Auctions in crypto

When I hear about an auction, I used to imagine a movie-style posh room full of rich people in tuxedos screaming numbers at each other, fighting over some old and confusing art object. James Bond vs a villain type in a monocle who is trying to destroy the world by buying a very old teapot.

However, when auctions were originally invented in Ancient Babylon, 500 BC, there was much less glamor and tuxedos involved, as the lots on sale were not antiquties, but people — slaves.

Much has changed since Babylon, and also since the precious antiquities were all you could buy at an auction. Modern types of auctions are deeply integrated in our lives: from eBay to NFTs, $10 toy to $1M jpeg.

The secret behind the success of both eBay and NFT marketplaces running auctions? The auctions benefit both the sellers and buyers.

For the seller, an auction presents a chance that someone would turn out to be willing to pay a much higher price for something, especially a unique object, than the seller’s own original estimate. For the buyer, it eliminates the chance of overpaying for something nobody else wants as much. A fair price makes everyone happy.

As it often happens in the crypto world, a useful real-world concept of an auction was simply recreated for the digital assets. NFT auctions are a very common practice when it comes to expensive collections; for example, a 101 token BAYC collection was sold at the Sotheby’s auction for $24 millions.
Pure crypto is auctioned off sometimes as well: the US government frequently holds auctions for funds that it acquires in asset seizures. According to an article published by CNBC last August, the government had already seized more than $1.2 billion worth of crypto by that date in 2021. The price is usually lower than at the exchanges, so if you do have a couple of millions in fiat cash lying around, it’s a good opportunity to buy the bottom. Bitcoin confiscated from cybercriminals or drug dealers is still Bitcoin.

Turns out, the most common type of auctions, the “open ascending” type, is known as an “English” auction. That’s your movie-type auction: buyers would start bidding with a low price, then the bid prices go up until it reaches the high point where nobody would offer more. The last bidder gets the item.

Sometimes the seller has a predetermined “reserved” price, and if that price has not been reached during bidding, the sale is simply canceled.

This type of auction is good for the seller, but not so much for the potential buyers. In an open auction like that, buyers tend to spend more than they originally planned. Even if they’d normally not go above a certain price, the heat of the moment, the collector’s passion, or the pure competitive spirit often cause them to reach deeper into their wallets. There is even a phenomenon called “the winner’s curse” describing how someone who wins an auction of a commodity of uncertain value with a fair number of bidders typically pays more than the asset is actually worth.

So sometimes when you win, you’ve actually lost.

There are however several less-known auction types, and some of them do eliminate this problem.

One example would be the Dutch auction, also known as the “open descending” auction, which is pretty much the opposite of an English auction. The seller begins with a high asking price which is then lowered until a buyer accepts the price.

Now both of the types we discussed so far were “open” auctions where buyers know how high the current offer is.
A couple of other auction types on the other hand hold their participants in the dark: you bid without knowing how much everyone else is willing to pay. These are in fact similar, and called the “first price” and “second price” sealed-bid auctions. With the first price option, the winner pays the highest price — their exact bid — and if there’re more than one item, the rest of the items will go to the bidders with second-highest, third-highest price, etc.

In the second price sealed-bid auction (also known as Vickrey auction), the winner would only pay the second-highest price: not their own bid, but the second, lower bid for the item!

Here’s an example:

Andrew bid $10, Jane bid $15, and Mark bid $20.

The lot goes to Mark who only pays $15, the second-highest bid.

This is probably the best time to mention our own auctions for the Heart & SOL P2E project, where Ancient Magic Dust will be sold via a Vickrey, or second price, auction. The Ancient Dust is a very rare resource used to hatch an Ancient Dragon with improved stats. Such dragons will be unique and cannot be obtained in any other way; they are extremely valuable as they have a higher chance of bringing an extra treasure chest from any quest.
Also, if you create a higher-tier egg using an Ancient dragon, and then hatch a higher-tier dragon, this new dragon will be Ancient as well.

The Ancient Magic Dust auctions will take place soon, so stay tuned.

Don’t miss your chance to breed your unique dragon!

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JFactory

JPool is a stake pool on the Solana blockchain network enabling safe, secure, high-yield rewards on your staked SOL.