Why We Chose to Distribute PERP Using a Balancer Liquidity Bootstrapping Pool
Since the release of our plan to use Balancer’s Liquidity Bootstrapping Pool (LBP) as the way to distribute tokens, we’ve been being asked “why not to use ___” (insert your favorite token launch platform)
With this article, we’d like to explain why we’re going with a Balancer LBP distribution, as well as other alternatives we’ve considered.
What is Balancer?
Before we explain what Balancer’s liquidity bootstrapping pool (LBP) is, we must understand what Balancer does.
For those who aren’t familiar with it, Balancer is a Uniswap-like protocol that facilitates token swaps on Ethereum. What makes it special is that each liquidity pool can store up to 8 different assets and each liquidity pool creator can customize:
- The weight of each asset in the pool.
- The transaction fee charged by the pool.
These unique characteristics make two things possible:
1) Impermanent Loss Mitigated Pool
Generally speaking, liquidity providers in the pools with a 50/50 weight between two assets suffer from a high impermanent loss. Now, with a customizable weight, pool creators on Balancer can set the weights between two assets as drastic as 95/5 to reduce the impermanent loss, as the line chart below shows:
As you can tell from the chart above, the higher an asset in the pool appreciates against the other, the more effective the impermanent loss mitigation is for a 95/5 pool. As DegenSpartan puts it:
2) Auto-rebalancing ETF-like Pool
Pool creators can make a pool that consists of various assets with different weights, and the pool token, which represents the ownership of that pool, can also be traded on exchanges such as Uniswap. This is similar to a stock exchange-traded fund (ETF), a fund that composes of multiple stocks, is also traded on a stock exchange.
The most famous example for this is PieDAO, a DAO that creates ETF-like pools with the end goal to create a portfolio that keeps investors safe in all weather. Their latest work is DeFi+S, a pool on Balancer that contains 13.49% of BAL, 26.52% of LRC, 29.99% of REN, and 30% of UMA, and whoever wants to have price exposure to those small market cap DeFi tokens can outright purchase DeFi+S token rather than buy the individual token inside the pool.
What is Balancer’s LBP
Now that you understand Balancer’s core functionality, we can start to dive into Balancer’s LBP and how it works.
Liquidity Bootstrapping Pools (LBP) is a kind of Balancer’s pool that changes its weight as time goes by to create constant downward pressure on the price. This helps prevent front-running and price speculation.
In our case, at the start, the weight of PERP will be 90% and that of USDC will be 10%. The weights of both assets are changed at least once per hour as the line chart below illustrates, which reduces the spot price of PERP whenever that happens.
You can play around our spreadsheet for the charts above over here.
What’s great about LBP for us?
There are three integral principles for our token distribution:
- The distribution must be fair for humans.
- The distribution must have better price discovery.
- The distribution must be permissionless and scalable.
With those in mind, let’s examine why we end up going with LBP:
🤖 Bots have no advantage to humans
Since the price of the asset inside an LBP will start from high and gradually go down with the passage of time, if a bot immediately gets PERP when the pool is live, the price on Balancer will soon be lower than the acquisition price that the bot has paid after the weight change.
📅 LBP lasts for a couple of days (can result in better price discovery)
The LBP in our case will last for three days, meaning that no matter which timezone you’re in, you’ll have your chance to get the tokens. And people aren’t incentivized to FOMO in at the start, which should result in better price discovery.
💱 Users can use popular tokens in exchange for PERP
Thanks to Balancer’s smart routing, users aren’t forced to use the asset we pair PERP within our LBP to get PERP. Instead, users can use tokens such as ETH, COMP, or even SUSHI in exchange for PERP on Balancer with a little higher slippage due to multiple hops between pools.
Alternatives we’ve considered?
Mesa is a batch auction platform run by DxDAO on the Gnoss Protocol. Traders on the platform can place their bids on-chain before the auction starts, and at the commerce of the auction, buy orders are matched with sell orders under the condition that traders’ combined welfare is maximized.
Mesa has many benefits for token distribution and has been used for projects such as mStable and DMM. However, due to our desire to minimize bots outcompeting humans during the distribution, as well as due to community feedback, we decided to go with Balancer instead.
Bounce Finance is a new token swap platform. With it, any person can create a pool that allows other people to 1) use ETH in exchange for the offered token by a predetermined price, or 2) place a sealed bid with ETH for the offered token, and when the pool’s running time is up, Bounce Finance’s smart contract will open the sealed bids and fill up the orders from highest bid to the lower ones until all of the token allocations are filled.
We really like what Bounce Finance is doing, but we decided to go with Balancer because it allows PERP to be purchased with USDC and other tokens, not just ETH.
The initial exchange offering, or IEO, is a token distribution approach where a centralized exchange distributes a crypto project’s tokens to its users either by a first come first served basis or a lottery system. In return, a crypto project typically offers a part of their tokens to the centralized exchange as the service fee or the listing fee.
While IEOs have their advantages, we aim to build a permissionless protocol with price discovery provided by vAMMs. Balancer’s permissionless design and open-access distribution are more in line with our values and our goals for PERP distribution.
As a publicly audited, open-sourced project, Balancer’s reliability, and code is transparent. It allows a variety of tokens to be swapped for PERP, and it helps us minimize the chance of bots outcompeting humans. As a DeFi project itself, Balancer also fulfills our goals of providing an open-access distribution for PERP.
If you want to try out an LBP, there is great news for you:
The LBP for PERP, the native token for Perpetual Protocol, will go live at 6:00 (UTC) on 9/9, so you can try it out yourself.
As a reminder, do not get PERP too early or you’ll get rekt.