When sellers want to sell goods with a fixed supply and high demand (or uncertain and possibly high), one of the choices they often make is to set the price significantly lower than the “market will bear” price. The result was that the item sold out quickly, and the lucky buyers were those who bought it first. This has happened in many situations in the Ethereum ecosystem, especially NFT sales and token sales/ICO. But the history of this phenomenon is actually much earlier; for example, certain concerts and restaurants often make similar choices at low prices, resulting in fast-selling seats or long queues of buyers to buy.
Economists have been asking a question for a long time: Why do sellers do this? Basic economic theory shows that the best situation is that the seller sells at a market clearing price, that is, the price at which the quantity that the buyer is willing to buy is exactly equal to the quantity that the seller must sell. If the seller does not know the clearing price, the seller should sell through auction and let the market determine the price. Selling at a price lower than the market clearing price not only sacrifices the seller’s income; it can also cause harm to the buyer: the product may be sold out so quickly that many buyers simply have no chance to obtain it, no matter how much they want Want it and be willing to pay for it. Sometimes, the competition caused by these non-price-based allocation mechanisms can even produce negative externalities that damage third parties-as we will see, this impact is particularly serious in the Ethereum ecosystem.
But despite this, the fact that prices below market clearing are so common suggests that sellers must have some compelling reasons for doing so. In fact, as the research on the subject over the past few decades has shown, it is often purposeful. Therefore, it is worth asking the question: Is there a way to achieve the same goal with greater fairness, less inefficiency, and less harm?
Selling at a price lower than the market clearing price will bring great inefficiency and negative externalities
If a seller sells an item at a market price or through an auction, then people who really want the item have an easy way to obtain it: they can pay a high price, or if it is an auction, they can pay a high price. If a seller sells an item at a price below the market, the supply is in short supply, so some people will get the item, while others won’t. But the mechanism for deciding who will get the item is obviously not random, and usually does not correlate well with the degree to which participants want the item. Sometimes, it involves clicking buttons faster than others. At other times, it involves waking up at 2 AM in your time zone (but 11 PM or even 2 PM in other people’s time zones). At other times, it just becomes an “auction by other means,” an auction that is more chaotic, less efficient, and full of more negative external factors.
In the Ethereum ecosystem, there are many obvious examples. First, we can look at the ICO boom in 2017. In 2017, a large number of projects launched initial coin offerings (ICOs). The typical model is a capped sale: the project will set the price of the tokens and the maximum hard cap of how many tokens they are willing to sell, and at a certain time Point sales will start automatically. Once the number of tokens reaches the upper limit, the sale will end.
What is the result? In fact, these sales usually end in as little as 30 seconds. Once (or rather, just before the sale starts), everyone will start sending transactions to try to enter, offering higher and higher fees to encourage miners to include their transactions in the first place. Auctions under another name—except that revenue flows to miners instead of token sellers, and the extremely harmful negative externalities that price all other applications on the chain while the sale is in progress.
For example, the most expensive transaction in the BAT sale sets a fee of 580,000 gwei, which means that a fee of $6,600 is paid to participate in the sale.
Since then, many ICOs have tried various strategies to avoid these gas price auctions; an ICO has a special smart contract that can check the gas price of the transaction, and if it exceeds 50 gwei, it will be rejected. But this of course did not solve the problem. Buyers wishing to deceive the system sent many transactions, hoping that at least one would come in successfully. The auction was again conducted under another name, which resulted in even more blockages in the blockchain.
Recently, ICOs have become less popular, but NFT and NFT sales are now very popular. Unfortunately, the NFT field failed to learn the lessons of 2017; they sell a fixed amount of a fixed supply like an ICO (for example, see the minting function on lines 97-108 of this contract). What is the result?
This is not even the most expensive; some NFT sales have caused gas prices to soar to 2000 gwei.
Once again, users sent higher and higher transaction fees just to preempt the transaction to succeed, causing gas prices to skyrocket. As before, another auction will price all other applications on the chain within 15 minutes.
So why do sellers sometimes sell at a price lower than the market price?
Selling at a price below the market price is not a new phenomenon inside and outside the blockchain field. In the past few decades, there have been many articles, papers and podcasts (sometimes bitterly complaining) that are reluctant to use auctions or set prices as The level of market clearance.
Many arguments are very similar between examples within the blockchain realm (NFT and ICO) and outside the blockchain realm (popular restaurants and concerts). A particular concern is fairness and the unwillingness to keep the poor out, not to lose fans or to cause tension because of what is believed to be greed. The 1986 paper by Kahneman, Knetsch, and Thaler provides a good illustration of how perceptions of fairness and greed affect these decisions. In my own memories of the 2017 ICO season, the desire to avoid the notion of greed is also a decisive factor in preventing the use of auction-like mechanisms (I basically have no memory of this and do not have many sources, although I did find an imitation that is no longer available. The link to the video is a comparison between the auction-based Gnosis ICO and the National Socialist German Workers’ Party).
In addition to the issue of fairness, there is also a long-standing argument that sold out and long queues will create a feeling of popularity and good reputation, which makes the product more attractive to others. Of course, in a rational hype model, high prices should have the same effect as long lines, but in fact, long lines have more obvious effects than high prices. This is true for ICOs and NFTs and for restaurants. In addition to these strategies that generate more marketing value, some people actually find it interesting to participate or watch games that seize limited opportunities before everyone else takes them all away.
But there are also some factors specific to the blockchain field. One factor for selling ICO tokens below the market clearing price (and also the decisive factor persuading the OmiseGo team to adopt their hard cap sales strategy) is related to the community dynamics of token issuance. The most basic rule of community sentiment management is simple: You want prices to rise, not fall. If community members “achieve up”, they are happy. However, if the price is lower than the purchase price of community members, leaving them at a net loss, they will become unhappy and start calling you a liar, which may have a ripple effect on social media, causing others to call you as well Liar.
The only way to avoid this effect is to set the sales price low enough so that the market price after listing will almost certainly be higher. But how do you really do this without causing the auction to snap up through other means?
Some more interesting solutions
It’s 2021 now. We have a blockchain. Blockchain not only includes a powerful decentralized financial ecosystem, but also includes a rapidly growing suite of various non-financial tools. Blockchain also provides us with a unique opportunity to reset social norms. When economists have failed to shout “efficiency” for decades, the ride-hailing service Uber will legitimize the surge pricing; of course, the blockchain can also be an opportunity to legitimize the new use of mechanism design. Of course, instead of fiddling with the coarse-grained one-dimensional strategy space sold at and below market prices (and perhaps the second dimension of auctions and fixed-price sales), we can use more advanced tools to create a more direct A way to solve the problem with fewer side effects?
- First, let us list the goals. We will try to cover (i) ICO, (ii) NFT and (iii) conference tickets (actually a type of NFT) at the same time; most of the required attributes are reflected in the three cases.
- Fairness: Don’t completely exclude low-income earners from participating, at least give them some opportunities to participate. For token sales, there is a different but related goal, which is to avoid a high concentration of initial wealth and have a larger and more diverse community of initial token holders.
- Don’t create a race: avoid creating a situation where many people are eager to take the same action and only the first few people enter (this situation will lead to the terrible auctions we saw above in the name of others).
- No fine-grained knowledge of market conditions is required: the mechanism should work even if the seller has no idea how much demand there is.
- Fun: Ideally, the process of participating in sales should be fun and game-like, but not frustrating.
Give buyers a positive expected return: In the case of tokens (or, for that matter, NFT), buyers should be more likely to see product prices rise rather than fall. This necessarily means selling to buyers at a price lower than the market price.
We can start by looking at (1). From the perspective of Ethereum, this is a very clear solution. Instead of creating competitive conditions, just use a clearly designed tool to accomplish the job: the proof of personality agreement! Here is a mechanism that is quickly proposed:
Mechanism 1: Each participant (verified by the identity certificate) can buy at most X units at the price of P. If they want to buy more, they can buy it in the auction.
It seems that this has met many goals: fairness is provided in terms of per capita participation. If the auction price is higher than P, the buyer can obtain a positive expected return on the part sold through the per capita mechanism, and the auction part does not require the seller to understand the level of demand. Does it avoid competition? If the number of participants purchased through the per-person pool is not that high, it seems to be the case. But what if so many people show up and everyone’s pool is not big enough to provide distribution for everyone?
This is an idea: to make each person’s distribution amount itself dynamic.
Mechanism 2: Each participant (verified by personal certification) can deposit deposits into a smart contract to show interest in obtaining up to X tokens. Finally, each buyer will be allocated min(X, N / number_of_buyers) tokens, where N is the total amount sold through the pool of everyone (some other amounts can also be sold through auctions). The part of the buyer’s deposit that exceeds the amount required for the purchase allocation will be returned to them.
Now, no matter how many buyers pass through the pool per person, there is no competition. No matter how high the demand is, there is no better way than participating early.
This is another idea if you like your game mechanics to be smarter and use fancy quadratic formulas.
Mechanism 3: Each participant (verified by personal certification) can purchase a unit at a certain price, up to the maximum quantity that each buyer can purchase. Start with a low quantity and increase over time until enough units are sold.
This mechanism has a particularly interesting feature. If you are making governance tokens (please do not do this; this is purely harm reduction advice), the amount allocated to each buyer is theoretically the best, although of course it is After-sales transfer will reduce this optimality over time. Both Mechanism 2 and Mechanism 3 seem to meet all of the above goals, at least to some extent. They are not necessarily perfect and ideal, but they are indeed a good starting point.
There is one more problem. For fixed and limited supply NFTs, you may encounter the problem that the equilibrium purchase quantity of each participant is a decimal number (in mechanism 2, number_of_buyers> N, in mechanism 3, the setting may have caused enough demand to exceed the quota Subscription sales). In this case, you can sell fragmented goods by offering lottery tickets: if there are N items to sell, then if you subscribe, you have a chance to get N / number_of_buyers items, otherwise you will get a refund. For conferences, groups that want to participate together can be allowed to bundle their lottery tickets to ensure all wins or all losses. The ability to obtain specific items can be sold at auctions.
An interesting mild gray hat strategy for conference tickets is to disguise pools sold at market prices as the “sponsored” bottom layer. You might end up seeing a bunch of people’s faces on the sponsor’s board, but…maybe it’s good? After all, EthCC has the face of John Lilic on their sponsor board!
In all these cases, the core of the solution is simple: if you want to be reliable and fair to people, then your mechanism should have some clear measure of human input. Personality Proof Protocol can do this (if necessary, it can be combined with zero-knowledge proof to ensure privacy). Therefore, we should combine the efficiency gains of market pricing and auction pricing, and the equal benefits proven by the personality mechanism.
Answers to possible questions
Q: Do many people who don’t care about your project at all buy the item through the egalitarian plan and resell it immediately?
Answer: Initially, maybe not. In practice, this kind of meta-game takes time to realize its potential. However, if/when they do, one possible mitigation measure is to make them untradeable for a period of time. This is actually effective because personal identification is not tradable: you can use your face to claim that your previous account has been hacked at any time, and the identity corresponding to you, including all the content in it, should be transferred to one New account.
Q: What if I want to make my project accessible not only to ordinary people but also to specific communities?
Answer: Do not use proof of personality, but use proof of participation tokens related to events in the community. Another alternative, which also has egalitarian and gamified value, is to lock some items in the solutions of some publicly released puzzles.
Q: How do we know people will accept this? In the past, people have resisted strange new mechanisms.
A: It is difficult to get people to accept a new mechanism that they think is weird, and ask economists to write down how they “should” accept it for the sake of “efficiency” (or even “fairness”). However, the rapid changes in the environment have done a good job of resetting the expectations set by people. So if there is a good time to try this, the blockchain space is that time. You can also wait for the “metauniverse”, but the best version of the metaverse will most likely run on Ethereum in some way, so you might as well start now.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/v-gods-latest-paper-selling-at-a-price-lower-than-the-market-clearing-price-to-achieve-a-fair-alternative/
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