Liquidity Bootstrapping Pool (LBP)

November 21, 2023 - Around 3 mins mins to read

Understanding the Liquidity Bootstrapping Pool (LBP)

A Liquidity Bootstrapping Pool (LBP), also referred to as a configurable rights pool or smart pool, is a contract that manages a core pool of tokens for use on an exchange. Unlike shared pools, LBP controllers have limited authority to modify the pool’s specifications. This makes LBPs less trustless compared to shared pools, but it does not require the complete trust of a private pool.

The primary objective of an LBP is to launch tokens with low capital requirements. This is accomplished by establishing a two-token pool consisting of a project token and a collateral token. Initially, the weights are set in favor of the project token. However, as time progresses, the weights gradually shift to favor the collateral token by the end of the token sale. Controllers have the ability to adjust the sale to maintain a relatively stable price and maximize revenue, or set the price to the desired minimum, such as the initial coin offering price.

LBPs also offer the unique feature of pausing swapping when necessary. Pool controllers may choose to do this for various reasons, such as unexpected demand driving up the token price or people selling tokens back to the pool for profit instead of buying them. Pausing swapping allows for more fluid price discovery for the token, as it prevents instant price volatility caused by certain trading techniques. However, disabling swapping is rare, as the main goal of a token sale is to sell tokens.

Let’s consider a hypothetical scenario where a new project wants to hold a token sale while simultaneously building deep liquidity. They can achieve this by enabling a custom weight/ratio and setting a fee charged by the pool. This setup is ideal for distributing new tokens, as the LBP controller only needs to provide the new tokens and a small portion of a second asset (e.g., DAI) to start the pool and initiate distribution. By releasing tokens slowly with changing weights, whales are forced to split their trades into smaller transactions over a longer period of time. This makes it easier for other participants to join the sale.

In some cases, whales may choose to wait until the end of an LBP to buy large positions, causing the price to pump quickly. However, due to the restrictions of the LBP, a rug pull event (a sudden price collapse) is highly unlikely. This protects the value of the token after the pump, as the price initially increases but gradually decreases over time. This process continues until all tokens are sold, ensuring an even distribution of the token.

LBPs offer a great solution for projects that want to distribute tokens to a user base without the limitations of a rapidly increasing price curve. It represents the future of fundraising for small projects struggling with liquidity. As long as people buy the tokens at a pace faster than the price decreases, LBPs provide an efficient way to ensure maximum distribution.

Author: Hsuan-Ting Chu, the founder and CEO of DINNGO exchange and CEO of Furucombo, is a serial entrepreneur with extensive experience in startups, particularly in building new business models in the financial field.