Analysis of the advantages and disadvantages of on-chain and off-chain auctions from Christie’s first NFT auction

Auction has become a basic part of our economy and society, and is one of the main mechanisms for allocating rights and resources. Auctions gather buyers and sellers in one place and gather liquidity in the process. This is particularly useful for selling assets that are difficult to price, otherwise the interests of buyers will be scattered. Auctions can be designed to be optimized for different results-whether it is to quickly unload inventory, obtain the highest possible price, or encourage repeat bidders in regular auctions.

In this article, we will discuss what are the advantages of auction, NFT auction, and NFT on-chain and off-chain? This article is quite long, so please watch it patiently.

When it comes to auctions, what do you think of? You might imagine that when a piece of art is sold to a buyer in an expensive suit, the mallet falls with a “bang”. Or, your finger may be hovering over the mouse button, hoping to secretly make the last bid before the eBay offer runs out.

There are more examples. For example, auctions will affect the air you breathe: In California, the rights to carbon emissions are regularly auctioned to generate revenue for the state and reduce emissions. Auctions have also shaped the way the grid works: in Texas, electricity prices are determined by an auction system called Day After Market, in which electricity suppliers and buyers bid on the energy that will be consumed in the following 24 hours ——This means that in extreme cases, the cost of electricity may change drastically every day, leading to a surge in electricity demand due to the unusually cold weather last winter.

The government uses auctions to raise funds through the sale of bonds, allocates access to valuable public resources (such as oil exploration rights and wireless bandwidth), and hires suppliers; in the financial sector, many stock exchanges operate auction markets, including the famous New York Stock Exchange Exchange.

The most important thing is that auctions are everywhere, and they are going on silently all the time around the world. They are so common for a reason. If you have a good understanding of the value of the items you want to sell, and a clear understanding of the types of buyers that may be interested in buying, then a simple price sale makes sense.

But for many items—such as unique items such as artworks or rare items such as collectibles—information on how they should be valued is incomplete, the buyer community is fragmented, and the price the market is willing to pay is unclear. In these situations, auctions enable transactions to proceed in a more efficient manner than selling at a price.

By determining market prices for items that do not yet exist, auctions can also be used as an important part of the sales life cycle. The auction can set a starting value for the product when it is first launched, and then it can be used as the benchmark price for its listing. (It is worth noting that this is how the New York Stock Exchange sets the trading price of securities every day when it opens.)

Auctions are also very helpful at the end of the product life cycle. It allows sellers to quickly move inventory of discontinued items-we often see this in the real world, in the form of “odd batches” and remaining auctions.

Auctioneers usually want to maximize the revenue they receive from merchandise. However, maximizing revenue is only one potential outcome that can optimize auctions. The other is efficiency or social welfare. When the winning bidder for a given project is the bidder with the highest valuation, the efficiency is maximized for that project. Perhaps surprisingly, these two goals are not always the same-an auction design that provides the seller with the most profit does not necessarily lead to the most efficient allocation, and vice versa. Therefore, depending on whether the goal is to optimize income or social welfare, the appropriate auction design for any particular market or environment may be different. Fortunately, as discussed further below, auctions are very flexible and provide a wide range of parameters that can be adjusted to achieve different results.

How did auctions evolve in history?

Of course, not all auctions are the same. Since their use was first recorded in human history, they have had enough time to evolve, as seen in Herodotus’s description of the bridegroom bidding for the bride in Babylon in 430 BC. (These events are unique because families “auction” their daughters sometimes starting with negative prices-for example, I will pay you to take her away from me; however, according to Herodotus, some sufferers The welcoming bride’s money is redirected as a form of dowry bonus for less attractive brides, ensuring fairness in the marriage market.)

Later, in ancient Rome, auctions were widely used in commercial trade to liquidate property, and the looted spoils were sold by the army. It is this era that gave us the official name “auction”, which comes from the Latin auctio, which means “increase” (although we will see that not all auctions are conducted incrementally). On March 28, 193 AD, Rome also witnessed the most striking auction in classical history, when the Imperial Guard bid for the office of the Roman emperorAfter killing the previous emperor Pettinax. Didius Julianus’ bid surpassed his competitor, each soldier bid 25,000 sestes, and some people calculated the price to be equivalent to about $6,250 dollars today. The Guards consisted of 4,500 men, so it is very conservative to estimate that the value of the emperor’s title is 28,125,000 US dollars. It may be overestimated, because nine weeks later, he was beheaded by his competitor Septimius Severus, who subsequently seized power for himself.

Although auctions in the classical era were usually held in the form of open bidding, participants publicly stated how much they were willing to pay, and then took turns to counter-bid each other—but over the centuries, the types of auctions available have varied. Dramatic increase. Today, auctions can vary in a wide range of dimensions, which can generate different bidding incentives and strategies, winning bid prices, and possibly even different winning bidders. For example, auctions may be in ascending or descending order, which refers to whether the price rises until only one bidder remains (ascending order) or decreases until the first bidder accepts the current price (descending order). The auction may also be the first or second price: in the first price auction, the winning bidder pays exactly the same amount as his or her bid, while in the second price auction, the winning bidder pays the second highest price submitted bid. Auctions may also differ in the amount of information provided to bidders: in an open bid auction, the bidder knows the bids submitted by other bidders and can decide whether to exceed the current bid, while in a sealed bid auction, all bidders Submit their bids at the same time, and do not know the price submitted by the competing bidders.

Other adjustable auction parameters include whether the reserve price is set (a minimum price must be met or exceeded in order to be considered); whether a mandatory bid increment has been established to control that newly submitted bids must exceed the current maximum bid amount. Be considered; and, in the case of many items being auctioned, whether these items are auctioned sequentially or at the same time.

Of course, when the conditions of the auction operation are not optimal, the auction may not be more effective than other market mechanisms in the end. Although auctions can protect against abuses like preemptive transactions, they are not perfect. They may be affected by other types, as well as other external factors, which will reduce the efficiency of the auction or reduce the satisfaction of participants with the results.

NFT Auction

In February of this year, Pablo Rodriguez-Fraile, an early NFT collector and co-founder of the Crypto Art Museum, reselled a $66,666 work by digital artist Mike Winkelmann for a staggering $6.6 million, the latter better known as It’s Beeple. A month later, Beeple’s latest NFT “Daily: First 5000 Days” was sold for a record $65 million. Rodriguez-Fraile purchases and resales are carried out on Nifty Gateway, which is one of the earliest and most active dedicated NFT auction platforms. “Daily” auctions are handled by the legendary art auction house Christie’s, and this is its first auction of purely digital art.

At the same time, the NFT-based collection card series NBA Top Shot released by the league, its players and NFT pioneer Dapper Labs packaged classic NBA video clips as NFT, attracting the attention of hundreds of thousands of basketball fans and speculators. The Top Shot card is launched in the form of a $9 “one pack”, and the rarest platinum cards and ultimate moment cards are sold through high-priced auctions. In April, a highlight of LeBron James was resold for $387,600, the highest price in the collectible card category.

However, the surge in the popularity of NFTs among connoisseurs and fans—sales exceeding $389 million in the first quarter of 2021 alone—has drawn attention to the key role of auctions as a new category of digital assets.

As we pointed out in the previous article, auctions provide a way to aggregate liquidity and determine prices in an uncertain value environment. NFT has no clear intrinsic value-as some people have pointed out, when you buy an NFT, what you buy is not obvious, except for the right to own the NFT itself, some people compare it to a purchase price tag or catalog entry ——The demand for them is diverse, scattered and changeable. Therefore, auctions are an ideal mechanism for bringing interested buyers together and setting a value benchmark for new asset classes.

However, as we said before, not all auctions are created equal. Key design decisions not only have a significant impact on the way their auctions operate, but also on the types of bidding audiences they attract and the final outcome of the auction.

How the unique characteristics of NFT shape the design of auction platforms

NFT is a type of blockchain-based tokens, created according to a set of standards, making each token unique (this is the “irreplaceable” among non-fungible tokens). NFT activities are mainly on more programmable blockchains, such as the Ethereum network, Dapper Labs’ Flow network, the WAX ​​chain of global asset exchanges, the Binance smart chain, and alternative chains like Tron, EOS, Polkadot, Tezos and Cosmos. At the same time, the types of digital content converted to NFT include artworks, collectibles, music (including the entire album of King Leon), books and other texts, video clips, and virtual “land” and other game content. In fact, in one of several examples of special NFT editions, the satirical sketch of NFT on Saturday night was turned into NFT, and it was auctioned on OpenSea for $365,000.

These two factors-the fact that NFTs are tied to a specific blockchain, and the large number of different types of projects that are collectively grouped under the umbrella category “NFT”, point out some of the core challenges of designing auctions for NFTs.

Each blockchain has its own token standard and compatible wallet. The auction platform must decide which one to accept, because Ethereum NFT cannot be sold on a Flow-based blockchain platform, and vice versa. Essentially, this divides the NFT space-it has been divided by the diversity of available works and asset classes. Although there are projects like Mochi.Market and that seek to solve NFT fragmentation, manage bids, and determine winners on non-blockchain platforms, and only transfer NFTs between buyers and sellers after the fact, so that traditional auctioneers It is easier to deal with NFTs in a chain-independent manner because, as can be seen from Christie’s example, this separates the bidding process from settlement and can be carried out on any chain.

The latter has its advantages, but in the eyes of purists, it also violates the basic concept of blockchain-based assets.

Christie’s off-chain NFT auction

Beeple Christie’s auction clearly illustrates the trade-offs involved in deciding to hold an NFT auction off-chain. Although Christie’s and the NFT auction platformMakersPlace co-organized this event, but they chose to use the traditional online interface instead of on-chain bidding. This has the advantage of making it easier for non-blockchain immersive individuals to participate. If they choose, they can use fiat currencies (such as U.S. dollars) instead of the local cryptocurrency ETH of the Ethereum network to bid for work. Beeple’s artwork has been registered (or “casted”). Considering Beeple’s sales history: only $100, Christie’s emphasized their commitment to “barrier-free” by offering a ridiculously low starting price.

During the Beeple auction, 33 bidders bid a total of 353 in fiat currency and ETH. But the winning bidder, Vignesh Sundaresan, is an experienced Singaporean NFT speculator, codenamed Metakovan, who paid for the work with 42,329.453 ETH, which is worth more than $110.5 million as of this writing.

However, observers pointed out that the sale took more than 24 hours to be fully executed. Beeple transferred the ownership of “Everydays” to the MakersPlace escrow account one day after the sale, and then transferred it to Metakovan more than an hour later. If the sale occurs on the chain, once the value of the winning bid is transferred, it will be automatically settled through a smart contract.

As Kelani Nichole, a blockchain art expert and gallery owner, said: Offline processes, delayed transactions and even Christie’s presence as an intermediary make this auction a real “NFT auction” invalid. “In the context of’digital art’, the most famous features of ERC-721 smart contracts are transparency on the chain, the direct relationship between the artist and the buyer, and the artist’s promise of permanent resale rights,” she said. “These technical availability have no effect in the execution of this auction. It is precisely because of these qualities that Christie’s has become obsolete.”

Bidding on the chain: weighing the pros and cons

For people like Nichole who believe that the process of decentralization and disintermediation is essential to the basic concept of blockchain, the only legal auction process for NFT is on the chain.

Holding auctions on the chain brings many benefits to the bidding process that are usually associated with blockchain-based transactions. For example, auctions conducted via blockchain are auditable: every bid is public and permanently recorded, which makes bidding more secure and transparent. (In contrast, Beeple auction records-bid failures and all-are deleted from Christie’s external online auction site immediately after the auction ends.) On-chain auctions can also be used without the need for a trusted third party get on. Party: There is no middleman of the auctioneer, the buyer and the seller have a greater sense of ownership in the bidding process, and can check the smart contract that calculates the cost and handles the final settlement. Because of all historical bids, there are more information available on Etherscan and on- chain auction works. (At the same time, contrary to their tradition, Christie’s chose to assign the “estimated unavailable” label to “every day.”)

However, holding an auction on the chain has great responsibilities. Bidding in on-chain auctions on the Ethereum network may result in high gas fees, which may make full participation unpleasant; at the current transaction price, bidders need to pay the equivalent of US$20 to US$150 for each bid Cost, regardless of whether the bid is a winner or a loser. If potential buyers have to bid multiple times before successfully winning the bid, this may significantly increase the purchase price of hot-priced items. Of course, if potential buyers bid higher than expected, the gasoline bills they spent will still disappear. In addition, holding auctions on the chain makes it more difficult to provide bidders with the option of bidding and settlement in legal tender. Although there are no technical barriers to real-time conversion of fiat currency to cryptocurrency, given the volatility of cryptocurrency valuations, even during the auction process, the relative value of cryptocurrency bids and fiat bids may change significantly, which may make certain A winner.

Off-chain bidding: weighing the pros and cons

On-chain auctions also almost entirely require bids in local cryptocurrencies. In our analysis of the main NFT auction platforms, there is only one on-chain auction platform, Christie’s partner MakersPlace, which provides fiat and cryptocurrency bidding, and converts the fiat currency bidding into ETH in real time.

Restricting bids on cryptocurrencies requires those who do not already own blockchain currencies to take the additional step of setting up compatible wallets and purchasing their inventory in advance to participate. This commitment will spontaneously decide that participation in the auction is unlikely. Bidding in a legal form makes it easier to set up a bidding account through a standard mechanism familiar to anyone engaged in e-commerce: add a credit card or additional bank account for ACH transfers.

The advantage of the off-chain platform is that it is easier to obtain for bidders who are not immersed in the blockchain. Bidding in fiat currency means that potential buyers will not feel burdened by unclear bids or the cost of synthetic natural gas, allowing them to participate more confidently. On a completely off-chain platform, buyers don’t even have to manually create a wallet to store their NFT purchases: for example, the vast majority of Top Shot owners leave their Moments in an auto-generated custodial wallet managed by Top Shot itself. Buy or resell on the platform (if they choose) without downloading them to a personal “cold wallet”. (The latter option is obviously more decentralized; keeping the NFT in a personal wallet means that you and only you have access to the private keys needed to transact with them.

Off-chain also provides some obvious advantages for auctioneers-it provides them with a broader pool of potential bidders, and it is easier to track the identity of bidders, not only to comply with anti-money laundering regulations, but also to establish ongoing relationships to encourage participation in the future Auction. However, if there is no proper custody mechanism, the execution of off-chain bidding is not as good as on-chain bidding. For example, Mintable has off-chain bidding and requires the winning bidder to pay within three days after the auction ends. But if buyers decide not to continue trading, they will only “strike” on the platform; they are not actually forced to buy NFT. Although this may have certain benefits for bidders—for example, eliminating “buyer’s regret” and withdrawing unexpected bids—it creates uncertainty for sellers because the winning bidder is constantly likely to breach payment obligations.

Construction strategies of two NFT auction platforms

Because on-chain and off-chain bidding formats provide different relative benefits and trade-offs, they tend to attract different participants. On-chain auctions are more likely to screen individuals who are immersed in the blockchain, while off-chain auctions create much less friction for those seeking to participate.

The final result is that NFT auction platforms can be divided into two categories according to different creation strategies.

The first is the “broad” strategy, which involves opening the bid pool to the widest possible number of participants, especially bidders who are not familiar with encryption technology. The strategy aims to create value for sellers by encouraging a larger number of bids and more competition among more bidders. This method is represented by platforms such as Nifty Gateway, which have the highest transaction volume among all NFT auction sites.

This is also the method adopted by NBA Top Shot. It has always been the most important driving force for the purchase of new NFT participants on any platform in the world, with approximately 30,000 active traders driving more than $4.25 million in daily trading volume. (Although Top Shot is currently not auctioned, it will be launched soon. Top Shot prioritizes transactions in US dollars “for a faster experience”, but also accepts Bitcoin, ETH and several other cryptocurrencies to reload storage account balance.)

Designing for a broad bidding pool means off-chain bidding, acceptance of fiat and cryptocurrency for payment, and certain other options, such as low auction fees. The positive aspects of this strategy include faster merchandise sales and greater on-demand liquidity. Negative aspects include greater customer service burdens—because some participants are more likely to be unfamiliar with the NFT purchase and ownership process—and more possibilities for fraud or buyer regret. Broad strategies may also not be suitable for the narrower “connoisseur” category of goods, such as fine art, which may have limited public awareness or appeal.

The second option is to adopt a “deep” strategy to create a relatively closed bidding pool of qualified participants. These participants are basically planning based on their knowledge, resources, and bidding capabilities of the category. This method consciously limits participation to those who are more immersed in encryption and blockchain, and creates value for sellers through the scale of bidding-estimates based on high reserve prices or bidders’ understanding of market demand and historical pricing value.

Designing for deep bidding pools implies on-chain bidding, which usually only accepts encryption; this approach also emphasizes the need for a community infrastructure around the platform to create a continuous group of active returning participants. This strategy may be more suitable for art and collectibles, and they have a unique appeal to the subcultures that have been well represented in the blockchain space.

As shown below, the main NFT auction platforms do belong to these two clusters. Nifty Gateway and Mintable tend to be “broad” strategies, while most other platforms focus on “deep” strategies.

Analysis of the advantages and disadvantages of on-chain and off-chain auctions from Christie’s first NFT auction

Other factors affecting the bidder pool and auction results

Auction platforms usually have to maintain their own business operations, which means that most auction platforms will charge a certain transaction fee. In our analysis, the fee may be as high as 30% of the sales value. The intermediate fee is about the final price paid by the buyer. 10%.

For on-chain auctions-depending on the blockchain where the platform is located, sellers and buyers will be charged a certain amount of transaction fees. Any conversion between cryptocurrencies and the actual transfer of items between buyers and sellers will also charge transaction fees. For NFTs on the Ethereum network, the cost of transactions has become a big problem, because the gas cost of Ethereum is usually so high that the platform is not tenable for anything other than auctioning high-priced goods.

Since blockchain projects can be embedded in smart contracts, allowing secondary transaction payments, platform design and bidder behavior may also be affected by factors such as royalties, and the buyer will be charged fees to continuously compensate artists/creators based on the needs of the secondary market. Industry standard royalties are usually 10% of the transaction value; however, there are some exceptions. Both Zora and OpenSea let creators decide the royalties to set for their assets, ranging from 0% to 100%.

There is also the reality that many bidders participating in high-risk chain auctions have cryptocurrency inventories that have greatly appreciated, which makes auctions psychologically “not worth mentioning”. For example, a bidder who may not be willing to pay $1 million in fiat currency may not blink when paying 400 ETH, even if the two amounts are currently equivalent, because they received ETH in 2015, and each coin at that time It is worth about $1. In view of this, it is a meaningful strategy to narrow the bidding pool to a small circle of crypto enthusiasts.

to sum up

As interest in NFTs becomes increasingly mainstream, the platform adopts a “broad” approach, by minimizing professionalism, making it easy for new users to access, and opening up participation to the widest possible audience, essentially giving priority to Scalability is not decentralization and security, but a “deep” approach. Although certain restrictions are imposed on the audience (only the circle of cryptocurrency enthusiasts), this reflects decentralization and security.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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