ‘Dutch Auction’ method. In most cases, a Dutch Auction is a method of selling in which price starts high and is reduced until a buyer is found. In our case, the price of the project raise token is lowered until the raise period ends. The tokens are then distributed at the final price. In this way, investors with a smaller amount of capital have a chance to get in on the action, without worrying about a whale who may enter the auction and buy all the tokens and alter the price of the token.
What makes this method different to other launchpad auction methods?
Traditional launchpads usually favor large investors or investment companies by offering a discounted price for large volumes, which means that they basically control the price of an IDO which is an act of price manipulation. To avoid this malpractice, we chose to be the Community’s Launchpad to give back control to ‘everyday’ investors and projects who support us consistently.
How it works
Once an auction begins, a project raise token will begin at a relatively high price for a specific period of time (which will be publicly announced).
Investors can look at the starting price and decide it they want to buy immediately or wait until it gets cheaper since the price will reduce over the course of the raise.
If investors start buying at the initial price, the increase in demand will increase the price of the token making it more expensive (due to supply and demand).
Investors will look at the new increased price and have the choice to pay that or wait for it to potentially come back down again. As mentioned above, the final price of the token will keep being lowered until the end of the raise period.
However, you may still be wondering; can’t a whale come and buy a high percentage of the tokens when it’s at a low price? And the simple answer is no! Even if whales try to buy up the supply, the price will increase to an unrealistic amount, and they will over pay. Therefore LBP works to incentivize people to buy in small amounts over the course of the raise.
This is a simple explainer to help Polygen users understand how our auction method works. You can get the full technical low down with our Head of Strategy, David Atkinson in this in depth video, originally live-streamed in our Telegram Community
