Liquidity Bootstrapping Pool (LBP) Explained

Liquidity Bootstrapping Pool

Overview

A Liquidity Bootstrapping Pool or LBP is a type of pool created by Balancer to achieve its namesake; to “bootstrap” or “kickstart” the liquidity of a project. An LBP does not use the standard token weight of 50/50 which is commonly used in other LP pools. Take, for example, a typical LP pool of two tokens (like in Uniswap) which holds a 50% weight of each token. Here there is a standard pre-defined price curve for trading in that LP pool. And the price of the tokens does not change if there are no buy/sell orders.

But what if:

A) The weight was not 50/50? What would happen to the price if the token weight was 80/20? Or 90/10?

B) The weight can be programmed to change over time dynamically? Say, over a week, the weight changes linearly from 90/10 to 40/60?

These two quirks form the basis of the mechanics of a Liquidity Bootstrapping Pool (LBP).

The result is a dynamic price curve that changes over time, even without any buy/sell orders. Visually, here is an example comparing the price action of a typical 50/50 pool and an LBP pool, assuming NO buying or selling takes place

liquidity bootstrapping pool explained

Therefore, participating in an LBP event is like a game of chicken...you want to wait till the price moves to a desirable range before you trade, but if someone trades before you do, they are getting in at a better price.

Advantages

From the many well-documented Liquidity Bootstrapping Pool events, there are a numerous key advantages of LBPs:

Price Discovery - The most common use for the LBP is for price discovery. It allows the market to determine the final price of a token. Setting an initial price and then changing the price over time, it becomes a game of chicken where buyers want to wait for the right time to trade the token at its best price but wait too long, and they might get burnt and end up missing out.

Wider Distribution - Unlike other models or token launches where it’s either a game of speed or gas fees, LBPs can help distribute tokens into the hands of as many people as possible in a fair way.

No Unfair advantage - LBPs disincentivize front-runners, bots, and whales getting better rates than smaller participants. The bigger or sooner the buy, the more risk they take in ultimately paying a bigger deviation from the market price.

Smaller Capital - One of the biggest draws of running an LBP for smaller protocols is that the initial price of the token being auctioned can be magnified up to 99 times relative to the collateral deposited. Meaning a protocol can start with a very small capital and end up with  larger bags at the end of the event.

Liquidity Bootstrapping Pool In Action

Let's look at an LBP in action. Perpetual Protocol conducted the first and biggest LBP for coin distribution. They have released in-depth data on the LBP event results.

liquidity bootstrapping pool lbp

A few things stood out during the LBP event.

  1. The transaction activity was relatively spread out throughout the event.
liquidity bootstrapping pool lbp

2. The size of these transactions were relatively small bar a few whale trades

liquidity bootstrapping pool lbp

3. We can see that the whale trades ended up being highly risky punts as they spiked the price high above the eventual final token market price. The token's highest price reached was $2.3USD (~11% higher than the eventual market price at the end of the LBP) and was paid by the few whale purchases.

4. The starting price for the token was $1.3USD, but by the end, the market had deemed the price to be closer to $2.08USD. Not too shabby!

Use Cases

So we know Liquidity Bootstrapping Pools have been battle-tested mainly for token distribution fairly and transparently. This has been used to great success by Copper Launch, a platform built on top of Balancer’s LBP to help launch new token liquidity and price discovery.

But are there other innovative use cases for LBPs? 🤔🤔

Stay tuned to find out…