Introductory Guide to Token Launchpads, IDO, and Liquidity Bootstrapping Pools
With new DeFi initiatives on the rise, several protocols are working on various methods to create liquidity for the new coins that they issue. I make early access to cryptocurrency investment opportunities possible by crypto launchpads, which allow hundreds of individuals to invest earlier than anybody else. Token launchpads may be a conservative investment that provides generous returns.
These events may be extremely successful when they are well-planned and created with teams and investors in mind. When they are poorly planned and poorly conceived, they can be disastrous. This is true for investors, traders, and developers.
This article should provide a high-level overview and assess the advantages and disadvantages of the many “models” of Initial DEX Offering launchpads that are available to crypto projects for fundraising for launching DeFi tokens.
What is a Token Launchpad?
Token Pool Launchpads help create new trading pairings. An already well-known formula was first presented by UniSwap, X*Y=K, in which the prices of two assets in the liquidity pool are given, and K is the constant. Incentives to lock in assets and get quick mathematical price discovery.
Next, let’s look at Tezos, a token launchpad example.
Tezos is a major smart contract blockchain. Many projects received a lot of attention and anticipation after its high-profile ICO in 2017. A dispute over code ownership marked the debut of XTZ. Luckily, the Tezos project is a wonderful example of a sizable community voting. However, Tezos smart contract programming is still very limited to a launchpad and has not developed into a full-fledged IDO.
When choosing the right launchpad for you, don’t forget to check the launchpad’s current pooled liquidity.
Decentralized exchanges like Uniswap price tokens in a pool based on balances. Before investing, examine the project’s pool liquidity and see if there is a time lock on the token pool. Not every project contributes liquidity to the pool before the launchpad’s IDO.
What is an IDO?
Token sales on decentralized exchanges are known as Initial DEX Offerings (IDOs). Companies often use IDOs because they allow them to connect with potential investors and build their brand in a more open manner (i.e. an established DEX). Initial Exchange Offerings are similar to ICOs, but are performed on larger, more controlled exchange platforms. IDOs are preferred over IEOs and ICOs because they give more immediate liquidity, a speedier trading route, and lower listing costs.
IDOs may be generated for a variety of purposes, including money, music albums, and aether-powered warships. IDOs provide companies with a mechanism for engaging their communities in an economy that benefits their products and services while also allowing them to make prudent asset management decisions. Similar to how traditional companies get venture cash before launching, enterprises making first DEX offers get funding from individual investors.
The major purpose of the creation of the Initial DEX Offering (IDO) model is to address the shortcomings of existing models, such as the initial coin offering (ICO), security token offering (STO), and initial exchange offering (IEO). Because IDO is a decentralized trading platform, organizing a fundraising event is not needed. This occurs automatically. While the advantages of IDO have been spectacular, there are several drawbacks to this approach. The most prevalent negative is the fast price fluctuation.
IDO vs IEO/ICO
IDOs provide many advantages over ICOs and IEOs, including increased liquidity, instant trade, and lower listing costs.
A decentralized exchange’s initial DEX offering, or IDO, is the procedure through which a currency is listed on the exchange (DEX). In an IDO, a blockchain project initially lists a cryptocurrency on a DEX to raise cash from retail investors. IDOs are like initial exchange offerings (IEOs), in which crypto businesses introduce their tokens and raise funds via a regulated exchange, in that both allow for rapid trading besides fundraising.
However, centralized exchanges set severe ground conditions, which include: payment of a substantial amount of money or providing a percentage of the tokens to the exchange; prohibition of the project from listing their tokens on rival exchanges; and restriction of the project from listing their tokens on rival exchanges. Having relatively little influence over the parameters of a token sale conducted by a project.
In comparison, IDOs can provide a far more cost-effective method for token sale and listing. To begin, an IDO allows fast liquidity via a DEX’s accessible liquidity pools with little to no slippage. In comparison, it has reduced listing costs. Similar to IEOs, it permits instant trade.
DEXs that offer IDO services include the Binance DEX, Polkastarter, and Uniswap. The majority of traders prefer IDOs to ICOs since they prevent the token issuer from controlling the fundraising round. RAVEN was one of the first IDOs to be published on the Binance DEX in June 2019.
Today, we’ll take a closer look at Polkastarter as an example of an IDO platform.
The platform should make it simple for projects to create their interoperable token pools, which may be fixed price or dynamic. Polkastarter is currently little more than a project launchpad. The bulk of its key features are still under development and will be available in 2021 — or when it migrates to the Polkadot network.
Polkastarter has been a great success, hosting the initial DEX offering (IDO) of some of the year’s most exciting projects, including Blockchain Cuties, Ethernity, and Convergence. This makes it a valuable fundraising tool since it allows investors to get access to new tokens while also donating.
Polkastarter IDOs are often open to the public, but you must have a minimum of 3,000 POLS to compete in pools reserved for POLS holders.
- There are no KYC requirements because the entire operation is performed on the blockchain.
- Without having to go through the lengthy vote procedure to change launchpads, projects with powerful communities may generate funds.
- Polkastarter has attracted over 200,000 investors despite its infancy, with some projects achieving extraordinary success.
- Investors must have a working knowledge of decentralized finance to take part.
- Because of the requirement of 3,000 POLs (about £3000) to join various pools, it is disadvantageous for small investors.
- The project has begun whitelisting.
- Participants that desire to take part submit their names for inclusion on the whitelist.
- The program randomly picks addresses from qualifying applicants for prospective whitelisting, pending the outcome of the subsequent stage.
- The IDO conducts a Know Your Customer (KYC) check on potential whitelisted addresses (we’ll get back to this!).
- Individuals who have been whitelisted and verified as having met the KYC requirements can now take part in the IDO, subject to general approval and verification.
Blockchains for IDO Launchpads
You may develop and deploy your IDO on one of many blockchain platforms to take advantage of the specific features of each platform. By selecting the proper platform, you may also increase the success of your IDO.
Ethereum’s inherent nature, as well as its abundance of smart contract functionalities, may help you stand out in the Ethereum community.
When you use the Polkadot ecosystem to launch an IDO, you gain multichain support and connectivity. It essentially expands the reach of your IDO.
Binance Smart Chain
The Binance market’s investing community has shown influential support for the development of IDO on the Binance smart chain.
Tron’s scalability and increased throughput make it easier to design and deploy an IDO.
How to Choose the Best IDO Launchpad
While it may be tempting to just select the launchpad with the largest trading volume, more exposure does not automatically imply increased risk. It is usually desirable to increase visibility by utilizing a more specialized platform that is geared towards the project’s expertise or target investment group.
It is important to place your IDO on a transparent platform that enables people to verify a project’s legitimacy, reputation, and reliability to boost investor confidence. Platforms should give full token information and enable users to verify data like the token contract’s address through a credible source such as CoinMarketCap.
Because DEXs may look to customers to be more difficult than centralized alternatives, it is important to select a simple platform. Certain platforms can combine the benefits of a decentralized exchange with the ability to connect to centralized service interfaces such as fiat on/off ramps, allowing non-crypto users to take part in your IDO.
DeFi customers are a discerning bunch that desires more functionality and control over their blockchain transactions. To encourage participation, select a platform that lets users build trading pools, liquidity mining programs for additional governance, token incentives, staking pools, and other contest and reward programs.
Types of IDO launchpads
Not all launchpad platforms are equal.
- A static listing, as is customary on Uniswap;
- An “Overflow Model” similar to that used on PancakeSwap;
- A first-come, first-served IDO similar to that used by Shyft Network on Polkastarter;
- or Truly Decentralized Liquidity Bootstrapping Pools like ALEX on Stacks blockchain
One concern is that algorithmic trading obscures the potential for arbitrage trading on alternative exchanges. While algorithmic trading using stable coins has a lot of potential, startups demand a more stable and dependable option. Liquidity Bootstrapping Pools are the solution.
What is LBP?
Liquidity Bootstrap Pools’ aim is to ensure that each project has enough time to distribute its tokens while also keeping a healthy team treasury. The pool is designed similarly to previous liquidity pools, with the exception that the new token is assigned 80:20 to the dollar-pegged currency. The token’s percentage gradually increases until 80 percent of the DAI in the pool equals 20% of the token, ensuring full price discovery. Periods set in advance may last up to six months.
“Liquidity bootstrapping pools” (LBPs) and “configurable rights pools” (CRPs) are synonymous concepts. A smart pool is essentially a contract that manages a central pool of tokens designed for use on an exchange. Compared to other shared pools, smart pool controllers have limited control over the parameters of the pool. Thus, a smart pool requires less trust than a shared pool but not as much as a private pool.
Liquidity Bootstrapping Pools safeguard nascent projects by enabling them to keep their reputation while slowly releasing their new coins to merchants. The protocol promotes more constant price discovery and enables projects to issue tokens fairly and with a modest entrance fee, without motivating whales to profit through rug-pulls or other market manipulation techniques.
What Are the Benefits of LBP Launchpads?
Next, we will highlight the key advantages of LBP over other Launchpad models.
Bots do not have a competitive edge over humans.
A typical IDO motivates players (inadvertently) to be the first to get their commands through, resulting in a nasty gas war. This occurs because teams often begin the IDO at the previous round’s pricing. Typically, that price is far lower than what the market would have valued the token at the IDO debut, as the project has matured significantly since then. However, Balancer LBPs transform this into a game in which participants compete to be the first to recognize when a token has achieved its fair worth and to place their purchase.
Participants may gain the token using any well-known cryptocurrency.
This allows the community to take part in the token sale regardless of the tokens they own in their wallets, rather than being restricted to just one or a few alternatives. Two Balancer features assure this: Smart Order Routing (SOR) (recently upgraded with multi-path routes), and the possibility for Balancer pools to support up to eight tokens. Thus, the Perpetual team might have sold PERP directly into the same LBP for USDC and ETH. Even if customers choose just USDC, Balancer’s SOR guarantees that they may gain PERP using a variety of alternative tokens that have liquidity in other pools alongside USDC.
Liquidity Pool Pause Option
Another distinguishing feature of LBPs is their capacity to halt swapping. A pool controller may choose to do so for a variety of reasons, including strong, unexpected demand driving the token price higher or individuals selling tokens back to the pool for profit rather than purchasing them. When a whale has no motivation to benefit from a “rug pull” or similar method that results in quick price volatility, the token’s price discovery becomes more flexible. Despite the ability to deactivate swapping, it is extremely unusual, since the pool operator is encouraged to leave it fully active, given the primary aim of a token sale is to sell tokens.
Effective Means for Fair and Secure Fundraising
Liquidity is certainly important for a token. It’s detrimental to a token’s value if it lacks rapid liquidity. A liquidity pool ensures continuous liquidity at all price levels. To enable token swapping in the liquidity pool, the project must first get liquidity for the tokens. On most launchpads, investors trade a project’s token immediately after it is launched. Early purchasers of tokens can sell them at a premium during the IDO. Once the initial investor purchases a token, the price fluctuates.
Compared to conventional fundraising methods, an IDO launch offers immediate token creation and liquidity. Private investors first gain a large number of tokens at a reduced rate. When the token is made available to the broader public, its value increases. The team can extend LBPs indefinitely LBPs, giving ample time for real price discovery. If a project’s token is linked to a liquidity exchange, installing a new smart contract costs just a few dollars in gas fees. Smart contracts are used to manage the asset tokens and the liquidity pool.
How do LBP Launchpads work?
The Liquidity Bootstrapping Pool is based on the Weighted Equation and should assist the capital-efficient launch of a token compared to another token. LBPs are completely customizable to meet the demands of a team, enabling them to link their token with any set of ERC-20 tokens and to weigh the pool’s value among the tokens as they see appropriate. These weights can be changed periodically by a predefined timetable defined by the team, thus continually altering the pool’s overall value allocation among the tokens.
A liquidity pool of the LBP kind that changes pool weights over time to maintain downward pressure on the market, therefore addressing concerns about unequal token distribution. Because of the downward shifting weights over time, there is natural downward selling pressure on the price throughout the pool’s duration, which is offset by the inflow of the second asset. Because the market determines the token’s ultimate price by starting at a high initial price and gradually declining over time, participants are motivated to wait until the price falls.
- Creating capital-efficient pools to handle the first distribution and price discovery of tokens.
- Price fluctuations are decoupled from the process of token distribution and liquidity creation.
- Reduce capital expenses associated with the liquidity program to establish a larger treasury to support development and marketing.
The fundamental reason for developing an LBP is to enable low-capital-requirement token production. This is accomplished by establishing a two-token pool composed of a project token and a collateral token. It then changes the weights in favor of the project token (at first). Gradually, the balance shifts, and at the end of the token sale, the collateral coin is preferred. Controllers can adjust the sale to maintain a relatively constant price to maximize revenue, or they can adjust the sale to a specified minimum price (e.g. the initial coin offering price).
To take an example, suppose a new project wishes to conduct a token sale while simultaneously establishing deep liquidity. They can accomplish this by providing a specific weight/ratio and also by allowing the pool to charge a fee. This is excellent for distributing new tokens, as the LBP controller only has to give the new tokens and a tiny amount of a second asset to begin distribution and establish the pool.
Since the settings are established in such a manner that tokens are released gradually with varying weights, whales are compelled to break their transactions into smaller, independent dealers over a longer time. As a result, it will be easy for everyone else to enter during the sale.
In rare instances, whales may decide to gain huge holdings after an LBP, causing the price to rapidly pump. However, due to the LBP’s limitations, a rug pull event is almost impossible, safeguarding the token’s value following the pump, since the token’s price first climbs but gradually declines over time. This process is repeated until all tokens have been sold and the tokens have been effectively divided equitably.