Liquidity Bootstrapping Pools (LBPs)
What is a liquidity bootstrapping pool?
A liquidity bootstrapping pool (LBP) is a launch mechanism designed to ensure equitable and transparent token launches. Similar to a dutch auction, LBPs utilize a descending price model where the initial price starts high and continues to decrease over time. This ensures that participants can purchase tokens at what they deem to be fair market value, enabling community-driven price discovery.
Fair and Efficient Price Discovery: LBPs enable a decentralized mechanism for price discovery that allows the market to dynamically determine the value of a token. This process helps prevent initial price manipulation and promotes a more equitable establishment of the token's market price.
Reduced Initial Capital Requirement: For project teams, LBPs reduce the need to provide a large amount of capital upfront to seed liquidity. The adjustable weight mechanism allows for starting with a higher price, which can decrease over time, requiring less collateral to initiate the pool.
Lower Risk of Front-Running and Manipulation: The structure of LBPs discourages large, early buys that can manipulate the market. This is due to the dynamic pricing mechanism, which increases the price as more tokens are purchased, making it less attractive for whales to buy large amounts at the outset.
Community Inclusive: By enabling a fairer and more transparent token distribution process, LBPs encourage broader community participation. This inclusivity helps build a strong, engaged community around the project from the beginning.
Flexible Liquidity Provisioning: LBPs offer project teams flexibility in managing liquidity. The ability to adjust weights over time allows projects to strategically influence liquidity depth and token distribution according to their needs.
Cross-Chain Functionality: In the context of platforms like Bazaar, LBPs can be integrated with cross-chain solutions, enhancing liquidity and participation across multiple blockchains. This opens up greater market access and diversification for both projects and investors.
How do LBPs work on Bazaar?
In order to ensure consistent liquidity on Bazaar as a sole venue throughout the duration of the sale, the protocol utilizes receipt tokens (rTOKENs) as the sale token. Participants who purchase a sale token receive a receipt (or virtual) variant of the token, created solely for the purpose of 1:1 redemption post-sale. This ensures that there are no logistical challenges for creating and adding liquidity post-sale for projects.
Receipt tokens are by default limited in terms of transferability in a way that participants are not able transfer these tokens (e.g., create a pool with receipt tokens in UniswapV3) without limit.
At the conclusion of the sale, after adding liquidity on appropriate third-party venues (i.e. Uniswap), the LBP creator can enable the claim function, allowing participants to redeem their deposit receipt sale token for the official project token. Following this, sale participants can redeem their receipt shares at a 1:1 exchange rate.
Note: It is important for sale participants to recognize that they are effectively trading receipt tokens of the official project token, and attempting to add liquidity throughout the live duration of the sale may result in unforseen losses.
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