🎢 "How to Avoid Pumps & Dumps in Your Token Offering," By Furucumbo's Blake Ho
Hello Defiers! Happy Chinese new year to those celebrating the year of the Ox —incredibly fitting for a bullish year for Ethereum— and happy President’s Day to those celebrating the holiday in the US.
The cryptocurrency space has provided investors and entrepreneurs a range of fundraising options. In general, most of these alternatives are steps towards taking out middle men of the past and providing a way for startups to directly raise funds from investors of all sizes and locations, and for individuals to support and benefit from early-stage companies’ growth.
The first of these more decentralized fundraising mechanisms was the initial coin offerings (ICO). The open nature of ICOs led to scams and manipulation, so the more controlled and centralized initial exchange offering (IEO) followed. DeFi is enabling a new kind of fundraising, the initial DEX offering (IDO). IDOs are as decentralized in nature as ICOs, but they’re done through decentralized exchanges —most commonly through Uniswap— instantly providing a market for the new token.
Today, we’re diving into a lesser known type of IDO, whcih is being pioneered by Balancer Labs through its Liquidity Bootstrapping Pools. Blake Ho of Furucombo, a platform which provides a drag-and-drop interface for DeFi traders, dives into her project’s experience with fundraising via LBPs. She believes this fundraising mechanism enabled a more stable price for the COMBO token when it was first issued, and helped the DeFi aggregator, raise over $4.5M in just 48 hours.
Blake Ho has an extensive background in traditional finance, holding positions at Citibank Commercial Banking and several large fintech projects. Blake’s passion for decentralized finance and creating an open financial system accessible to all led to her joining the teams at DINNGO and Furucombo where she specialises in data analysis and team building.
Both paid and free subscribers receive the full guest post, but paid subscribers got it early. Paid subscribers also get complete access to The Defiant content and archive, and access to The Defiant Discord chat. Join the club! Pay with Dai on this link (100 Dai/yr) or in fiat ($100/yr, $10/mo) at the link below.
🙌 Together with:
- Zerion, a simple interface to access and use decentralized finance
- Ledger, a hardware wallet combined with the Ledger application to securely buy, sell, exchange, stake, lend & manage your crypto
- Kraken, consistently rated the best and most secure cryptocurrency exchange, which can get you from fiat to DeFi
- Casper, an enterprise-focused blockchain which aims to introduce unprecedented security, speed and scale for businesses
Preventing Pump and Dump Token Schemes and Building Deep Liquidity with Liquidity Bootstrapping Pools
By Blake Ho, chief operating officer at DINNGO and Furucombo
Since the 2017 Bitcoin boom, there has been a constant evolution in mechanisms for token launches. Failures of previous mechanisms, mainly the volatility and scams associated with ICO’s, paved the way for novel methods like the Balancer liquidity bootstrapping pool (LBP).
LBP’s are designed to minimize volatility and prevent front-running and price speculation by automatically adjusting the weights down during a token launch. LBPs are open and accessible for all to use, and allow teams to release a token project while building liquidity. This method also allows a project to set their own ratio of initial capital allocated to the sale.
Bots and whale buying gave token launches a bad reputation, and mechanisms like LBP’s are designed to provide fair competition between humans and bots, bringing stability to token launches and to DeFi as a whole.
Failures of ICO’s & IEO’s
We all remember the initial coin offering (ICO) craze, the most popular fundraising mechanism in 2017, which is similar to a mix of online crowdfunding and an IPO, but for cryptocurrency. The lack of regulation and frequent pumps and dumps gave ICO’s a reputation for being fraudulent and ridden with scams. The ICO market caused millions in losses and produced shockingly few success stories, giving crypto a bad reputation.
An alternative to an ICO is an initial exchange offering IEO, which is a token distribution method where a centralized exchange distributes a crypto project’s tokens either by a lottery system or first come first serve basis. Because a centralized exchange is hosting the token sale, there is a lengthy vetting process to getting your project listed, protecting against fraudulent projects in a way in which ICO’s failed. IEO’s typically have high listing fees, are still at risk for pump and dump, and can still fall prey to projects cutting corners amidst the vetting process.
Balancer’s LBP is more in line with the vision of DeFi by offering open access and flexibility. With LBP’s, the price is very carefully considered before and during the initial launch, and there are a number of mechanisms built in to ensure a successful launch.
What is an LBP and why are they useful?
A Liquidity Bootstrapping Pool (LBP) is a token launch mechanism that creates more equitable and fair token distribution events. Balancer’s LBP smart pool template adjusts its weight over time to create a constant downward pressure on price, minimizing volatility, and preventing front-running and price speculation. LBP’s are designed to provide fair competition between humans and bots and allow for a more equitable token launch.
At the core of Balancer’s LBP is the continuous pool weight adjustment. This means that the price will keep declining until someone thinks that the price is fair enough to buy. By quickly adjusting weights down, and therefore dropping the value of the token in the pool, it discourages an eventual price spike due to early speculation. This prevents initial hype and “pumping” of a token that often leads to a spike in price followed by a sharp decline.
LBP’s were created with the idea that a team should be able to build liquidity without large amounts of upfront capital, and that a team should be able to design a token sale mechanism that fits their specific funding goal. In addition, LBP’s operate with the belief that distribution of tokens and liquidity provision should be separate from token price changes. Different from bonding curves, tokens should be distributed even if their unit price stays constant.
LBP’s allow teams to have more flexibility and control over their token distribution mechanism.
Smart Pools: How LBP’s provide an initial advantage
There are a number of platforms to choose when holding a token launch. Most popular platforms like UniSwap require projects to supply 50/50 liquidity to initially list a project token. This presents a problem for projects who do not have the initial capital to do this efficiently, preventing projects from launching.
LBP’s use a mechanism called Smart Pools which allow projects to set their own ratio, meaning they can decide how much capital they will supply, and the smart pool uses complex logic to readjust balances, weights, and fees. The lower you set the weight of the reserve assets in your LBP, the less upfront capital you would need to seed your project.
For example, you could set a 20:80 ratio, meaning that the pool composition will be 20% of your own capital, and 80% will be the project token. The value of your project’s tokens is proportional to the value of the capital you provide for the sale, therefore the amount of funds you can raise in an LBP is limited by the total value of the reserve assets you provide. Balancer’s LBP uses the [(reserve asset / 0.2) / starting token price] = number of tokens. If your initial ratio is 20:80 and you contribute 1M USD, and your starting price is 10 USD, the amount of tokens you can sell is 400,000.
Balancer provides an LBP simulator so that teams can type in balances, weights, and swap fees to calculate the initial token price, and experiment to come up with a reasonable price curve.
Smart Pools lower the barrier to entry by allowing teams to decide how much capital they are willing to allocate to a project, preventing price speculation, and the automatic weight adjustment mechanism preventing volatility.
What makes LBP a better fundraising option for some projects?
LBP templates allow a customizable token distribution mechanism that gives teams more control and flexibility over their token launch. At its core, LBP’s are a mechanism to prevent speculation, and allow teams with any amount of capital to host a token launch. Projects like PERP, APY.Finance have used LBP’s for their token launch.
What are the downsides of an LBP?
The largest downside to LBP’s is their visibility within the space. Some people are not familiar with them, and platforms like Balancer are less well known than platforms like UniSwap, so it can be more difficult to attract users to your token launch. In addition to trying to attract first-time users to a platform like Balancer, it may take more time for a team to determine their initial ratio and weights when they begin experimenting with their LBP.
Even though LBP’s prevent price speculation and volatility, there are still possibilities to have pump and dump scenarios, but in general the fluctuation is not nearly as volatile.
Furucombo as a Case Study for a successful LBP
Back in December 2020, Furucombo completed a fundraising round with investors and needed to launch a token to kick-off our token economics for Furucombo V2. Like many projects, at first we planned to use Uniswap because it was a popular platform and we were able to provide the 50/50 upfront capital to add liquidity into the Uniswap pool.
However, when we saw a few DeFi projects experience severe price volatility during the few days of their token launches on Uniswap, we began to worry about how listing on an exchange like Uniswap would affect our price.
Furucombo wanted to prevent token price from rapidly dropping to the bottom during the initial launch, so we looked for other solutions to have a more stable launch. After learning about the Balancer LBP, we quickly realized that it was an ideal solution for launching our token. Our key considerations in choosing Balancer include the fact that Balancer has a proven record for a more stable token launch (Perpetual, APY Finance), that we don’t have to write contracts ourselves nor do audits (Hegic bonding curve), and that Balancer has a better user experience and less learning cost for most users . We also already have Balancer cube on Furucombo thus we could easily let users trade COMBO directly.
Balancer’s values are aligned with our goals for open access and permissionless distribution, and LBP’s show the potential for a more equitable future. Balancer’s LBP simplifies the token launch process, making it accessible to all. Personally I like the Balancer team, and Balancer is providing a lot of upgrades soon to make their platform even more accessible.
Because Balancer’s LBP is such a new mechanism, it can be challenging to attract users to the platform. We are lucky to have a group of long term users that help spread the word on our token launch. Our product is already well-known for certain features, so the maturity of our product, loyal users, and investors have helped make the launch so successful.
The end result was a successful token launch with $4.5m token distributed in 48 hours.
Summary
Existing token mechanisms have a lot of room for error. Pump and dump, whale buying, needing liquidity up front, and bot interference are the main points of failure. These failures open opportunities for ingenuitive ways to design a token distribution launch like an LBP.
DeFi is centered around collaboration, and building community begins with the initial token launch. A core value of a LBP is that it can be accessed by anyone - they are designed to be more fair and allow companies of any size and scale to participate by allowing them to launch a project even if they don’t have a large amount of upfront capital.The weighted pools automatically adjust over time to ensure a more equitable and fair launch mechanism, and the open source code allows for all of the activity to be transparent and publicly audited and verified.
As token projects continue to thrive in the crypto space, more experimentation and flexibility is required around liquidity bootstrapping. We see LBP’s playing an important role in that process, allowing teams of all sizes to have successful token launches.
The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access, while free signups get only part of the content. Click here to pay with DAI (for $100/yr) or sub with fiat by clicking on the button above ($10/mo, $100/yr).
