DISCLAIMER: The text below is just a description of how the LBP Price discovery works in theory. Any figures mentioned serve only as an illustration. Engaging in LBP without necessary skills or experience can result in a loss of funds. This is a very experimental tool so please treat it as such.
TLDR: LBP (Liquidity Bootstrapping Pool) is an adjustable Balancer smart contract that is used for initial distribution and price discovery of new assets. It uses a constant selling pressure and has a limited time duration, during which price continually drops if there is no demand.
The key questions we have been asking since the very beginning are:
“How to bootstrap a community of stakeholders?”
“How to optimize for decentralization as early as possible?”
ICOs, a direct form of sale, were a prominent way used to distribute tokens in the past. This usually involved a team of developers selling tokens to raise funds which they then used to develop functionality for the same token.
As a reminder, our distribution event is not a means for us to receive funds from community members - we have already developed functionality with investor support and will continue to do so with their funds. All funds deployed in this LBP are therefore kept within the smart contract and establish liquidity for the protocol for the benefit of the community of users.
Since AMMs became a thing, Uniswap listing has become a distribution mechanism of choice. However, the underlying parameters of a Uniswap pool are making this very capital intensive (due to slippage prevention) and also do not guarantee a wide and meaningful distribution.
The Liquidity Bootstrapping Pool (LBP) is described by Balancer as “a smart pool template that allows teams to release a project token while at the same time building deep liquidity”. The key difference in comparison to Uniswap listing, is that the LBP enables custom weights/ratios (and also ability to set a fee charged by the pool).
This makes it great for distributing new tokens because you only need to provide a small portion of the second asset (in HydraDX case it is DAI) to initiate a pool and you optimize the distribution.
The Balancer LBP will start from block 11817007 (~ 8.2.2021 4pm GMT) and end at block 11836793 (~ 11.2.2021 4pm GMT), approximately for 3 days. The weights of the LBP will gradually change from xHDX:DAI = 92.5:7.5 to xHDX:DAI = 17.5:82.5 during that period, creating downward pressure on the price.
We will be creating the pool with 500mm xHDX tokens (5% of total supply) and 1.2mm DAI. This means that the initial price of the HDX token is 0.0296$. If nobody bought, it will fall to roughly 0.0005$ after the 3 days. This is how the curve would look like in such a scenario (not actual data only illustration):
However, this is an unlikely scenario assuming that somebody will buy HDX at some point during the LBP. If people started snapping up the token gradually before the price hits 0.01$ with a relatively small but constant buy pressure, the curve would look something like this (see below).
In yet another hypothetical scenario, if the first buyer is a whale that buys 1/4 of all of the tokens at the price of 0.5 cents, and nobody else buys any tokens, the curve would look like in the figure below. As you can see, the pool is able to absorb large buys and still go back down before other potential buyers join in.
The best deterrent against a few whales single-handedly scooping up the whole pool of xHDX is the ability to release the token slowly with changing weights. Whales are forced to split their trades into a series of smaller tranches over a longer period of time, making it easier for everybody else to get in.
Also, if some whales decide to wait until the very late of the LBP, they will cause the price to pump rapidly:
A case study: PERP
PERP's LBP can be considered a success. It provides some takeaways that can improve our understanding of the price dynamics during the LBP. The optimal strategy seems to be splitting the orders throughout the duration of LBP as seen on the PERP token case study below.
The only small flaw during PERP LBP was that some participants tried to buy as late as possible, causing a smaller pump at the end of LBP as they rushed in with their bids. In general, this was still a very well executed distribution.
It is impossible to predict how the LBP goes. Ultimately, it is the market that decides (or discovers) the final price. The ideal scenario would look like something pictured below.
The general lesson from the model scenarios and PERP LBP can be summarized as:
While we cannot advise anyone on the strategy, we expect smart buyers to wait until the price drops a bit (since at the beginning the price is dropping the fastest) but also not to wait until the very end.
Based on the models available, buying a lot too early and or a lot too late is the best way to get REKT. Smart buyers will be buying in small chunks throughout the LBP and not FOMO in at once.