SundaeSwap Presents: The Taste Test
One of the most common types of questions we get is around what the initial price of the Sundae token will be. Our answer has consistently been that we plan to let the market decide the initial price, and today we want to explain how that will work.
First, it’s worth reiterating what the Sundae token is. The Sundae Token is a utility token central to the healthy operation of the SundaeSwap DEX. We are focused on building the most useful decentralized exchange protocol we can, in line with the decentralized ethos that we all believe in. As part of that, we strongly believe that this protocol doesn’t belong to us, the company who wrote the software, but to us, the whole SundaeSwap community. To best embody that spirit, the protocol establishes a Decentralized Autonomous Organization (DAO) to guide its way, and the Sundae token represents voting power within that organization. Holders of the Sundae token will be able to shape, on-chain, the future of the protocol. Some things the DAO might vote on include feature upgrade proposals, choice of scoopers, grant proposals, and more.
As such, it doesn’t feel appropriate for SundaeSwap Labs, only one member of that community, to sell the token or set a price.
Instead, the initial circulating supply of the token will be sold by the DAO directly using an automated price discovery mechanism. Enter: the Taste Test.
In the first section, we’ll explain at a basic level what this will look like for the average end user. Then, we will walk through the benefits we believe this provides. In the appendix, for those who are curious, we will walk through the math behind a hypothetical example.
How it works
At the launch of the protocol, 7% of the community supply of the token will be locked by the DAO into a smart contract called the “Taste Test.”
Over the course of ten days after the taste test launches, members of the community will be able to deposit ADA or Sundae from their ISO rewards into the same contract. The ratio of ADA to Sundae will fluctuate, but unlike a liquidity pool, no swapping can happen and you will only be able to withdraw the tokens you put in.
At the end of those ten days, all of these tokens will be used to create the ADA/Sundae liquidity pool, establishing the initial price for the token. Everyone who deposited ADA or Sundae (including the DAO itself) will then be able to claim liquidity provider tokens that track their share of the pool; however, these LP tokens represent ownership of both assets in the pool. It is as if everyone who participated swapped half their deposited assets for the other, collectively at the same price.
We believe this has a number of benefits.
First, it is aligned with our decentralized Ethos. The initial liquidity will come from the DAO itself, and be owned by the DAO to do with as you, the community, decide.
Second, a common cycle even with legitimate projects is the “pump and dump”: a new token is initially priced extremely low, and the price correction builds up a momentum of its own; less experienced traders see this, and fear missing out, and so they continue to buy into the coin until it is dramatically overpriced; eventually someone realizes it’s unsustainable, and starts a bank run; those who sell at the top make money off the many more people who bought the rise. In our model, much of the unhealthy price discovery happens in a safe environment, and everyone shares the net result to establish the market.
Finally, other projects will be able to borrow this model. Often new projects struggle to raise money because they either initially under-price their token due to low access to capital, or they strike unfavorable deals with large market makers. This allows projects with low access to capital, but a large supply of their own coin, to fundraise effectively and easily and fairly establish a price for their token.
Our vision at SundaeSwap is to decentralize not just the access to financial services, but also the core business model itself. The taste test is an exciting step in that journey, and one we’re very proud of. We hope you’re as excited as we are, and will help us try out these new flavors once the protocol launches.
Appendix: For the Technically Curious
Let’s walk through an example to see how this works in practice.
Suppose a hypothetical project wants to launch their new coin, RBERRY. They dedicate 100 million tokens from the supply to price discovery, locking it in the taste test smart contract. This mints 100 million ttRBERRY coins, which track their contribution of tokens.
Their community can then deposit ADA to begin establishing a price. Early on, the ratio is very cheap: the first person can deposit as little as a single ADA and, should no one else participate, receive 50 million RBERRY tokens. Others realize this possibility, and continue to deposit as long as they believe that the ratio will produce a fair outcome for them. In return, they are each issued ttADA, in a 1-to-1 exchange rate, representing their deposit.
At some point, the ratio will go above what earlier participants believe is a good price, and they might choose to withdraw their ADA, burning ttADA in return for ADA.
Finally, the taste test comes to a close, with a final ratio of 100 million RBERRY to 20 million ADA. These assets will be deposited into the SundaeSwap protocol to establish an RBERRY/ADA pool, creating roughly 44.7 million liquidity tokens.
Since 100 million RBERRY represents 50% of the assets in the pool, each ttRBERRY is redeemable for
And each ttADA is redeemable for
A user who deposited 600 ADA, for example, would be entitled to roughly 670 LP tokens, which would represent ownership of roughly 1500 RBERRY and 300 ADA. It is as if they swapped 300 ADA for 1500 SBERRY.