Lightlink Case Study

LightLink, an Ethereum Layer 2 blockchain, conducted a Liquidity Bootstrapping Pool (LBP) sale. This fundraising event was hosted on the Fjord Foundry platform and aimed to raise significant funds while ensuring fair price discovery and broad token distribution. In this read, we will examine the strategic parameters set by BlockApex that contributed to the successful LBP, which raised $5.28 million from 3,581 participants.

About LightLink

LightLink is designed to facilitate instant, gasless transactions tailored for decentralized applications (dApps) and enterprises. It targets enterprises that require predictable gas fees and high throughput transactions, offering a seamless user experience through direct interactions with web3 wallets. 

To get an idea of how big LightLink is, have a look at the mainnet statistics as of the time of writing:

• Daily Transactions: ~126,000
• Total Transactions: 29,859,676
• Wallets: 590,180
• Total Contracts: 30,474​​.

Also Read: Top Bitcoin Layer 2 Projects to know

Token Sale Models

The landscape of token launch models in the cryptocurrency domain is diverse, reflecting the adage that there is no “one size fits all” solution. As the popularity of cryptocurrencies continues to surge, a variety of token launch mechanisms have emerged, each tailored to the unique needs and goals of different projects.

Despite this diversity, these models – Fixed Price Sales, AMM Markets, Dutch Auctions, and LBPs – share three core objectives: establishing deep liquidity, ensuring fair and broad token distribution, and facilitating efficient price discovery. Each model serves different objectives and suits different project needs. For LightLink, the LBP model was chosen due to its ability to ensure fair market price discovery and broad token distribution.

• Fixed Price Sales: These are straightforward but the distribution is based on the investing amount and has the risk of price manipulation.
• AMM Markets: Dynamic pricing based on liquidity pool ratios but can be volatile and subject to manipulation.
• Dutch Auctions: Price starts high and decreases over time, but early buyers can manipulate the outcome.
• LBPs: Offer dynamic pricing with decreasing prices over time, discouraging manipulation and encouraging broad participation.

Why LBP Strategy for LightLink

The LBP model was selected for several key advantages over other token sale mechanisms:

1. Fair Price Discovery: LBPs allow for a gradual price decrease, which helps in finding a fair market value for the token without abrupt price spikes.
2. Wide Token Distribution: The decreasing price mechanism encourages a larger number of participants to buy tokens at various price points, leading to broader token distribution.
3. Prevention of Manipulation: High initial prices and controlled liquidity make it difficult for early buyers or large investors (whales) to manipulate the price.
4. Community Engagement: LBPs are designed to involve the community in the price discovery process, making it a more inclusive and fair method compared to fixed price sales or Dutch auctions.

Strategic Parameter Setting for the LBP

The success of the LBP sale hinged on several carefully set strategic parameters:

Initial Price and Weight Settings

• Initial Token Price: The initial price was set high to allow pool weights to influence price discovery and prevent early manipulation. The starting price was ~$0.93 per token​.
• Liquidity Provided: High initial liquidity ensured a stable starting price and deep liquidity for smooth trading. Approximately 158 ETH (valued at $485,000) was provided as initial liquidity.
• Token Supply: 5% of the total token supply (50 million tokens) was offered in the LBP to ensure a substantial float at launch​.
• Starting and Ending Weights: The pool started with a 99/1 LL/WETH weight and gradually shifted to a 1/99 WETH/LL weight, ensuring a decreasing price curve throughout the sale.

LBP Math

A combination of weights and balances determines prices in a liquidity bootstrapping pool. As the LBP progresses, the weights are algorithmically adjusted to decrease over time, inherently influencing the price to follow a downward trajectory. This price reduction is contingent upon the balance of the project token not diminishing at a faster rate than that of the decreasing weights. The relationship between these variables can be understood by the effective price formula:

Where 

• Bo and Bi represent the project token and reserve token balances respectively in the pool. 
• Wo and Wi represent the respective weights of the two tokens.
• Ao represents the trade size at each step in terms of project tokens. 

This formula is used to capture the price movement at each step of the sale given the changing balances and weights.

The relationship within the Liquidity Bootstrapping Pool becomes apparent when we observe the dynamics of the project token’s weights, specifically Wo (the initial weight of the project token). As Wo decreases over time, it leads to a reduction in the exponent value within the LBP’s price determination formula. Consequently, this diminishes the expression in the numerator, resulting in a decrease in the token’s price.

However, in scenarios where there is substantial buy pressure—indicating a rapid reduction in the project token’s balance and an increase in the reserve token’s balance at a rate that offsets the weight reduction—we can witness an increase in price rather than the anticipated reduction. This underscores the dynamic nature of LBPs, where price fluctuations are influenced by the interplay between supply and demand forces.

The project token balance Bo at each step or after each trade can be calculated through the following equation:

Where Bo(new) is the balance after the trade and Bo(old) is the balance of project tokens before the trade, ‘t’ is the number of project tokens purchased i.e. the sale amount.

Similarly, we can find the reserve token balance Bi at each step or after each trade using the following formula:

Where ‘t’ is the number of project tokens purchased and ‘P’ is the effective price of purchase.

Since the LBP sale follows a fixed schedule of decreasing weights, the weights flip over time, giving the participants to find their own price points to purchase the tokens.

Price Discovery and Distribution Dynamics

• Decreasing Price Mechanism: The LBP’s dynamic pricing mechanism involved a systematic decrease in price over time, adjusted through pre-defined starting and ending weight parameters. This structure encouraged participants to engage at various price points, preventing early large-scale purchases and ensuring fair distribution.
• Participation and Distribution: The strategic weight setting and price mechanism resulted in broad participation with 3,581 participants and near-complete token sales – 49.82 million tokens. The final on-chain price settled around $0.209 per token, reflecting true market value.

Managing Volatility and Ensuring Fair Sale

• ETH Volatility Adjustment: To mitigate the impact of Ethereum price volatility, BlockApex incorporated a volatility adjustment based on the preceding 90 days’ average volatility of 3.67%. This adjustment ensured the initial capital remained stable, safeguarding the pricing strategy throughout the sale period.
• Price Manipulation Prevention: The high initial price and dynamic weight adjustment discouraged early large-scale purchases and potential manipulation by bots and whales, maintaining the integrity of the sale.

Analysis and Outcomes

The sale was marked by a well-distributed participation and smooth price discovery process:

• Funds Raised: $5.28 million
• Tokens Sold: 49.82 million tokens (almost 100% of the offered tokens)
• Final On-Chain Price: ~$0.209 per token
• Participants: 3,581 wallets, one of the highest participant counts for LBPs on Fjord Foundry.

Strategic Recommendations and Findings

BlockApex provided several strategic recommendations based on the analysis of the LBP sale, which was conducted via simulations and modeling participants’ behavior.

1. Setting Initial Prices and Weights: Establishing high initial prices combined with strategic weight settings can effectively prevent price manipulation and ensure fair price discovery.
2. Provision of Adequate Liquidity: Adequate initial liquidity is crucial for establishing a stable starting price and facilitating smooth trades throughout the sale period.
3. Token Supply Management: Offering a standard percentage of the total supply ensures a substantial float at launch, reflecting accurate price discovery.
4. Dynamic Weight Adjustments: Transitioning from high to low weights encourages broader participation and ensures fair token distribution by allowing participants to engage at various price points.
5. Utilization of Simulations and Participant Behavior Modeling: Leveraging a digital twin of the LBP sale to mimic market conditions and participant behavior was instrumental in determining the optimal parameters.

This approach enabled the prediction of an average price range of $0.15-$0.20 from simulations, whereas the actual price settled slightly lower at ~$0.12.

Conclusion

Strategic parameter setting in LBPs isn’t just about creating a fair and orderly sale; it’s about actively shaping the market dynamics around a new token in ways that align with the project’s long-term goals. By thoughtfully choosing initial prices, weight configurations, token supply proportions, and sale durations, projects can not only adapt to existing market conditions but also influence investor behavior to optimize the sale’s success.

The collaboration between BlockApex and LightLink in conducting the LBP sale on Fjord Foundry highlights the importance of strategic parameter setting in achieving successful fundraising and fair market practices. 

Does your project have a similar need? Partner with BlockApex to leverage our expertise in strategic parameter setting and innovative fundraising models. Contact us today to learn how we can help you design and execute a successful token sale, ensuring fair price discovery, broad token distribution, and robust community engagement.