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LBPs: Key Concepts

Let's explore the fundamentals of LBPs. Before participating in Swerve, it is wise to understand everything here.

1. Overview of LBPs#

Liquidity Bootstrapping Pools are an innovative and efficient method of token distribution, offering an alternative to traditional liquidity pools and fixed-price auctions. Pioneered by the Balancer protocol, LBPs utilize smart contracts to enable permissionless, decentralized, and fair liquidity generation.

With LBPs, projects can perform token sales that dynamically adjust token prices based on a combination of token weights and market demand from active trading (this is covered in more detail in 3. Parameters). When projects conduct an LBP event, it is in pursuit of some of these unique properties:

  • Fair distribution: Token prices initiate at a higher value and progressively decrease, enabling participants to enter at their preferred price point, which means equitable distribution.
  • No front-running: The price decay mechanism helps thwart participants and bots from manipulating the price to their advantage, ensuring a fairer allocation process.
  • Price discovery: LBPs lead to an efficient price discovery process, establishing the real market value of the token.
  • Liquidity incubation: As funds are contributed to the pool, liquidity is organically generated. Upon the conclusion of a successful LBP, the initial liquidity pool can then trade the token indefinitely.
  • Permissionless raises: LBPs can also enable projects to raise capital in a decentralized manner, because if they wish to do so, they can remove some of the liquidity generated in the LBP to put to use on their roadmap.
  • Capital efficiency: By dynamically adjusting token prices, LBPs optimize capital allocation by allowing projects to amplify the value of their treasury collateral relative to their project token. (If this doesn't make immediate sense, please see section 3. regarding token weights).

2. LBPs vs. Traditional Liquidity Pools#

The primary difference between LBPs and traditional liquidity pools lies in their token pricing mechanism. In a standard liquidity pool, the token price can remain relatively constant, while in an LBP, the price is dynamically adjusted throughout the LBP's (comparatively short) duration. This continuous price adjustment helps reduce price manipulation, facilitates a more efficient price discovery process, and allows participants to find their preferred entry point.

3. Parameters#

Understanding the core features of LBPs means examining the underlying parameters that set initial conditions, ultimately resulting in the features outlined above. By fine-tuning these parameters, projects can optimize LBP events, resulting in a streamlined and equitable token distribution process. As an LBP participant - whether swapping or launching, understanding the interplay of these values is important. Here, we delve into these parameters while referencing an actual Swerve LBP page:

Image Description

When you first arrive at a Swerve Pool page, you will see something like the above. Highlights are provided in yellow to identify key parameters in the LBP event.

  1. Pool Duration: The pool's duration influences the pace of price discovery. Throughout the pool's duration, token weightings are continuously adjusted in a linear fashion between the designated start and end weight values (see point 2). Participants are able to trade in the LBP throughout the pool's duration (see Start Date and End Date, which are adjusted to your browser's local time). On the end date and time, participants will no longer be able to trade in the pool. As a rule of thumb, LBPs tend to typically last about 3 - 4 days.

  2. Token Weights: The start and end weights of the project token and the pool's collateral token (usually a stablecoin like USDC) significantly affect the starting price and price trajectory of the pool during the sale period. For example, higher initial project token weights compared to the reserve token will result in a steeper price decline as the weights are adjusted to move towards token parity or below token parity. This continuous adjustment of these weights is what creates the Price Decay Mechanism (see section 5). Commonly, initial values for the project token weight start at around 95% in favor of the project token, and finish at 50% (parity), but there are many exceptions to this rule - weights are adjusted to satisfy specific project objectives.

  3. Pool Reserves: On the pools page, the existing pool reserves for the project token and collateral token can be seen in the (Pool Reserves) brackets for CLAMr and USDC respectively. These values are obviously updated as the pools is traded. Whenever a pool is traded or contributed to, (for example when a project first seeds its liquidity), the pool liquidity is calculated as a function of the token weights, and the existing reserves in the pool. For more information about the mathematics involved in this calculation, and pricing in general, please see the Balancer Docs.

  4. Swap Fee: The swap fee, expressed as a percentage, is charged to users who trade tokens in the pool. This fee is captured by the launching project. Selecting an appropriate fee rate balances user trading costs with liquidity incentives, ensuring efficient capital allocation. Note that all swaps going into the pool will have a swap fee applied.

  5. Price Decay Mechanism: The gray price chart displays the predicted price curve, if you extrapolate the token weights and reserve amounts throughout the duration of the sale. On a Swerve pool page, this is represented by a gray curve, with the key: "Token Predicted Price - (If No More Swaps)". It is important to understand that the final price curve after the LBP is completed will probably not look like this, because any swaps into the pool represent demand, and thus effect the underlying price. However, for reference purposes this initial chart may be used to inform a participant as to when they might be interested in trying to enter the pool.

  6. Actual Price: On a Swerve LBP page, the current market price is updated dynamically on the page. This price is derived from the token weights and reserve amounts set for the LBP. HOWEVER, it is important to understand that this Current Price value provides a limited view onto the pool - in fact it specifically represents the current price to buy ONE project token using collateral tokens. Due to slippage, price feed delays, and swap direction, this current price may become less representative of your final trade outcome, it should be considered informational only. This means it is important to take note of the actual quoted token out amount (see 6. CLAMr input box) when you enter collateral for a trade.

Disclaimer

The Current Price value on the Swerve pool page provides a limited view onto the pool - in fact it specifically represents the current price to buy ONE project token using collateral tokens. Due to slippage, price feed delays, and swap direction, this current price may become less representative of your final trade outcome, it should be considered informational only.