Liquidity Bootstrapping Pool (LBP)

A Liquidity Bootstrapping Pool (LBP), also known as a configurable rights pool or smart pool, is a concept within blockchain technology that aims to facilitate token launches with low capital requirements. LBPs are designed to manage a core pool of tokens for use on an exchange, providing a controlled environment for token distribution and liquidity formation.

Unlike shared pools, LBPs have limited authority granted to their controllers to modify the pool’s specifications. This characteristic makes LBPs less trustless compared to shared pools, which require no central authority for operation. However, LBPs strike a balance between complete trust in a private pool and the trustless nature of shared pools.

The primary objective of an LBP is to launch tokens in a controlled manner, allowing projects to distribute their tokens while building deep liquidity. This is achieved by establishing a two-token pool consisting of a project token and a collateral token. Initially, the weights in the pool 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 of an LBP have the ability to adjust the sale parameters to maintain a relatively stable price and maximize revenue. They can also set the price to the desired minimum, such as the initial coin offering (ICO) price. This flexibility allows projects to have more control over the token sale process.

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 relatively rare since the main goal of a token sale is to sell tokens.

To understand how an LBP can be beneficial, let’s consider a hypothetical scenario. Imagine a new project that 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 (large buyers) 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 and prevents a few individuals from dominating the token distribution process.

In some cases, whales may choose to wait until the end of an LBP to buy large positions, causing the price to increase rapidly. However, due to the restrictions and gradual weight adjustments of the LBP, a sudden price collapse (known as a rug pull event) is highly unlikely. This protects the value of the token after the price 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 facing the limitations of a rapidly increasing price curve. They represent the future of fundraising for small projects struggling with liquidity. As long as people continue to buy the tokens at a pace faster than the price decreases, LBPs provide an efficient way to ensure maximum distribution.

In summary, a Liquidity Bootstrapping Pool (LBP) is a contract that manages a core pool of tokens for use on an exchange. It allows projects to launch tokens with low capital requirements and provides control over the token sale process. LBPs gradually shift the weight in favor of the collateral token, preventing sudden price collapses and enabling more controlled and even token 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.