Liquid Auctions
What is a Liquid Auction?
Liquid auctions are an auction mechanism that facilitates continuous trading. The primary purpose of the Liquid Auction is to facilitate price discovery and create significant liquidity at the established price. It is often the second or third phase in a multi-stage modular launch following a distribution phase of either an airdrop, lockdrop or both.
V2 of our Liquid Auctions is coming - details will be provided shortly.
How do Liquid Auctions Work?
During a liquid auction, participants can deposit their tokens into a liquidity pool, typically consisting of a token-stablecoin pair. The auction has two main parts:
Deposit Phase: Participants from the previous distribution phase, or new buyers, can add tokens or USDC to the pool. Adding tokens lowers the price of the token, while adding stablecoins raises it, facilitating price efficient discovery. Participants can only withdraw stablecoins during this phase, enhancing predictability. This part lasts from Day 1 till Day 5.
Limited Withdrawals Phase: Stablecoin withdrawal limits are gradually reduced, locking liquidity into the pool. For example, withdrawal limits may start at 50% and decrease over time. This part lasts from Day 6 to Day 7 and includes only one withdrawal per participant to prevent manipulation.
Why Launch Using a Liquid Auction?
Launching using a liquid auction offers several advantages. The equilibrium between supply and demand that emerges during the auction establishes a fair price for the asset, creating a stable and transparent price discovery process. This two-part structure helps prevent large players, or "whales," from suddenly affecting prices, thereby maintaining market integrity.
Additionally, the model's design, which allows users to trade with each other rather than the protocol selling tokens directly, ensures compliance with various regulations. Measures are also included to mitigate the risk of impermanent loss for liquidity providers, such as offering incentives and proportional rewards based on the risk they undertake.
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