Token Price Discovery
In this section, we explore the characteristics and differences between four price discovery mechanisms: IFOs & lockdrops, Liquidity Boostrapping Pools (LBP), Liquidity Boostrapping Auctions (LBA), an
Initial Farm Offering (IFO)/Lockdrop
- Price Discovery Mechanism - rewards active participation in DeFi - can distribute tokens more equitably
- requires understanding of yield farming - high risk of Impermanent Loss for users
low risk
Liquidity Bootstrapping Pools (LBP)
- Price Discovery Mechanism - fair price discovery - disincentivizes bots & whales
- complex for users to understand & participate - high price volatility in the beginning
moderate risk
Liquidity Backed Auctions (LBA)
- Price Discovery Mechanism - fair price discovery - encourages early participation
- incentivizes bots - early volatility
moderate risk
Fair Launch
- Price Discovery on the market afterwards - maximizes decentralization - no pre-mine or pre-sale
- no initial funds for development - can lead to high initial price volatility
low risk
Direct Listing
- Price Discovery Mechanism - exchange listing & marketing
- no funds raised - potential low liquidity or market maker needed
low risk
Each mechanism serves as a means for blockchain projects for token price discovery and raising liquidity for the project or token.
Common Aspects
All price discovery mechanisms involve the issuance of tokens to the public.
They enable projects to generate liquidity for the token, or the project and set a price for the token in a public & decentralized way.
The timing varies, but generally, projects conduct these mechanisms at or right before the launch of the protocol/project..
The initiator of the sale can be the project's founding team or protocol governance, for a decentralized launch and/or token sale they are initiated through a governance proposal and decided on by the community
Legal Implications & Security Laws
Each token price discovery mechanism is designed to minimize legal implications by conducting the token launch and price discovery in a manner that is as decentralized as possible. However the legal implications depend very much on the exact way the mechanisms are conducted.
In order to have no central entity that initiates the launch, these mechanisms should be voted on by governance. However this requires the tokens to be in the hand of a variety of users already e.g. via a prior airdrop.
Decentralization & Adoption Rate
In terms of decentralization, IFOs, LBPs, and LBAs are designed to be more decentralized than traditional token sales like ICOs and IEOs. Among these mechanisms, IFOs are considered one of the most decentralized approaches. This is because participants in IFOs lock their existing tokens, and the process is governed by smart contracts, reducing the reliance on centralized control.
In contrast, LBPs and LBAs involve a degree of centralization as the project team or protocol creators often provide initial liquidity or determine the starting price. However, they still promote a more decentralized price discovery process compared to traditional token sales facilitated by centralized exchanges.
Overall, these price discovery mechanisms offer more inclusive and community-driven token distribution approaches, encouraging broader participation and reducing the reliance on centralized entities.
However, it's essential to consider the specific implementation and governance models of each mechanism to determine the level of decentralization in practice. We'll dive deeper into how to launch a network sufficiently decentralized in the following article: Steps to Launching a Sufficiently Decentralized Cosmos SDK Chain.