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What is Token Launch Auction?
Token Launch Auction is built on top of Balancer's LBPs (Balancer's Liquidity Bootstrapping Pool) feature. In particular, LBP changes the proportion of tokens in the Pool according to a predetermined time.
Thus, Token Launch Auction will be similar to Dutch auctions. With the help of LBPs, the price of the Token will be started with a high price and then gradually decrease over time. During the auction period, investors can buy Tokens at whatever price they think is reasonable.
Metaverse Starter is among the first ones to adopt this model to Polygon, Avalance, BSC, ETH (and more to come) to help token teams have a better alternative to distributing their tokens to the community upon launching.
Providing liquidity & price discovery during a token offering has traditionally been a highly capital-intensive process for a new project. Exchange listing fees is very costly, and paying market makers can be even more expensive. Bancor and Uniswap democratized the token offering process by introducing the permissionless autonomous market-maker (AMM) performed on-chain by a smart contract and backed by liquidity mining to incentivize investors to contribute liquidity to a new token pool.
When Initial Dex Offerings (IDO) runs on an AMMs-based DEX, bots front-run buy a vast number of tokens at the sales event’s opening, and the project’s token gets access to immediate liquidity, which can benefit the token price. The act does solve the problem of liquidity; however, it raises the concern of fair distribution of tokens among investors.
Currently, deep pockets are required to build liquidity in popular AMMs like Uniswap and Pancakeswap that require a 50:50 ratio be maintained in the swap pair. The table below illustrates the corresponding liquidity and slippage for entering a constant-product 50/50 AMM. For instance, a team created token ABC with the initial price of $1 and the price of BNB is $350.
Capital requirements & slippage for 50:50 AMM
As you can see, new coins have to pile enormous upfront capital into BNB to prevent slippage while combating whales, speculators, and frontrunning bots. Gaining control of the resultant price volatility creates high capital demands on projects. Because projects face such high capital outlays in token offerings, many are left without adequate treasury funds to build out their business models and support their growth.
Liquidity Bootstrapping Pool now comes as the most attractive and efficient option available to address all of the remaining issues above. LBP is a special type of liquidity pool that adjusts pool weights over time to create constant downward pressure on the price. It enables teams to release a project token with high capital efficiency while at the same time building deep liquidity and eliminating the concern over unfair token distribution.
Let’s going back to the example above to see how we can do it better with LBP. The team setups an LBP pool at a weight of ABC:BNB = 80:20 initially, and will gradually shift on a linear function of ABC:BNB = 20:80 over the course of 3 days, creating downward pressure on the price. Assume we use the same amount of BNB as the original setup, the team can now distribute 4x the amount of token ABC in liquidity with even lower slippage.
Capital requirement & slippage in a 80:20 LBP pool
Therefore, LBP is ideal for distributing new tokens for two reasons:
- 1.Capital Efficiency: only a small amount of the second asset (it is BNB in the above example) is required initially.
- 2.Fair Distribution: thanks to a mechanism that is unique only to LBP — going against bots front-running. The price of the asset inside an LBP will start from high and gradually go down with the passage of time. If a bot immediately gets token when the pool is live, the price on Bunicorn will soon slump, holding less value than the acquisition price that the bot has paid after the weight change. Large buyers are incentivized to split their trades into a series of smaller tranches over a longer period of time to avoid driving the price up, making it easier for everybody else to participate.
Due to the downward shifting weights over time, there is a natural downward selling pressure on the price throughout the duration of the pool, which is offset by the inflow of the second asset (it’s BNB in the example above) into the pool. Thus, the market decides the final price of the token, it is impossible to determine ahead of time how the price discovery curve will look.
However, let’s explore some hypothetical scenarios of how the pricing curve could play out. Assuming that we’ll setup an LBP with the weight of ABC:BNB = 96:4 at the beginning, and toward ABC:BNB = 4:96 over the course of 72 hours. This is an extreme design with minimal upfront capital requirements.
This graph displays the token price over 3 days if there is no buy/sell orders resulting in zero BNB inflow, the automatic selling pressure would cause the price of token ABC to decline to near zero after 72 hours. At the early stages, the price will be dropping fastest.
In this hypothetical scenario, the hype for token ABC is high, the community members urge to own ABC and shift the price with buy pressure.
As you can see, there is high inflow at the start of the sale due to whale or bot activity. This sharply increases the amount of BNB in the pool, causing the price of the ABC token to rise. However, the shifting pool weights allow the pool to absorb large swaps and the curve flattens.
In this scenario, constant buy pressure will cause the the price discovery curve to look flat. The downward weight pressure will balance the upward buy pressure, keeping the price oscillating around market value. This represents the base case of the LBP and the ideal outcome as a fair distribution is achieved with all participants receiving a similar price.
In this circumstance, by starting at a high initial price which gradually descends over time, participants are incentivized to wait until the price falls during the distribution period. There is high inflow at the end of the sale due likely due to participants waiting toward the end of the sale to swap. This sharply increases amount of BNB in the pool, causing the price of the ABC token to rise.
Price Discovery Chart of PERP during LBP distribution
During PERP LBP, some participants tried to buy as late as possible, causing a small pump at the end of LBP as they rushed in with their bids. Despite the small spike in price at the end, this was a well executed distribution.
Therefore, users, especially retail investors can fairly attain their desired and reasonable number of tokens. This fact will be most evident in the chart below of the Perpetual Protocol (PERP), the first project to adopt LBP. Anyone can see the distribution is very even with this new template of smart pool.
Token Distribution of LBP for PERP
In recapping their LBP, the Perpetual Protocol team wrote:
A high IQ move to participate in an LBP should be picking a valuation that you’re comfortable with and then starting using way #3 [dividing the budget into smaller chunks and dollar-cost averaging with each chunk of the fund] when the market valuation is below the valuation in your mind.
- Do Your Own Research: Nothing in this document should be taken as financial advice. It only describes the mechanisms and parameters of the LBP.
- No FOMO: The declining price mechanism of the LBP allows interested users to wait until they are comfortable with the price before acquiring tokens. No need to rush.
- Bots are not Incentivized: Front-running or sniping transactions do not work due to the nature of the pool.
- Price Discovery: Similar to a Dutch auction, users will have a long time window to acquire tokens at a price they find attractive. Market forces will determine what the final valuation will be.
The graph above shows the price of a token compared to the starting price (as a percentage) in a situation where no purchases are made. This is to illustrate the downward pressure on the spot price.
The graph above shows the price of a token compared to the starting price (as a percentage) in a situation where random purchases are made throughout the sale. This is to illustrate how purchases bump the price.
📌 NOTE: This does not represent the actual price or direction of the token during the sale and is used for illustrative purposes only.