TL;DR: On the 23rd of February, Minswap will launch a Liquidity Bootstrapping Event (LBE) for the MIN/ADA pair. You can supply ADA and after the price discovery phase ends, we will launch the Mainnet and you have a 10 days period to claim the resulting MIN/ADA LP tokens and stake them in a Yield Farm for MIN rewards.
Our launch is nearing! As we get ready to deploy the DEX, there is one overarching question we need to answer, namely: how do we bootstrap liquidity for our launch? In this article, we will explain how we plan to go about liquidity bootstrapping and why we believe we have chosen the best method to do so.
Before we dig in, we want to lay a bit of a foundation. In DeFi, liquidity is the name of the game. This is especially the case for a DEX, where more liquidity leads to more efficient prices. To have a healthy DEX, it’s of paramount importance that the pool with our native token MIN and the Cardano blockchain’s native currency ADA, be deep and sustainable long-term. But bootstrapping this liquidity is a tall order, as there needs to be an equilibrium between incentives, enabling effective price discovery and mechanisms against manipulation by whales, to name but a few.
Meanwhile, DeFi has recently witnessed the emergence of a new trend, dubbed “DeFi 2.0”. The basic premise revolves around the idea of “Protocol Owned Liquidity” (POL). Essentially, it means a protocol owning its own liquidity, in the case of Minswap, it would for instance be MIN/ADA LP tokens. The two main advantages of POL are: that this liquidity is a revenue source for the DAO because of the fees generated from the LP tokens and that this liquidity is sustainable as it is controlled by the DAO and remains in the protocol long term. We believe POL is a crucial step towards a sustainable DEX and we want to implement it right from the get-go through our Liquidity Bootstrapping Event (LBE).
How will the Minswap LBE work
Before we launch the DEX, there will be a Liquidity Bootstrapping Event for the MIN/ADA pair. This event will last for 10 days and 2% of the total MIN supply (100 million MIN), meaning 33.3% of the DAO treasury supply, will be allocated towards it. There will be 3 phases for the event.
From February 23rd to March 4th the first phase or “Discovery Phase” will take place. Community members can partake by supplying ADA. It works as follows: as a participant deposits ADA, they receive in return “purrADA”, which marks their contribution to the Liquidity Bootstrapping pool (thus throughout the event 1 purrADA = 1 ADA). As the event advances, and MIN/ADA price changes according to the amount of ADA supplied, participants may claim back their ADA by returning the purrADA anytime.
However, as to prevent manipulation, during the last 2 days of the event, there will be a fee of 25% for any purrADA redemption. This means, if you had deposited 100 ADA and had gotten 100 purrADA in return, if you redeem the 100 purrADA during the last two days, you will only redeem 75 ADA effectively because of the 25% fee. Once the 10 days have gone by, and fair price discovery has resulted in a given MIN/ADA ratio, the initial MIN/ADA liquidity pool will be created with the ADA from the participants and the MIN from the DAO treasury.
Then, March 4th will mark the start of the second or “The Encounter Phase”, which will last until March 13th. From March 4th to March 13th, participants can turn in their purrADA obtained in the Discovery Phase to get the equivalent in MIN/ADA LP tokens that their share of purrADA represents of the entire pool. This will be done following a fixed conversion rate from purrADA to MIN/ADA LP tokens according to the MIN/ADA ratio at the end of the event.
After having obtained their MIN/ADA LP tokens, the third phase or “Settlement Phase” begins on march 14th. Participants will be able to stake those MIN/ADA LP tokens in a Yield Farming pool to earn MIN tokens. To incentivise LBE participation, LBE participants who obtain and stake their ADA/MIN LP tokens will receive a bonus on their Yield Farming rewards from 110% to 200% for the first week of Yield Farming. Please note, this bonus is essentially 1.1x to 2x, so in real numbers 10% to 100% more APR than normal APR. The NFT bonus will apply only for the first 7 days since the start of Yield Farming on 16th of March 2022 3:00 AM EST/ 07:00 AM UTC, so until the 23rd of March 2022 3:00 AM EST/ 07:00 AM UTC.
Let us recap with an example. Let’s say, hypothetically, 100 million MIN had been allocated to this event and 20 million ADA had been supplied by participants. This would give us a price of 1 ADA equals 5 MIN.
So, let’s say you had deposited 100,000 ADA in the Discovery Phase, for which you had gotten back 100,000 purrADA. As the pool’s total value in ADA would be 40 million, then 100,000 purrADA would mean you own 0.25% of the pool. This would mean, in the Encounter Phase, the 100,000 purrADA can be redeemed for MIN/ADA LP tokens representing 0.25% of the pool, meaning 50,000 ADA and 250,000 MIN (remember for this example, 1 ADA = 5 MIN). In the Settlement Phase, you can stake those LP tokens in a farm to earn MIN. To sum up, by supplying ADA in this event, participants will effectively swap half of the ADA they supply for MIN, at the price which will be fairly discovered at the end.
Because the MIN is being provided solely from the DAO treasury, this essentially translates to 50% of the pool belonging to participants, and the other 50% being owned by the DAO. The MIN/ADA LP tokens from the DAO will be controlled by the DAO long-term and will earn LP fees for the DAO treasury.
Benefits and Risks
It’s impossible to predict how the LBE will turn out, and ultimately, as more supply enters into circulation, it’s the market that will discover the price. The only thing we can do is provide sufficient context for participants to make informed decisions by highlighting a number of benefits and risks we have identified.
We are excited about this approach because of the following benefits it presents:
- Fair Price Discovery and Transparency: we will not launch the DEX and decide the price of the MIN/ADA pair ourselves, but rather it will be the community that sets a fair price by how much ADA is provided. The price of the MIN/ADA pair during the LBE will be visible at all times in our UI.
- Equitable and Wide Distribution: participation is permissionless and the barriers of entry to partake are very low, you just need to own ADA! Everyone, regardless of their capital size, will be able to join the event on equal terms, which will result in broader token distribution. As a community governed project, we will begin to rely more and more heavily on the DAO, so we think the more governance participants the better.
- Less backlog pressure on the DEX: while we expect congestion to still be a factor, we want to avoid a situation where users rush and need to wait days under uncertain conditions in order to swap in the MIN/ADA pair. In this way, we hope everyone can get their hands on the MIN they want and avoid long queues.
- No front-running by a smart whale: given the price will be determined only at the end, and there will be the same price for all participants, it’s not possible for a smart whale to submit an order before the launch of the DEX.
As with everything DeFi, there are a number of risks users need to bear in mind. We try to expound the ones we have identified here:
- Trust in the Minswap team: Minswap has developed a secured and fast off-chain system for the LBE, so that it will process requests smoothly even with chain congestion. However, there is a trust element on the Minswap team during the event.
- Price volatility: there will be significant price volatility prior to, during and after the event. Of course, the starting price will be very low compared to current price and adjust throughout the event. It’s also possible the price changes significantly at the last minute. We recommend those wanting to participate to do thorough research, and we have compiled a series of valuable resources below we believe can help that effort.
- First time approach: it’s the first time we are deploying this mechanism and it will be the first time such a bootstrapping mechanism is utilized on the Cardano blockchain. Measures will be taken such as deploying the mechanism on the public testnet first in order to ensure the execution is as smooth as possible.
- Custody of Funds: implementing on-chain governance on Cardano has proven to be challenging given our mainnet launch time constraint and smart contract limitations. Even though we have good security practices and experience, we would like to avoid having a significant amount of LP tokens in a team wallet for an extended period of time. That is why we will lock LP tokens in a verifiable open-source contract for 6 months, while we develop a DAO treasury management contract.
Cool, but what about the DEX?
Let us recap with a timeline to include LBE and other important dates:
- 23rd of February to March 4th — Discovery Phase: you can supply ADA to the LBE.
- March 3rd to March 4th: Projects can create pools and provide the initial liquidity for their pairs.
- March 5th: Anyone can start providing liquidity to existing pools on the DEX.
- March 5th to March 13th — Encounter Phase: you can redeem the provided ADA for MIN/ADA LP tokens.
- March 8th — Mainnet Launch — You can swap, Provide Liquidity and create pools.
- March 14th: Yield farming opens in selected farms.
An important topic we want to update our community on is the MINt token. MINt token conversion will be available one month after the launch of our Yield Farms, meaning on the 16th of April.
In addition, we have added a new Tokenomics section to our Docs. The section includes the Vesting Schedule for Yield Farming rewards, Vesting Schedule for the Team tokens and Development Fund as well as current circulating MIN and MINt supply. As a reminder, Minswap is an entirely community-funded project and thus there are no insiders or investors with a token vesting schedule to consider.
We share here a series of resources of different approaches to Liquidity Bootstrapping. While our approach is significantly different to the ones described below, we hope these resources will give participants a better background to make informed decisions:
- Perpetuals Protocol shares their experience with Liquidity Bootstrapping here.
- Maple Finance shares case studies on Liquidity Bootstrapping here.
- SundaeSwap shares their idea for Liquidity Bootstrapping or “Taste Test” here.
- Loops Markets explains the fundamentals of Liquidity Bootstrapping Pools here.
- Astroport shares their approach to Liquidity Bootstrapping here.