Why Liquidity Bootstrap Pools are the Future of Fundraising | Hacker Noon

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@ks.shilovKirill

Blockchain enthusiast developer and writer. My telegram: ksshilov

Crypto projects went through multiple cycles, seeking the right recipe to build finance operations. The most intuitive and immediate takeaway was that crypto was volatile and unpredictable, with wild price swings for new projects. There were multiple reasons for the price swings, ranging from outright scams to coordinated pumps. 

At the same time, cryptocurrencies remained highly effective for fundraising and trading, fueling, boosting even multiple early-stage projects. The ICO boom in 2017 and 2018 showed the world the true power of crowdfunding. The problems arrived once the newly launched tokens started to seek exchange listings. 

An exchange listing made all the difference between a failing and a booming token economy model. Projects either had to pay steep fees for a listing, or rely on small, obscure exchanges which often led to hacks and loss of reputation for the project. The more tokens appeared, the more good listings became near impossible to attain. 

Enter decentralized exchanges. Venues like EtherDelta managed to immediately create trading pairs for new tokens, most often against ETH. This model helped generate market pairs, albeit rather inactive, as users had to overcome the difficulties of using decentralized exchanges. 

Liquidity was fickle for the above reasons. Interest in a new token depended on grass-roots enthusiasm, or a mix of aggressive social media shilling plus concerted pumps. Projects also did not have a reliable pairing, instead trading against other volatile ETH or other tokens. Pairings with BTC also hurt smaller tokens, which were often used to gain more BTC as an endgame.

Stablecoins and Algorithmic Trading: Two Things that are Game Changers for Liquidity

Stablecoins like USDT and DAI serve an important function in creating new trading pairs. There is less fluctuation for new tokens, and there is ample supply of stablecoins, which are created just as tools for trading. Instead of relying on ETH owners or whales, stablecoins allow anyone to enter the world of crypto assets with the specific purpose of adding liquidity and finding opportunities on token markets. 

The other discovery, happening as late as the summer of 2020, was algorithmic trading. The UniSwap exchange introduced what is already a rather well-known formula, X*Y=K, where X and Y are the prices of two assets in a liquidity pool and K is a constant. This formula shows an incentive to lock in assets and achieve immediate, mathematically derived price discovery. The problem is that algorithmic trading hides the opportunity for arbitrage on other exchanges, which may quickly sway the ratio of asset prices. 

And while algorithmic trading with stablecoins is highly promising, new projects just raising funds need another step. This step is known as bootstrap liquidity pools, which ensure a smoother price discovery, with no incentive for whales to profit from a rug-pull or another trading technique that will lead to immediate price volatility. The technology and smart contracts allowing bootstrap liquidity creation represent a set of safeguards for new projects, to preserve their reputation and gradually introduce traders to the new token. 

Listing a new token through the bootstrap liquidity pool approach prevents flash sales, “rug pulls” or aggressive arbitrage that would lead to rapid exchange rate fluctuations. This helps to discourage big owners from swaying the price too fast in one direction, while destroying a token’s appeal. 

We tracked several projects with various fundraising and sale models, showing that bootstrap liquidity was the path to list a token fast and move on with building the network. 

Why Balancer is Key to LBPs

Balancer is an older crypto project that has adapted to the 2020 boom in decentralized finance. The project operates with more than $900M in liquidity, steadily growing over the past few months. Balancer offers multiple tools for algorithmic trading, but its most notable contribution is a delayed price discovery mechanism for new tokens. 

The objectives of the Balancer Liquidity Bootstrap Pools is to ensure each project has ample time to distribute its tokens, while securing a healthy treasury for the team. The pool resembles the usual pairs in liquidity pools, but the ratio of the new token to the DAI dollar-pegged coin is 80:20%. Gradually, the ratio of the token increases until there is 80% DAI in the pool to 20% of the token, reaching the full price discovery. Predetermined periods can run for up to six months.

Balancer promises to achieve low slippage, low initial capital due to the smaller share of DAI, and stable prices over time. Because the smart contracts allow some flexibility, this approach to token launches is also known as programmable liquidity.

Projects that used the Liquidity Bootstrap Pools at Balancer for their token distribution include Perpetual Protocol and APY.Finance.

DGBLabs

DGBLabs is the special vehicle for the Prasaga project, aiming to expand the potential of LBPs. The project is in the stages of rolling out its own token – DGT. After KYC verification, the DGT presale is available to anyone who is interested in taking part in Prasaga’s journey to build the next iteration of blockchain.

The presale runs until February 13th, with DGT offered at a price of $0.005. Following the presale, DGBLabs will immediately launch the LBP on Balancer, harnessing the power of its BLPs… The project team has chosen a period of 91 days for the BLP stage, after which the token will undergo a series of DeFi listings to be traded algorithmically similar to other DeFi pairings.

After the sale period, the combined holdings of retail buyers and presale participants will be 34% of all tokens, a significant share in comparison to other projects with a very small public distribution. About 18% of tokens will go toward building and supporting liquidity and the blockchain ecosystem, while the team only reserves 4% of all assets.

The goal of DGBLabs and Prasaga is to start with an Ethereum-based token, to make use of the current algorithmic trading smart contracts. But the endgame for Prasaga is to create its proprietary blockchain and ecosystem of developers and users. The project will allow easy creation on top of its blockchain protocol, while also connecting users worldwide in a new model tokenomics. 

The Prasaga project appears at a time when blockchain access is in high demand, especially for mobile device users. This factor lies at the heart of the Data Grid structure, which aims to onboard as many users as possible. The connections will create opportunities for new projects, such as multi-sided marketplaces, analytics tools, ratings and personal store ownership. Due to the decentralized, censorship resistant network, Prasaga users will also have a powerful tool for ownership and a blockchain-based identity.

Binance Ecosystem

An earlier example of what Prasaga aims to do can be found in the Binance protocol. Initially built on top of Ethereum, the growth of trading led to more demands for the BNB token. Thus, Binance moved forward and built its own blockchain. 

The difference with Binance is that its launch platform is different in comparison to the DeFi trading. The platform allows for fundraising, though only for pre-approved buyers and for curated projects. This makes Binance somewhat limited in comparison to Prasaga’s goals of being open to the worldwide participation. 

The Binance ecosystem is still in its early stages, and block production is semi-centralized. Currently, the Binance exchange controls some of the block creator nodes, with the intention of handing them over to external partners in the coming years. 

The BNB token already has an established role, serving several purposes. BNB is part of multiple trading pairs both on the centralized and decentralized Binance exchanges. It is also a ticket to participating in some of Binance’s curated token sales.

Tezos

Tezos is one of the leading blockchains with smart contract functionality. Due to its high-profile ICO, raising more than $400M equivalent in 2017, the project gained much attention and expectations. However, all was not smooth with the XTZ launch, as there was a lawsuit with regards to the code ownership. 

XTZ was also met with choppy trading, especially during its pre-launch stage. At that point, XTZ had to rely on the small-scale exchanges and its price was highly volatile. 

The Tezos project is a good example of creating a large community and enabling it to vote. However, programming and launching smart contracts on Tezos is still limited and highly specialized. As of 2021, the XTZ market price hovers around $2.86, mostly relying on liquidity from centralized exchanges.

OpenChain

OpenChain bears similarities to the Prasaga ecosystem. Its chief goal is to offer immediate access to creating and adapting applications. The focus on ease for developers and for wallet users is one of the project’s chief aims.

OpenChain’s main selling point is sidechains, or a structure that allows the benefits of blockchain with personalization. The project offers tools to build data structures for enterprises and business organizations. The chief difference is that those side chains are private and use traditional client-server architecture. This approach works faster, but sidesteps the potential to build truly connected global networks. 

OpenChain deliberately isolates its various users, creating disconnected enterprise niches. This approach has its benefits, though lacks the synergies of a truly open network. 

Crypto startups remain highly risky, and ultimate success cannot be estimated from the beginning. Over the past few years, however, the world of crypto trading learned some lessons and replaced older, riskier models with BLPs. 

Each project has its own specifics in fundraising, as well as historical setbacks due to the current organization of the crypto market. But the BLP approach looks like the way forward for financing crypto innovation.

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