Liquidity Bootstrapping Pools
A (fair) pricing game.
Last updated
A (fair) pricing game.
Last updated
There are two factors that are crucial for any DAO's token:
Fair distribution
Sufficient liquidity
Airdrops are often used to ensure fair distribution, but as a downside don't necessarily improve token liquidity. IDOs (Initial DEX Offering) are often used to kickstart liquidity, but are either unfair or require a substantial amount of starting capital.
So, how do we achieve both at once? Liquidity Bootstrapping Pools!
You might be thinking, "Sounds like a buzzword—what exactly is a Liquidity Bootstrapping Pool?!" Let us explain.
In a traditional liquidity pool, two assets are paired with equal weighting. In other words, the Automated Market Maker (AMM) treats both assets as having the same value. Then Balancer came along and introduced a game-changer: pools with uneven weights! In a Balancer-style liquidity pool, the AMM recognizes that one asset can be valued higher than the other, and the exact ratio can be customized. For instance, an 80/20 Balancer pool assumes one asset is worth four times as much as the other.
A Liquidity Bootstrapping Pool (LBP) is a special type of Balancer pool where the weights shift over time. For example, an LBP might start with a 95/5 ratio, but gradually transition to a 50/50 balance as the pool matures.
"But, uhm... I still don't know why LBPs are so useful."
Yea, right! Remember, two crucial factors in ensuring a healthy token launch are fair distribution and sufficient liquidity.
IDOs are usually an effective way to gather some liquidity, but are inherently unfair: early buyers usually get way too good of a deal, and become whales too easily. With an LBP's shifting weights, it's possible to start out at with a high token price, that gradually decreases. This discourages early snatching up of all tokens, and rewards patient buyers. An LBP is essentially a fair pricing game, where players try to time their buys perfectly, leading to a fairer distribution. Similar to IDOs though, LBPs are a great way to bootstrap some liquidity!
In the image below, a hypothetical XRD/ILIS price chart is shown, to give a general overview of an LBP's lifetime and illustrate how certain actions influence the price.
What we see is the price of ILIS denominated in XRD, being traded solely using an LBP. We can see that an ILIS buy increases its price as usual [1]. However, when no trading takes place, weights shift in such a way that ILIS's price decreases [2]!
In the example below, the data points shown in cyan are points in time that have already passed. The black line [4] however, is an extrapolated price, based on the assumptation that nobody uses the LBP to trade ILIS anymore!
