Last week, the new game Dragonverse Neo produced by the veteran oil refining leader #MOBOX launched the fair launch of the game token $MDBL, using the method of #LBP on the Bitcoin native second-layer Merlin Chain.
As an IDO strategy, LBP is widely adopted and enduring in the crypto world with the advantage of fair and efficient price discovery. However, many investors are not sure how to participate in this mechanism, and even get into trouble in the process. This article will introduce the price mechanism of LBP in easy-to-understand language and share more reasonable participation strategies. After reading this article, you will naturally have answers to the following questions:
Why is LBP a fairer, more community-friendly approach to IDO?
What factors affect the token price during the LBP process?
Why are you hanging at the top of the mountain while others can buy cheaper chips?
When should I enter the market and what is the best way to buy?
1. LBP: Born for fairness
LBP, the full name of Liquidity Bootstrapping Pool, is a decentralized token issuance method that originated from the weighted pool proposed by Balancer and has since been widely adopted. It was born to solve a core problem:
How to distribute tokens to community members at a relatively fair price?
If a token is sold on Uniswap, as soon as the token pool is added, hundreds of robots start rushing to buy it, and the price soars instantly and gets higher and higher. Real project participants cannot outrun the robots; If tokens are allocated based on capital weight, users with small capital will have almost no fair purchase opportunity.
LBP came into being under this situation. It combines the Dutch auction (price from high to low) and the British auction (price from low to high), allowing the token to adjust the price with market demand during the launch process. If If there are many buyers, the price rises; if no one buys, the price falls. This strategy solves IDO’s fairness problem to a large extent:
Buying first does not necessarily lead to buying the lowest-priced chips, thereby avoiding front-running – achieving fairness in the timing of purchases.
There is no limit on the purchase amount to prevent large investors and robots from accumulating funds - making positions more widely distributed.
The price can rise or fall during the launch process, encouraging the establishment of positions at rational prices - forming efficient price discovery.
2. Why can prices rise or fall in LBP?
To understand the LBP price model, you first need to understand a concept: weight. In the LBP liquidity pool, there are two types of tokens: one is the project's issuance token, and the other is a token with a relatively stable value (such as USDC). "Weight" represents the value ratio of the two tokens in the pool.
The weight changes from high to low over time during the LBP process and is only related to time.
Take $MASK issued by Mask Network as an example. At the beginning of its LBP, MASK's value accounted for 95% of the total value of the liquidity pool, and the remaining 5% was USDC. As time goes by, this ratio will gradually change until the end, when MASK's value share drops to 40% and USDC's share increases to 60%. The parameters for weight change are preset by MASK Network.
From this we can derive the price formula of MASK:
MASK price = (MASK weight / USDC weight) * (USDC quantity / MASK quantity)
It can be seen from the price formula:
As time goes by, the left side of the formula (MASK weight/USDC weight) gradually decreases, from 95:5 to 40:60;
As the purchase volume increases, the (USDC quantity/MASK quantity) on the right side of the formula gradually increases, and there are fewer and fewer MASKs in the pool.
Therefore, the token price is affected by both “time weight” and “trading behavior” and can rise or fall. The process of LBP can reflect the spontaneous mechanism in the market economy, make prices more reasonable through trading activities, and reflect the real supply and demand relationship in the market. It is a good price discovery process.
Advantages and challenges of LBP
Benefits to users
Regardless of the amount of funds, you can buy chips.
There is a greater probability of buying chips at a reasonable price without having to rush into competition.
A test for users
Test the timing of entry. Being impatient may result in you being stuck on the top of the mountain, while being indecisive may result in you missing the best opportunity to get on board.
To test your perspective on the project, you need to examine whether the team has the strength and plan for long-term development.
Advantages for project parties
Since mainstream assets account for a small proportion in the pool at the beginning, the project side can use fewer assets to provide liquidity and there will be less startup pressure.
Test for project parties
Test long-term construction capabilities: If the token has no practical application in subsequent products and ecology, or there is no continuous good information, then the launch method of LBP will not make much sense.
3. LBP strategy: how to buy the most reasonable chips
(1) Preliminary research: Psychological price determines the timing of entry
Because it is difficult to predict its short-term price fluctuations, LBP is essentially a valuation game. Give the project a valuation, divide the valuation by the total amount of tokens, and you can get the psychological expected price. If at any time during the LBP period, the current price is lower than your psychological price, it is a relatively suitable time to enter the market.
Before LBP, the following aspects of the project can be investigated:
Market value estimation: Is it in a high-ceiling, hot track? Is the business a pure pie or does it have a clear product roadmap?
Project team: investment background, past reputation, team strength;
Economic model: The economic model of the token and its subsequent applications in the ecosystem.
(2) Several price trends that may occur based on market popularity and initial FDV
Review LBP’s price formula:
Token price = (Token weight / USD weight) * (USD quantity / Token quantity)
Combining the price formula with past cases, we summarize several possible price trends under different market heat + initial FDV to derive the corresponding LBP purchase strategy:
1. Initial FDV is low and participation enthusiasm is extremely high: the sooner you participate, the better
If the initial pricing of the token is low and market participation is extremely high, the price will often rise rapidly after the opening and then fall back, but there is a high probability that it will not be lower than the initial issuance price throughout the process.
Taking $MASK as an example, the initial price of LBP is $3.9, the end price is $13.28, and the whole process $MASK $MASK 0.94. The same is true for other famous LBP cases: Merit Circle's $MC, GuildFi's $GF, the price was the lowest at the opening, rose rapidly as soon as the market opened, and never fell back to the price at the beginning.
If a project is popular and you think the market value represented by its initial FDV is underestimated, then the strategy of participating is to participate as early as possible.
2. There is a certain degree of popularity, but not FOMO: enter in the middle, not recommended to wait until the end
Many people will be confused by the expected price curve of LBP, thinking that the price will definitely drop later, and waiting can be exchanged for cheaper chips. However, the later the period, the smaller the value of (Token weight / USD weight) becomes. According to the LBP price calculation formula, the same purchase amount will cause the price to rise even more. If everyone waits until near the end to buy, it will cause the price to form a U-shaped recovery with a larger amplitude.
In real LBP, this situation often happens: taking $TUNA and $DEAI as examples, the price dropped for a period of time at the beginning, and the price was the lowest in the mid-term. Therefore, in this case, it is recommended to buy when the price/market value reaches appropriate psychological expectations.
3. LBP with low expected popularity
For LBP with fewer participants, the right half of the price formula (USD quantity / Token quantity) has little impact, and the price is mainly affected by (Token weight / USD weight). Theoretically, if there is no purchase, the purchase price is the lowest at the end. However, in the real environment, the assumption of no purchase is not completely true. In order to avoid the price being pulled up at the last moment, you can choose to buy some time before the end.
Summarize
Summarizing all the above analyses, the most common LBP strategy can be obtained:
At any time when the price is lower than your valuation, divide the total amount into multiple buys.
For projects with high popularity and low opening prices, you will not lose money if you enter the market immediately after the market opens, but it is not recommended to invest a large amount of money as soon as the market opens like traditional IDO.
In most cases, it is not recommended to wait until the later stage for cheaper chips. The later the weight is, the lower it is, and a small purchase may cause the price to rise. Most of the past LBP’s lowest points are in the mid-term, so it is recommended to enter the market at a suitable price range.
