Gro LBP: How LBP Price Discovery works

This is the second of our Gro LBP introduction series. Please see here for our first article outlining why we propose using an LBP to distribute Gro DAO tokens.

Our community has been asking how LBP pricing works since we proposed to launch Gro DAO tokens through an LBP. This article is to help you understand the LBP price discovery process and develop your own strategy.

Recap

Gro will propose distributing 5,000,000 GRO governance tokens (5% of total supply) via a Balancer Liquidity Bootstrapping Pool (LBP) on Tuesday Sep 28 at 4PM UTC for 72 hours. If the vote goes through, you could participate through accessing our LBP page directly on the Gro website, our launch partner Copper, or directly on Balancer. The exact links on Copper and Balancer will be provided after the DAO vote and ahead of the LBP.

The LBP will start at a pool weight of GRO:USDC = 95:5 and will gradually shift to GRO:USDC = 50:50 over the period, creating downward pressure on the price. Transaction costs will be set at 1.5% throughout the LBP.

How do I decide what price to pay?

Key details for $GRO LBP

  1. The last $GRO private raise was completed in March 2021 — with a fully diluted valuation of $38M or $0.38 per GRO token. The start price of Gro DAO tokens will be at $10, which implies a fully diluted valuation of $1 billion.
  2. For this LBP, we propose distributing 5mn Gro DAO tokens (5% total supply) which will be the only tokens unlocked for circulation after the launch. The 5mn tokens in the LBP will come from the 45% earmarked as community incentives (see the chart below). Other tokens will be gradually unlocked; team and seed investors all have a 3 year vesting schedule with a 1 year cliff.

Hypothetical Model Scenarios

DISCLAIMER: The text below is just a description of how the LBP price discovery works in theory. Any figures mentioned serve only as an illustration. Engaging in LBP without necessary skills or experience could result in a loss of funds. This is an experimental tool so please treat it as such.

We have set up an LBP model with the parameters of the Gro Balancer LBP. Once you make a copy of this model, you can adjust the primary unknown variable (USDC inflow over time) to see how it will affect the price curve.

The scenarios below are examples we put together to show how price discovery works in theory. As the market decides the final price of the GRO token, it is impossible to determine ahead of time how the price will trend. All numbers below are hypothetical and are only meant to help understand the price discovery mechanics of the Balancer LBP.

Across all scenarios, due to the downward shifting weights over time, there is a natural downward selling pressure on the price throughout the duration of the pool that would be offset by the inflow of USDC into the pool.

Scenario 1: Without any buy/sell orders (no USDC inflow)

If the pool begins and no one swapped for the GRO token, the price will trend downwards automatically as there is no USDC inflow into the pool. In the very beginning, the price will be dropping the fastest.

Scenario 2: High USDC inflow to swap for GRO tokens at the start

High inflow at the start of the sale sharply increases the amount of USDC in the pool, causing the price of the GRO token to rise. However, the shifting pool weights allow the pool to absorb large swaps and the curve flattens.

Scenario 3: Steady USDC inflow to swap for GRO tokens

Constant buying pressure causes the price curve to look flat. The downward pressure will balance the upward buying pressure, keeping the price oscillating around market value. This is the ideal outcome as a fair distribution is achieved with all participants receiving a similar price.

Scenario 4: High USDC inflow to swap for GRO tokens at the end

High inflow at the end of the sale (likely due to participants waiting toward the end to swap) sharply increases the amount of USDC in the pool, causing the price of the GRO token to rise.

Case studies

Case Study 1: PERP

​​Perpetual Protocol used a Balancer LBP in distributing their native token, PERP, in late 2020. During its LBP, some participants tried to buy as late as possible, causing a small pump at the end of LBP as they rushed in with their bids.

Perpetual Protocol LBP price discovery curve

After the conclusion of their LBP, the Perpetual Protocol team published their experience with the process. In recapping their LBP, the Perpetual Protocol team wrote:

A high IQ move to participate in an LBP should be picking a valuation that you’re comfortable with and then starting using way #3 [dividing the budget into smaller chunks and dollar-cost averaging with each chunk of the fund] when the market valuation is below the valuation in your mind.

Case Study 2: MPL

Maple Finance also used a Balancer LBP in distributing their native token, MPL, in May 2021. During its LBP, Maple observed that some bots were trying to prop up prices early in the process, but the price soon found a floor around $17 with most tokens acquired between $19–26 per MPL. The LBP exceeded the USDC raise amount simulated in their bull case scenario while maintaining a stable price range throughout the distribution.

Maple Finance LBP price discovery curve

The Maple team also published an LBP retro that you could refer to here. The team observed that there was very high volume swapping for tokens in the last 12 hours, which is in line with their observations of previous LBPs conducted by PERP and Radicle.

Conclusion

It is impossible to predict how the LBP goes. The only thing we can hope to provide is sufficient context for you all to make informed decisions. While we cannot advise users on strategy, based on former LBP executions, buying too early and/or too late may cause participants to pay a premium in a Balancer LBP.

Ultimately, it is the market that decides the price. We encourage you to read more about our roadmap, product, and tokenomics to determine a price that you feel comfortable about ahead of the LBP.

Next Steps

We are available on Discord, Telegram, or Twitter to answer questions and provide support to ensure our community understands the process and potential risks.

We will also provide a step-to-step guide after the DAO vote to share more detailed instructions for those who’re participating in an LBP for the first time.

Special Thanks

Our special thanks go to Maple, Perpetual, and Radicle teams that have shared resources and their experience in conducting LBP token launch. We are grateful for the support given by others in the ecosystem to assist our execution and look forward to seeing more experimentation in this space.

Important Disclaimers:

This post is for general informational purposes only and is not a formal offer to sell or a solicitation of an offer to buy any securities, options, futures, or other derivatives related to securities in any jurisdiction and its content is not prescribed by securities laws.

Prohibited from participating in the distribution: Any citizen of, or a person domiciled in, the United States, Cuba, Iran, Syria, North Korea, and the Crimea region of Ukraine, Afghanistan, Ethiopia, Guyana, Iraq, Sudan, or Yemen.

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