As a composer, one of our all-time favourite things is creating or hearing new masterpieces. The work that goes in, the talent, the ideas, the creativity, the grit and the grindset.
In the last 12 months alone over 6000 new projects in crypto have been launched. By comparison however, a single country like India alone saw over 50’000 start-ups founded in a year — meaning, the crypto space has much more growth to see in the future.
In today’s “Learning The Notes” we will look at:
- The mechanics of how a token is launched in a “classic launch pad” launch
- What the advantages and disadvantages of different types of launches are
- How a Beethoven X Liquidity Bootstrapping Pool offers protocols a superior alternative to launch their token.
The Crowdfunding / Launch Pad approach:
One of the most common forms of token launch is a “launch pad” launch and it’s important to understand the mechanics behind how they work in order to accurately judge why other alternatives may be superior.
In this type of launch, the first phase usually called a pre-sale, a limited number of users get the chance to purchase a token before it is launched on the market.
In this model, interested users have to hold the governance token of the launch pad to qualify for different tiers of token allocations for the protocol launch.
Additionally, users will often have to whitelist through a manual process for each launch, meaning extra work on the part of the user.
If many people are interested in whitelisting to buy the IDO (initial digital offering) then each user’s share of tokens they may purchase becomes smaller.
Once the pre-sale phase is concluded, the token is then listed with seeded liquidity on an exchange, usually a DEX.
For this the teams have to sell tokens to investors, VC’s or supporters, like in the pre-sale, in order to afford the seed liquidity.
Remember, these are often 50–50 pools and a hyped launch needs to ensure enough liquidity for trading and may as a consequence be expensive to seed.
At a predefined time the token then gets listed on exchanges like Uniswap, Pancakeswap, etc. Some CEX’es like Binance also offer launch pads with their own whitelisting mechanisms.
For the reasons mentioned above , a launch can initially become a messy affair as those who could not buy in the pre-sale ape in, bots are set up to frontrun trades the millisecond trading opens up, and those who acquired discounted tokens in the pre-sale, in some cases, dump their tokens.
Disadvantages of Launch Pads:
- Launch pads force users to hold governance tokens, thus benefiting whales who have the means to buy more tokens and get larger allocations
- Users often have to whitelist for a launch, requiring extra effort on the part of the user
- Often IDO’s in lower tiers are oversubscribed, meaning users can only buy tiny allocations of the new tokens
- Tokens purchased in an IDO often are vested over time, and users cannot sell them when they please
- The actual listing on the market is often a messy process with front running, sniping and whale action
The Liquidity Bootstrapping Pool — the superior alternative:
If you are an avid follower of Beethoven X and Balancer Tech you may have already spotted a few issues in the above approach that can be mitigated through weighted pools.
For example, an 80–20 pool might be much better suited to the circumstances of a protocol launching their token.
However, there are several more adaptations to a simple weighted pool that a liquidity bootstrapping pool offers to make it a much more pleasant form of token launch.
A liquidity bootstrapping pool is a special permissionless weighted pool that allows a project to launch a token themselves with many benefits.
- The LBP offers a mechanism for fair price discovery and can greatly amplify seed capital allowing protocols to “bootstrap” their launch.
- The LBP discourages whales, front-running and bots.
- Any user can participate.
- The only fee charged is transparent and goes directly to the Beethoven X Treasury.
Fair Price Discovery & Starting Capital:
In an LBP, a protocol can set its desired starting and end weights within a weighted bootstrapping pool. So over the run time of a LBP the ratio of the assets in the LBP will actually change to create downward price pressure while allowing the protocol to amplify their starting capital.
How, you ask? Let’s go through an example!
In our fictitious example, let’s assume Beethoven Junior wishes to launch his own token (BJUNIOR) on Fantom. After learning about the advantages of LBPs, Beethoven Junior may want to create a pool that enables trading in BJUNIOR — FTM with the following variables:
- starting weight at 95–5. Thus 95% of the tokens in the pool initially are BJUNIOR and 5% are Fantom.
- Run time 24 hours
- End weight at 80–20. Thus 80% of the tokens in the pool are BJUNIOR and 20% are Fantom.
- Tokens in the LBP of 250’000 BJUNIOR (for the sake of simplicity we will assume this to be the current circulating supply).
If no trades happened, the price would decrease over the run time along the predefined price decay curve similar to this:
Additionally, let’s assume the launching market cap valuation of BJUNIOR is 250k with a token price of 1 USD. In the case of a liquidity pool on a Uniswap clone, the team would need to provide:
- 250k in BJUNIOR (assuming a price of 1 USD per BJUNIOR) and,
- 250k in USD to launch the token at this price point.
In the LBP, however, they can start with 475k BJUNIOR tokens and 25k in USD. Thus, greatly amplifying their starting capital and limiting the need to raise funds pre token launch.
No investor wants to be the first as there is downward pressure on price but waiting until the end might not be advisable, since if everyone behaves so, the price will spike at the very end and entries may be more expensive. Provided a protocols launching market cap is not wholly unrealistic and they have a rational community which believes that the fair market cap is equal to the launching one, or higher, they should see a healthy development of the BJUNIOR price along the price decay line with their starting and end weights.
LBP discourages whales, front-running and bots:
Now, as there is already a pre-existing price decay curve that disincentives the behaviour associated with launch pads.
There is no pre-sale and the moment trading goes live, is in theory, not the best moment to buy-in. In reality, anyone can buy or sell into an LBP at any point.
Therefore, everyone knows trading will happen and this will cause some price volatility. However, having a time-boxed period (for example 24 hours or even longer) in which everyone knows the price is designed to adjust downwards is a great incentive for investors to dollar cost average in the project and a disincentive to snipe or frontrun the launch.
This certainly sounds a lot more like fair price discovery!
Anyone can participate:
In an LBP anyone can buy or sell at any point. Users don’t need to whitelist or hold any governance tokens to be able to participate. This greatly levels the playing field for everyone, as whales can’t qualify for higher allocations. All users buy their token according to their favoured strategy and at their chosen time during the liquidity bootstrapping pool.
The fee for a protocol using the LBP is 2% of the collateral token raised. This flows directly and completely to the treasury.
Therefore, Beethoven X will not hold the launching token and be in a position to accumulate, farm or dump the token.
On the contrary, the protocol owned liquidity will grow. Additionally, protocols may choose to keep their liquidity on Beethoven X, in a pool that may even become incentivized down the line, to enable trading of their freshly launched token.
We believe that we will continue to see explosive growth in the number of projects launching over the net short and medium term, and we believe that using LBPs for launches creates a much healthier environment for both protocols and investors to thrive in.
Launches take on many forms and shapes. They are dependent on many factors beyond the technical solution which influence the price greatly. Therefore, it’s likely that launches do not follow the pre-defined curve and great volatility is possible. Teams may also experiment with unusual weights in the pool. Participating in any launch auction is a high-risk endeavour and the value of tokens you have received for your contribution might go to 0. Do your own research, invest only what you can afford to lose and formulate your own hypothesis for the valuation of the token you desire to buy. Beethoven X is not responsible for or affiliated with any projects, their tokens or teams — anyone can launch a token on the permissionless LBP.