Balancing Act: InfinitySwap's Liquidity Bootstrapping Pools

InfinitySwap aims to become the best DEX and AMM in all of web3, and as such, our focus is to serve traders and projects alike. Each party plays an equally important role in a healthy DeFi environment as traders want access to tokens from good projects, and projects want to distribute their tokens to a wide array of people. Providing a stellar experience to both categories of users is integral to our goal of becoming the premier DeFi hub on The Internet Computer.

One of the many features that InfinitySwap plans to implement is a liquidity bootstrapping option for new start-ups, in addition to the standard, tried-and-true liquidity pools. Liquidity bootstrapping is not only capital-efficient; this method ensures that promising new start-ups are protected from unnecessary price volatility during their vulnerable infancy stage.

The Token Economy

One of the most meaningful innovations in DeFi is crowdfunding via token sales. The barrier to entry for new start-ups is relatively low compared to the traditional finance (TradFi) route, though the unique challenges of a token sale are not insignificant. However, once a token is on its way to being properly established, the potential for financial success is virtually unlimited for both investor and project. This makes tokenization extremely attractive for everyone involved.

This new economy of tokens has proven to be a double-edged sword for speculative buyers as the relative ease of a token launch means that bad actors abound in the DeFi space. Nonetheless, those who have done their due diligence benefit as they are given access to early-stage investment opportunities that are only available behind closed doors in the TradFi world. On the other side, these newly crowdfunded projects must be careful of opportunistic traders who create drastic fluctuations in price and liquidity, leaving their tokens a toxic asset that no one wants to touch.

Tokenomics Matter

DeFi players can be divided into two broad groups: those who seek high volatility and risk for quick profits and those who invest in tokens of projects they believe in, typically for longer periods. Though essential to both, a solid tokenomics model is an especially pertinent facet to scrutinize for those in the latter group. Investing in a crypto with poor tokenomics is far from ideal as it denotes malicious intent by the team or an instability of the project's future finances, even if the team's intentions are good.

Therefore it is critical that any new crypto project pay attention to initial token distribution and subsequent market movement. A healthy token circulation is necessary to ensure that investors continue to find value in market participation, guaranteeing that projects have access to a reliable source of working capital.

Growing Pains

Aside from building a usable protocol, the general goal of legitimate crypto projects is to grow their reputation while introducing new investors to their token in a gradual fashion, allowing a steady rise in price while diversifying token distribution. However, even with the best tokenomics structure conceived on paper, a project can end up with undesirable price action because of liquidity pressures.

While typical liquidity pools operate in a manner aligned with DeFi's free-market ethos, they can pose some problems for new projects. The ideal scenario for a newly launched token is proper price discovery alongside a balanced liquidity pool; in other words, a healthy token is able to reach a price that the market values as fair without extraneous supply and demand pressures due to liquidity imbalance. However, due to the for-profit nature of trading and limited liquidity of new tokens, these early-stage projects often find themselves at risk.

A certain volume of trading activity is required to maintain proper liquidity--this is something that is not typically possible for a new token. While an established token has enough volume to maintain a market-decided equilibrium in a liquidity pool, a new project must be particularly mindful of a proper ratio between token pairings. Furthermore, a project must initially provide both sides of the trading pair until a sufficient number of liquidity providers enter the picture, which can be financially daunting for projects that are operating on a smaller budget.

InfinitySwap's Liquidity Bootstrapping Is The Answer

One of the newest and best solutions to the aforementioned problems is Liquidity Bootstrapping Pools (LBPs), the most notable working example being Balancer on Ethereum. Liquidity Pools are essentially smart contracts that manage a "pool" of token pairs for liquidity purposes, and Liquidity Bootstrapping Pools are a more complex iteration that can be configured in limited ways (namely, to calibrate how the pool is weighted over a determined set of time) to create a more optimal setup for new tokens during their preliminary growth phase.

LBPs alleviate a portion of the financial burden for new start-ups because they make it possible to add tokens with lower capital requirements than a regular liquidity pool. In other words, nascent projects making their token debut though InfinitySwap won't have to lock up as much of their ICP as the collateral token. Instead of being forced to provide a 1:1 ratio of both the project token and an equivalent value in ICP, projects can provide a smaller portion of ICP to initiate token distribution.

There is also a built-in measure against the dreaded liquidity imbalance as a project fosters a new token during its critical initial price discovery period. The weighted structure of LBPs means that high-volume traders are discouraged from transacting in large quantities at once, eliminating the possibility of flash sale price manipulation (i.e., rug pulls).

InfinitySwap has considered all possible user experiences, that of both traders and tokenized projects. We intend to provide the best possible service as the last DEX/AMM you will ever need, and that means creating a platform that is reliable and easy to use no matter which side of the trade you're on.

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*Disclaimer: While every effort is made on this website to provide accurate information, any opinions expressed or information disseminated do not necessarily reflect the views of InfinitySwap itself.