Last week, the new game Dragonverse Neo produced by the established on-chain game leader, MOBOX, launched the fair launch of the game token $MDBL, using the LBP method on Bitcoin’s native Layer2 Merlin Chain.

As an IDO strategy, LBP is widely adopted and maintains success in the crypto world with the 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 hesitant about the high price while others can buy cheaper chips?

※ When should I enter the market and what is the best way to purchase?

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 start rushing to buy it, and the price soars instantly and gets higher and higher. Real project participants cannot outrun the robots; If tokens are allocated based on capital weight, users with small capital will have almost no fair purchase opportunity.

LBP came into being under this situation. It combines the Dutch auction (price from high to low) and the British auction (price from low to high), allowing the token to adjust the price with market demand during the launch process. If there are many buyers, the price rises; if no one buys, the price falls. This strategy solves IDO’s fairness problem to a large extent:

1. Buying first does not necessarily lead to buying the lowest-priced chips, thus avoiding front-running - and achieving fairness in purchasing time.

2. There is no limit on the purchase amount to prevent large investors and robots from accumulating funds - making 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 and fall in LBP?

To understand the LBP price model, 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 changes from high to low over time during the LBP process and is only related to time.

Taking MASK issued by Mask Network as an example, when its LBP started, 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 derive the price formula of MASK:

MASK price = (MASK weight / USDC weight) * (USDC quantity / MASK quantity)

It can be seen from the price formula that:

· As time goes by, the left side of the formula (MASK weight/USDC weight) gradually decreases, from 95:5 to 40:60;

· As the purchase volume increases, the (USDC quantity/MASK quantity) on the right side of the formula gradually increases, and there are fewer and fewer MASKs in the pool.

Therefore, the token price is affected by both “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 challenges of LBP

Benefits to users

· Regardless of the amount of funds, you can buy chips.

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

Challenges for users

· The timing of entry is a challenge. 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.

· Challenge of assessing the project, it is necessary to examine whether the team has the strength and plan for long-term development.

Advantages for project parties

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

Challenge for project parties

· Challenge of long-term construction capabilities: 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 determines the 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 at any time during the LBP period, the current price is lower than your psychological price, it is a more appropriate time to enter.

Before LBP, the following aspects of the project can be investigated:

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

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

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

Several possible price movements depending on market heat and initial FDV

Review LBP’s price formula:

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. Low initial FDV and high participation enthusiasm: the sooner you participate, the better

If the initial pricing of the token is low and market participation is extremely high, 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.

Taking $MASK as an example, LBP was priced at $3.9 at the beginning and ended at $13.28. The average price of $MASK throughout the process was $20.94. The same is true for other famous LBP cases including Merit Circle’s $MC and GuildFi’s $GF, whose price was the lowest at the opening and rose rapidly as soon as the market opened but never fell back to the price at the beginning.

If a project is highly popular and you believe that its initial Fully Diluted Valuation (FDV) represents an undervalued market cap, then the participation strategy is the earlier, the better.

2. Moderate popularity but not quite a FOMO: enter mid-term, but not recommend to wait until the end

Many people may be misled by the expected price curve of the LBP, thinking that prices will surely go down later, and waiting will bring cheaper chips. However, the later it gets, the less the impact of weight changes on prices. When purchasing behavior causes prices to rise, it becomes less likely to fall back to lower prices over time. If everyone waits until the end to buy, it will lead to a significant U-shaped rebound in prices.

In real LBPs, this situation often occurs: take $TUNA and $DEAI as examples, both experienced a period of price decline at the beginning, reaching their lowest prices in the middle. Therefore, in this situation, it is advisable to buy when the price/market cap reaches the expected psychological level.

3. LBP with low expected popularity

For LBPs with fewer participants, the right half of the price formula (USD amount / Token amount) has little influence, and the price is mainly affected by (Token weight / USD weight). Theoretically, if there are no purchases, the purchase price will be lowest at the end. However, in a real environment, the assumption of no purchases is not entirely true. To avoid the price being pulled up at the last moment, it is advisable to make purchases a short time before the end.

Summary

Based on all the analysis above, the most common LBP strategies can be summarized as follows:

• Divide the total amount into multiple purchases at any time when the price is below your valuation.
• For projects with high popularity and low opening prices, entering immediately after opening is not a loss, but it is not recommended to invest a large amount of funds right at the opening like traditional IDOs.
• In most cases, it is not recommended to wait until later for cheaper chips. The later it gets, the lower the weight, when a small purchase may cause the price to rise. The lowest point for most past LBPs is usually in the middle term, so it is advisable to enter the market at the appropriate price range.

Disclaimer：

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