Decentralizing Ascending Auctions on Blockchain

[TL;DR] With the use of blockchain technology many things can be done better, more secure and in a transparent manner, and a regular person can influence some portions of its future developments — in our case this would be changing the auctions market and business for the better. For the end bidder / buyer and the seller. Find out more about why blockchain is the best options for ascending auctions all by reading this article.

Ever since we started working on Auctionity our claim has always been to use blockchain to decentralize real-time auctions.

First, let’s start with the most important point:

Why blockchain?

The decision to use blockchain technology was never made because blockchain was ‘so popular’. We chose to use blockchain technology because blockchain is, indeed, perfectly relevant to our project as it answers some security requirements that traditional auctions can’t currently guarantee. Decentralization, which is an intrinsic part of blockchain, can solve several issues inherent to traditional auctions, including the fact that:

They are not transparent. Bidders have no way to ensure the origin, authenticity and legitimacy of a higher bid. Yet, thanks to blockchain technology, bidding history is made trackable and verifiable by anyone.

Current auctions are not open, because of the very essence of their centralization. Bidders must use the organizer’s platform. This is not the case with Auctionity as it can be used solely for its blockchain layer if necessary. Interoperability is the key. And this is what Auctionity brings.

Thus, the Auctionity blockchain has been created to tackle many issues with security properties, as previously explained in the Yellow Paper:

• Highest Price Wins. The Highest-Price-Wins property establishes that the bidder who submitted the highest valid bid is the one who wins the auction. If Alice (an honest bidder) places the highest bid, another bidder Bob must be unable to win the auction on his behalf on a bid lower than Alice’s.
• Non-Repudiation. Blockchain technology ensures the immutability of each bid registered. Thus, if it were possible for a bidder to win without submitting the winning bid, he could try to claim that he did not submit the winning bid even in a case where he rightfully won. To ensure Non-Repudiation, a bidder who placed a bid must not be able to contest that he placed it.
• Non-Cancellation. As, in an English auction, all bids count to the final result, the Non-Cancellation property for Auctionity assumes that the winning amount is correct. So, if Alice places a bid that is accepted then she will be the leader until a higher bid is placed and accepted. As a result, the bidder who submitted the last accepted bid must win the auction. If, however, there is a possibility that she did not win even though her bid was accepted, this would mean that someone, an intruder or the bidder himself, was able to cancel the bid even after acceptance.

Auctionity, the decentralized blockchain platform will transform the bidding process, becoming fair and transparent as the bidding parties are also able to supervise the auction process. Thanks to that, the authenticity and security of the bidding data can be guaranteed.

Real-time auctions

Auctionity, by taking away transaction validation times, allows real-time transaction, with a consensus below 1 second.

In a world where everything is more instant, auctions are now live. In a Gods Unchained’s auction, if a bid is placed within the last remaining hour, the auction extends for one more hour. This anti-snipping system is certainly a good solution to allow other people to place their bid, leaving time for the Ethereum blockchain to receive and validate the transaction which can take several minutes. But if they are many other bids each hour, the auction will be extended each time. This can be acceptable if it only happens once or twice but it can’t be a long-term solution.

Auctionity, by taking away transaction validation times, allows real-time transaction. Thanks to that, interactivity between bidders is much improved, bringing the same exaltation that you can find in a physical auction house.

Auctionity’s solution is fast ⚡. In order to remain compatible with the “real time” constraint of live auctions (that is, those physically run by an auctioneer), blockchain offers the technical consensus mechanism, ensuring that each higher bid is validated in 1 second.

Payment Guarantee: Why the ETH deposit is key

In Auctionity, Payment Guarantee requires you to make a deposit on the livenet prior to placing any bid.
Let’s first have a look at one application of the ascending-auction mechanism to blockchain, which was the case in the auction system run by the Crypto-Collectible Gaming company mentioned above. They use smart contracts to prove that each bid is recorded on the blockchain. When, say, Alice wants to bid, she has to send ETH to the smart contract. To do that, she has to pay a gas transaction each time she bids. If someone else (Bob) outbids her, the auction house will have to give her her money back and pay transaction gas fees in the process. In addition, it will saturate the Ethereum network with useless transactions that can be avoided.

Auctionity, by using an ETH deposit to a treasurer, allows Alice to make a deposit which can be withdrawn at any time. To allow more flexibility and take away the need to wait for the transaction validation before bidding, it can be useful to make a deposit covering the total amount you intend to bid at once, rather than topping it up each time you want to bid. This will prevent you from having to wait for the transaction to be validated when you make a new deposit and also prevent you from paying gas fees several times instead of just one (gas fees are the same no matter the amount deposited). This deposit on our blockchain guarantee the speed of each bid (tx) that are placed in few seconds.

Another interesting aspect of Payment Guarantee is that it makes transactions far more trustful between the seller and the buyer. Indeed, it sometimes happens that, once the auction has ended, the winning bidder refuses to pay or buy his prize, leading to both seller and bidder having lost their time and money. But once the auctioneer has adjudicated the auction, the object must be paid. There should be no way around it. Let’s have a look at the transaction process on Ebay: say, Alice places a bid for a tempered glass screen protection for smartphones at $4.99.Alice later realizes that this is more than she’s willing to pay for the screen protection so she decides not to buy it anymore. She can retract her bid if, and only if, the auction is still going on. Alice cannot cancel it once the auction has ended or if she has won the auction. In that case, she will have to pay for the object she won. However, Ebay explains that its marketplace is not here to teach buyers a lesson and that it cannot force buyers to pay, claiming that it is not worth for the seller to file a dispute against the buyer and risk ending up in a dead-end where no parties are willing to cooperate. The reason Ebay cannot force buyers to pay is that they do not have the necessary securities to execute the unspoken agreement implied by an auction: if you are the winning bidder, you have to pay for the object, that’s it. If Ebay cannot do that, a smart contract can, blockchain can guarantee payment for the seller.

Delivery Guarantee

At the other end of Payment Guarantee, there is another interesting feature brought by blockchain to overcome issues related to the delivery process. Auctionity’s blockchain can guarantee the delivery of any tokenized goods. This feature works in a similar way as the Payment Guarantee, ensuring bidders that they will receive the product they won at auctions. To ensure delivery, the seller will have to transfer the relevant crypto asset — a Non-Fungible Token (NFT), for instance — onto the Deposit Smart Contract, prior to the beginning of the auction. The asset will be locked onto the Deposit Smart Contract until the auction ends, it will then be transferred to the winning bidder.

In a nutshell, when Alice the buyer claims her Crypto-Collectible, her payment will be transmitted to the seller. Everything is done on the blockchain through the Auction End Voucher, guarantying the transfer of funds and the NFT ownership. For a full detailled review about the voucher properties (auction end, withdrawal, read the Yellow paper.

English Auctions

Ascending auctions provide a process of price discovery. Value is socially determined through the escalation of bids. — Peter Cramton

There are other applications of the blockchain auction that emerged meanwhile Auctionity was developed. These projects should be welcome as they support the development and new application of the blockchain technology. Most of them have a real value, both technical and business. However, most of the time these auction systems in place are Dutch auctions. In Dutch auctions, also known as the descending-price auction, the selling of the good starts at a price then it lowers in steps until a bidder makes an offer at the level it seems reasonable to him to purchase it. In the history of auctions, the Dutch auction were commonly used for sell quickly big quantities of goods, such as vegetables, tobbaco or flowers and nowadays, the Dutch auction is mostly used in B2B to trade important quantities of goods. The main criticism is that in this kind of auction, the final selling price is the lowest price at which a buyer wants to buy it, excluding other potential buyers who were expecting the price went further down. This situation can also create frustration for the seller, as the price going down, leader to lower prices than the seller expected.

A review conduced by Adam, Eidels, Lux & Teubner (2017) pointed out some lacuna of the Dutch auction system in practice:

• Dutch auction yield lower revenues to the seller than First-Price sealed-bid auction (aka blind auction, in which all bidders simultaneously submit private bids and the highest bid wins the auction). “prices could be disturbingly low when employing a Dutch auction instead of an alternative pricing mechanism.
• emotional arousal and competition: it has been demonstrated that, surprisingly, the Dutch auction was more likely to raise.

Despite the long-standing history of the Dutch auction, its applications in e-commerce research and practice are scant… If there are only a few items to be sold and if the bidders face high levels of uncertainty about their valuation for the items, it can be advantageous for the marketer to employ an English auction, as this format yields higher prices than the Dutch auction when value uncertainty is high, particularly in CV (common value model) settings. This may explain why auctions for unique items (e.g., houses, famous artwork) often employ the English auction format.

At the opposite, english auctions, are another dynamic auction system in which bidders increasingly submit higher bids increasing the value and stop bidding when they are not willing to pay more than the current highest bid. English auctions, aka Open ascending-bid auctions, are, by far, the most common and most widespread auction mechanism used in the world, for physical and online auctions.

English auctions are the most widely spread kind of auctions in the world because they maximize the value of goods in auctions, by promoting competition between pool of bidders. This is why famous Auctions’ houses such as Christie’s or Sotheby’s use this auction system for selling art goods, and even CryptoKitties as it was the case a few months ago.

Conclusion

Real-time, increasing value, seller and bidder’s guarantee, these are some of the reasons we chose the ascending-auctions model. We do believe that blockchain can enhance the ascending-auctions, providing more value to Crypto-Collectibles transactions, in a decentralized way.
Auctionity will run in September. Stay tuned!

References:

• Marc T.P. Adam, Ami Eidels, Ewa Lux & Timm Teubner (2017). Bidding Behavior in Dutch Auctions: Insights from a Structured Literature Review. International Journal of Electronic Commerce, 21:3, 363–397, DOI: 10.1080/10864415.2016.1319222
• Pascal Lafourcade, Mike Nopère, Daniela Pizzuti, Etienne Roudeix (2018). Auctionity Yellow Paper
• Peter Cramton, “Ascending Auctions,” European Economic Review 42:3–5 (1998) 745–756.