With the number of new DeFi project constantly on the rise, various protocols have been experimenting with ways to create liquidity for newly-launched tokens. The rise of AMMs such as Uniswap has certainly improved the process, offering a much cheaper alternative to ICOs and exchange listings.
Further experimentation with AMMs has led to the creation of liquidity bootstrapping pools (LBPs). Decentralized blockchain protocol Balancer has been the leader in LBPs since its launch last year, enabling projects to distribute tokens fairly and with a low starting cost.
In a recent blog post, the company explored the mechanism behind its LBPs by using the example of Radicle, a decentralized alternative to the popular code collaborating platform GitHub. The project chose Balancer’s LBP mechanism to sell a percentage of its token supply to the community and secure financing for further development.
What makes Balancer’s LBPs unique is the fact they allow for the pool’s token pair weighting to be skewed. Weighting changes throughout the sale give average buyers the ability to participate in the project at a fair price — a sharp contrast to traditional 50/50 initial DEX offerings (IDOs) where large buyers can bid up the price at the start of the sale.
Radicle paired its RAD token with USDC, shifting the pool weight from a 92.5%/7.5% RAD/USDC weighting to a 50%/50% RAD/USDC over the course of two days. Initially priced at 11.5 USDC, the sale spiked up to 28 USDC within hours. However, the shifting nature of the pool applied downwards pressure on the price, stabilizing the price between 10 and 15 USDC throughout the sale, which lasted between 25 February and 27 February.
The project sold 51% of the provided RAD tokens, raising 24.73 million USDC. Radicle beat the previous LBP record set by HydraDX by 7.5% and recorded an ATH volume of $20 million.
With an initial investment of 3.5 million USDC, Radicle raised $24.73 million USDC. To achieve the same returns in a 50/50 AMM, the project would have needed 1,131% more capital (43.1 million USDC). Aside from being unlikely that the developers could come up with the investment in the first place, it would have also made it impossible to keep the price of the RAD token stable.
Pricing the token at an initial 11.5 USDC allowed the liquidity bootstrapping process to foster price discovery that resulted in a price that remained stable throughout the sale.
“In this way, Liquidity Bootstrapping Pools turn out to be an optimal choice for both the project, since they can distribute their tokens with little investment, and the community, which has a straightforward way to buy the token at a fair price without pressure,” Balancer explained in a post.
According to Balancer, LBPs result in a significantly better-funded project whose governance tokens are more evenly distributed among the community. This means the tokens remain in the hands of those that are invested in the project in the long term, instead of speculators looking for quick profits.
We are yet to see whether the success projects such as Radicle and HydraDEX have seen with Balancer’s LBPs leads other DeFi apps to explore the novel token sale mechanism.