Auctions & Bonding
A liquidity bootstrapping protocol (LBP) is a type of token launch designed to ensure the market decides the final price of the token at the end of auction and reaches a fair price discovery. Overall, some of the key benefits of an LBP are as follows:
- Inherent downward pressure on price to promote fair valuation determination
- Preventing Whale price manipulation
- Preventing bot intervention and pump and dumps
- Enabling the community the chance for an early entry point at an extremely fair valuation
For example, imagine an LBP being used to launch the PICA token. In return for another more commonly available token, in this case Kusama, users could buy PICA. The price of PICA will continue to fall until the market responds with BUY orders - therefore allowing the community to achieve a more fair price than the protocol itself deciding the “market value”.
Such auctions can be used to deploy the tokens of other protocols connected to the Composable ecosystem. Liquidity incentives can be used in order to incentivize users to trade in an asset for the new token, which ensures the new token is widely distributed. These features can be leveraged by developers and other projects.
Once deep liquidity has been established in this new token pair, the liquidity can be used on the Pablo DEX in order to enable its use for exchange more widely. Due to Picasso acting as a cross-chain hub, this gives it wide spread and availability across DeFi’s major chains.
One of the key challenges DEXs face is the challenge of mercenary capital. LPers are frequently incentivized by high APYs, and once a greater opportunity exists elsewhere or if APYs on that exchange drop, their liquidity becomes fleeting. This often results in DEXs having a high inflationary token to continue to “pay” for the leased liquidity. This liquidity is unloyal and creates unsustainable pressure on the token especially in unfavourable market conditions. This creates a downward spiral where the token price goes down which means the farm rewards go down which means liquidity evaporates even faster.
Pablo overcomes this through a bonding process to establish protocol-owned-liquidity (POL). Pablo allows users to bond their LP tokens to purchase PBLO tokens at a discount. The liquidity that Pablo owns is therefore permanent, benefitting users while also reducing reliance on inflationary rewards. Pablo will also earn trading fees from holding the LP, therefore creating further sources of yield for token holders.