What is Liquidity Bootstrapping Pool (LBP)?

Liquidity Bootstrapping Pool (LBP), also known as configurable rights pool or smart pool, is a contract that controls a core pool of tokens that can be utilized on a cryptocurrency exchange. LBP controllers, unlike other shared pool controllers, have limited ability to adjust the pool’s specifications. This makes LBPs more trustworthy than shared pools but doesn’t require the entire trust of a private pool.

The possibility to launch tokens with minimum capital requirements is the driving force behind an LBP. A two-token pool with a project and a collateral token is set up to accomplish this. After that, the weights are adjusted to favor the token of the project and, by the end of the token sale, a progressive shift in favor of the collateral token occurs. Controllers can adjust the sale to optimize income by keeping the price generally consistent or they can lower the price to the required minimum.

The option to pause swapping when needed is another great benefit of LBPs. The pool controller might desire to do this for a variety of reasons. He could decide to do that when high demand drives token prices up or when customers sell tokens back to the pool for profit instead of buying them. Besides, when a whale has no motivation to profit from a rug pull (or other similar methods) this provides a more fluid price discovery for the token.

Moreover, LBPs are ideal for distributing new tokens. This is because an LBP controller only needs to provide new tokens and a small fraction of another asset (e.g. DAI) to create a pool and begin distribution.

Note that whales are obliged to split their trades into separate smaller trades because the parameters of LBPs are set in a way that makes the release of tokens slow. Besides, the trades have changing weights. This makes it easier for everyone else to get in on the sale. However, sometimes whales decide to wait for the end of an LBP to buy large positions which cause prices to pump rapidly.

Though because of the LBP's constraints, a rug pull event is nearly impossible. Therefore, the token's value after the pump is protected when the price of the token initially rises but then drops over time. This procedure continues until all tokens have been sold and the token has been effectively distributed.

LBPs are a great way to get tokens into the hands of a large number of people without the limitations of a fast-climbing price curve. Therefore, they are great for fundraising small projects that struggle with liquidity or an efficient way to ensure maximum distribution when traders buy tokens faster than the price falls.