What is a Liquidity Bootstrapping Pool?
Traditionally, crypto startups raise money by launching new currencies on AMMs like Uniswap, Balancer, Terraswap. This is done by creating a liquidity pool by pairing a startup’s newly issued crypto token with established stablecoins (UST, USDC, etc.) or reference tokens like ETH. As an example, if a founder wants to launch a token sale on Terra for TOKX, they would create a liquidity pool for TOKX-UST with 50% TOKX and 50% UST tokens. However, this approach has several problems.
- If the founders want to raise 10 million UST through a liquidity pool, they should raise 5 million UST.
- Upon launching the pool, bots may purchase all the newly issued tokens. It will cause a large artificial demand for new issue tokens and push prices up. The bots will take advantage of this opportunity and dump the tokens on genuine users of the application.
- The initial price of a newly issued token, in our example TOKX, is very difficult to determine. Consequently, any price they decide to set is going to be arbitrary.
The Balance’s team came up with a new type of smart liquidity pool called a Bootstrapping Pool to address all these problems. The Liquidity Bootstrapping Pools, LBP for short, solves these problems by getting rid of 50-50 requirements of AMM pools. Instead they allow the pool owners to set arbitrary numbers like 95% TOKX and 5% UST and gradually change them over a period of time by factoring in the demand to token by real users. Also the LBP allows setting newly issues price very high at the beginning and slowly change it based on demand.
Liquidity bootstrapping pools (LBPs) are also known as configurable rights pools or smart pools. A smart pool essentially is a contract that manages a core pool that contains tokens to be used on an exchange. Unlike other shared pools, smart pool controllers have the power to change the specifications of the pool in limited ways. Hence, a smart pool is less trustless than a shared pool but at the same time, does not require the entire trust of a private pool.
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Angel Protocol Launches HALO Tokens Using Liquidity Bootstraping Pool
In order to prevent whales and bots from launching front runs on Angel Protocol supporters, the HALO token of Angel Protocol was launched using a LBP. Initially, the pool was funded with a HALO-UST pair with a proportion of 96% and 4% respectively. As a result, the price of the HALO token at launch was deliberately set very high at a rate of 0.40 US dollars per token.
As shown in the chart below, the high price of HALO token stopped the bots and allowed Angel Protocol to gauge the demand for HALO token over several hours and slowly rebalance the pool with more UST. HALO token prices gradually decreased and reached a low of 0.07 UST per token, before genuine users bought the tokens. When HALO was trading at 0.07 UST, the long-term believers and crypto users found the price of the token attractive and began buying the token. By allowing markets to decide the price of HALO tokens, this natural demand pushed the token price to equilibrium.
In the next chart, we will be taking a look at the growth of users on an hourly basis during the Liquidity Bootstrapping Pool event. The chart shows hourly new users in the bar chart with an line chart showcasing cumulative new users growth. The blue dots on the chart shows the price of HALO token during the LBP event. The HALO price started at 0.40 UST and hit the low of 0.06 UST before settling down at 0.07 UST.
Around 900 Terra blockchain unique users participated in the event during the 72 hours of LBP event.
The following chart shows hourly buyers and sellers of HALO token. Thanks to LBP, we see more buyers than sellers during the LBP event.
References
The following resources are referred for preparing this analysis report.