How can NFT sales avoid Gas War? a16z teaches you a few tricks

How can NFT sales avoid Gas War?  a16z teaches you a few tricks

Rather than letting the market determine the price of their primary product sold, many Sometimes it’s because the team didn’t realize the sheer need for their product, or because their initial sales mechanics were poorly designed. Often, however, selling NFTs below the floor price is motivated by a buyer’s desire to enable more people to buy NFTs or achieve a specific distribution goal.

But what happens when market designers weigh efficiency versus fairness? Will demand far outstrip supply, as often happens with high-demand NFT issuances and airdrops?

When people want to buy scarce resources in the market, this inevitably leads to competition among potential buyers in other areas. In the Ethereum ecosystem, this competition could create what is known as a “GasWar,” which escalates when potential buyers bid up gas prices in order to get ahead. GasWars are a market equilibrium phenomenon: they are created directly through market forces in response to limited supply. So how does the Builder avoid this? If Builders really want to sell NFTs below the market clearing price, how do they address market demand? Here, we provide some guidance for the Builder from the perspective of auction theory and mechanism design.

Odaily Planet Daily Note: Market Clearing Prices – When there is high demand to launch or limit purchases, buyer demand can far outstrip supply. Market pressure then pushes the price to a level where supply and demand match (or equilibrium), the “market clearing price”. This inevitable push to bring prices into balance with supply and demand is one of the most central principles of economics. For example, competition in gas fees. Ultimately, market forces will allow some form of payment to ultimately help match supply and demand.

1. The market clears

Perhaps the easiest strategy to avoid GasWars is to rely on market forces to run NFT sales in a market-clearing way (with full flexibility in commodity prices). For example, there are two auction mechanisms that enable this, and both are currently used in NFT sales.

“Pay-As-Bid” auctions with gradually decreasing prices

One option is to run a markdown auction, which starts with a very high price and then slowly drops the price, with bidders buying at any current price until the available supply is exhausted.

A “pay-as-bid” auction: because bidders pay their bids exactly for each bid. Bidding has also eased GasWar somewhat over time. Although we do sometimes see GasWars happening towards the end of the auction as bidders try to join the auction with the lowest possible actual price.

But there’s an interesting incentive problem in this type of auction, where participants have an incentive to wait if they think others are unlikely to bid, and subsequent bids will lower the price you end up paying. In a “pay-as-bid” auction, everyone waits to see when other bidders start bidding. This may instead lower the clearing price (resulting in GasWar again when everyone ends up bidding at the same time).

Fairness is a concern for these types of auctions: a project’s biggest fans and backers are the ones most motivated to lock in bids with higher prices early on. This means they may end up paying more than others. While it makes sense from an economic point of view to pay a premium to the person with the highest token value to ensure they can win the token, having the most engaged backers pay (say 10x the final closing price of the auction) may It goes against the spirit of the community.

Clearance auctions with gradual price reductions

If the team used so-called “clearing price” auctions (or “flat price” auctions), the above problems could be avoided, as well as the GasWar that would be triggered at the end of “pay-as-bid” auctions. In this auction mechanism, the price starts to drop again from the high price, and in the process, people will bid to buy at any price.

Note that in a clearing price auction, while no one will pay more than their respective bids, in principle they may end up paying less than their bids if they bid when the price was high Much more, but the final price will be low.

From a market design perspective, clearing price auctions make sense in many ways. They encourage cost-effectiveness, especially when a reasonable number of units are sold. Be aware, however, that running them on the blockchain introduces some complications, as bidders must actually escrow funds when bidding and then receive a refund when the final price is set. Refund functions must be specified carefully, such as to avoid accidentally locking up additional funds in a sales contract.

2. Limit the need

If a team really wants to sell below market-clearing levels, the way to avoid GasWar is to limit demand in some way so buyers don’t have to compete with each other to buy.

This is difficult to do because there is often a need to limit who is allowed to buy and how much these potential buyers can buy. The total quantity required by all eligible buyers should be less than or equal to the available quantity. This is especially difficult to ensure in the crypto world, where it is common to maintain multiple pseudonymous accounts.

Still, there are ways to limit participation. Below are three options, and some projects have successfully used these techniques.

(1) Identity certificate

One way to limit participation is to require some form of “proof of identity” as a condition of entering a transaction — pre-registering buyer accounts, making sure each account represents a single buyer. This limits the buyer pool (buyer wallets) to those who can prove unique identity, possibly through KYC, requiring uploading of identity documents. Robots can be eliminated, greatly reducing the number of potential buyers.

But identification alone is not enough to achieve market stability and fairness. People usually get around the purchase limit by hiring someone to buy additional wallets. But even if it were possible to truly limit sales to buyers with a “one-to-one status,” that still wouldn’t solve the problem if demand far outstrips supply.

As we highlighted above, as long as supply exceeds demand, market forces have the potential to push prices higher. In this case, the scramble to buy would result in a GasWar, driving the total price per unit of gas toward market-clearing levels.

(2) Whitelist

Another way to limit participation is to create a whitelist — a list of potential buyers that is explicitly managed. Many teams offer purchase rights to token holders associated with partner projects or those who were particularly active in the community prior to the NFT launch. This approach does have the potential to limit demand below supply, alleviating GasWar’s problems entirely – as long as the project side doesn’t whitelist too many people.

However, this approach does not escape the issue of market pricing. In fact, the price competition here takes another form: potential buyers don’t just pay with money, but pay part of the fee through work—the effort to get on the whitelist.

Whitelisting does create an opportunity for more incentives, in the sense that potential members of the NFT community engage in activities that increase the engagement of the entire community. Ultimately, the opportunity to buy NFTs goes to those most actively involved. Additionally, the whitelist is designed in a way that makes it easier for those who have the time and energy, but less liquidity, to buy NFTs.

However, whitelisted contests tend to be “all pays” rather than “winner pays”. Unlike the auctions described above, only the winner ends up paying the price. Under the whitelist, everyone involved ends up putting in the effort (or getting a collaborative project NFT). Regardless of whether they end up getting the right to buy NFTs. This can lead to negative emotions from those who work hard and are excluded, which can be tricky for the NFT community.

(3) Lottery

Another way to limit participation (and possibly avoid GasWars) is to randomly assign buying opportunities through a lottery. Potential buyers have a chance to sign up for the lottery in about a week. Finally, a randomly selected group of registrants are granted the right to purchase NFTs.

Such mechanisms first decentralize the registration process. So there is no need for all registered transactions to happen at the same time, and then GasWar is effectively mitigated by limiting the number of buyers to exactly match the available supply. However, as is the case with whitelisting, market clearing pricing comes into play again – buyers will work hard to enter the lottery.

In a demanding pre-sale draw, potential buyers may create a large network of bot registrations. The lottery could devolve into a competition between botnets, where the average individual buyer can’t actually take any position in the sale.

Lottery participation can more effectively control bot buyers by using identification strategies such as KYC. Alternatively, it is also possible to reduce the number of entries by requiring people to deposit a deposit for each draw. Escrow makes it expensive to submit a large number of applications, but at the same time, buyers with more liquidity will be more able to participate (possibly multiple times) than others, limiting the overall accessibility of the sale.

Hybrid mechanism

It’s worth noting that many of the mechanisms described above can be used simultaneously for the same sale.

For example, Tally Labs’ Jenkins the Valet Bored & Dangerous minting took place through a three-stage process: first, the team held a markdown auction for 2,367 units; then, they offered the existing community a discount to the final auction clearing price Various members of the whitelisted sale. Finally, holders of the team’s founding NFT series – “Writer’s Room” can get a copy of the Bored & Dangerous NFT for free.

Summarize

Market clearing prices are inevitable. Anyone building a market mechanism (blockchain based or not) has to deal with the forces of supply and demand balancing. But at the same time, considering market forces and incentive design can help us build the right mechanism and shape the final sales balance.

The design of NFT airdrops provides another example of mechanism design on the blockchain. As the NFT field develops, we would like to see new mechanisms both guided by and contributing to the classical theory of market design. But as more researchers and builders deeply internalize classic mechanism designs and Web3 features, we’re starting to see experiments with various blockchain-based distribution mechanisms.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/how-can-nft-sales-avoid-gas-war-a16z-teaches-you-a-few-tricks/
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