Liquidity Bootstrapping Pool (LBP)

A Liquidity Bootstrapping Pool (LBP) is a mechanism utilized in decentralized finance (DeFi) to launch new tokens while establishing liquidity. It involves a token issuer providing an initial supply of both the new token and a base currency (often Ethereum) into a smart contract-based pool. Participants can then trade between these tokens based on their desired price.

Here's how it typically works:

1. Token Issuance: The token issuer deposits an initial supply of the new token and an equivalent value of a base currency into the LBP smart contract.
2. Price Discovery: Initially, the price of the new token is high due to limited liquidity. As trading occurs, the price adjusts based on market demand.
3. Gradual Token Release: Over a specified period (e.g., hours or days), the smart contract gradually releases more of the new token into the pool, increasing its liquidity.
4. Dynamic Pricing: The price of the new token dynamically changes based on trading activity. Early buyers might pay a premium, while later buyers might benefit from a lower price.
5. Bootstrapping Liquidity: The LBP aims to bootstrap liquidity for the new token, ensuring a more stable market once the initial distribution phase ends.

Example:

Suppose a project launches a new token called XYZ. To bootstrap liquidity, they initiate an LBP by depositing 10,000 XYZ tokens and an equivalent value of 100 ETH into the smart contract.

During the LBP period, traders can buy XYZ tokens using ETH. Initially, the price of XYZ might be high due to low liquidity. As more trading occurs, the price adjusts.

Over the next 24 hours, the smart contract releases an additional 10,000 XYZ tokens into the pool, gradually increasing liquidity.

Case:

A decentralized exchange (DEX) platform launches its native governance token via an LBP. The platform deposits an initial supply of the new token and an equivalent value of a stablecoin into the LBP.

Traders participate in the LBP, buying and selling the new token based on market demand. As the LBP progresses, more tokens are released into the pool, increasing liquidity.

Once the LBP phase ends, the new token is listed on the DEX with sufficient liquidity, enabling trading to continue seamlessly.