Popular Science | Understand LBP in 5 minutes, how to buy the most reasonable chips in the fairest IDO

Original author: Dongle

Last week, the new game Dragonverse Neo produced by the veteran oil refining leader MOBOX launched the fair launch of the game token $MDBL. The currency's native second-layer Merlin Chain is launched using LBP.

As an IDO strategy, LBP is widely adopted and enduring in the crypto world, taking 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 and more beneficial IDO method to the community?

※ What factors affect the token price during the LBP process?

※ Why are you hung 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?

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 will start rushing to buy it, and the price will instantly increase. It is soaring and getting higher and higher, and real project participants cannot outrun the robots; if tokens are allocated according to the weight of funds, users with small funds will have almost no fair chance to buy.

LBP came into being in this situation, which combines the Dutch auction (price from high to low) and the English auction (price from low to high ), allowing the token to adjust its price with market demand during the launch process. If there are many buyers, the price will rise; if no one buys, the price will fall. This strategy solves the fairness problem of IDO to a large extent:

1. Pre-emptive buying may not necessarily buy the lowest-priced chips, thereby avoiding front-running ——Achieving fairness in the timing of purchases.

2. There is no limit on the purchase amount to prevent large investors and robots from attracting funds - making the positions more widely distributed.

3. The price can rise or fall during the launch process, encouraging the establishment of positions at rational prices - forming efficient price discovery.

Why can prices rise or fall in LBP?

To understand the price model of LBP, 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 will change 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, the MASK value accounted for 95% of the total liquidity pool value, and the remaining 5% was USDC . As time goes by, this ratio will gradually change until it ends, with MASK's value accounting for 40% and USDC's accounting for 60%. The parameters of weight change are preset by MASK Network.

From this we can get 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;

· With the purchase As the amount increases, the right side of the formula (USDC amount/MASK amount) gradually rises, and there are fewer and fewer MASKs in the pool

Therefore, the token price is affected by the "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 tests of LBP

Benefits to users

· You can buy chips regardless of the amount of funds.

· There is a greater probability of buying chips at a reasonable price without front-running competition.

Test for users

· The timing of entry is tested. If you are impatient, you may get caught in the wind at the top of the mountain. If you are hesitant, you may miss the best opportunity to get on the bus.

· To test the perspective of the project, you need to examine whether the team has the strength and plan for long-term development.

Advantages to the project side

· Since at the beginning Mainstream assets account for a small proportion in the pool, and project parties can use fewer assets to provide liquidity, and there will be less startup pressure.

A test for the project side

· A test of long-term construction Capability: 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.

LBP Strategy: How to Buy the Most Reasonable Chips

Preliminary Research: Psychological Price Determination 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 and divide the valuation by the total amount of Tokens to get the psychologically expected price. If the current price is lower than your psychological price at any time during the LBP period, it is a more appropriate time to enter.

Before LBP, you can conduct research on the following aspects of the project:

· Market value Estimate: Is it a track with high ceilings and high heat? Is the business a pure pie or does it have a clear product roadmap?

· Project team: investment background, past reputation, team strength

· Economic model: economic model of the token, subsequent application in the ecosystem

Depending on market popularity and initial FDV, several price trends may occur

Review the price formula of LBP:

Token price = (Token weight/USD weight) * (USD quantity/Token quantity)

Combining the price formula and past cases, we summarized several price trends that may occur under different market heat + initial FDV to derive the corresponding LBP buying strategy:

1. The initial FDV is low and the popularity of participation is extremely high: the sooner you participate, the better

If the initial pricing of the token is low, the popularity of market participation will be high If it is extremely high, then 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.

Take $MASK as an example. The initial price of LBP is $3.9, and the end price is $13.28. The average price of $MASK throughout the process is $20.94. 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 starting price,

If a project is very popular and you think the market value represented by its initial FDV is undervalued, then the earlier the better, the strategy is to get involved.

2. There is a certain popularity , but does not count as FOMO: mid-term entry, not recommended to wait until the end

Many people will be confused by the expected price curve of LBP and think that the price will definitely drop later. Go down and wait to get 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. Prices are lowest in the mid-term. Therefore, in this case, it is recommended to buy when the price/market value reaches appropriate psychological expectations.

3. Expected low popularity LBP

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 are no purchases, the purchase price is the lowest at closing. However, in the real environment, the assumption that there is 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.

Summary

To sum up all the above analysis, the most common LBP strategy can be obtained:

· Divide the total amount into multiple buys at any time when the price is lower than your valuation.

· 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.

· For most situations, it is not recommended to wait until the later stages for cheaper chips. The later the option weights, the lower the weight, and a small purchase may cause the price to rise. Most of the past lows of LBP have been in the mid-term, and it is recommended to enter the market at a suitable price range.

This article is from a submission and does not represent the views of BlockBeats.