What is Dutch Auction?
A Dutch auction, also known as a uniform price auction or a descending price auction, is a bidding technique that has gained traction in the crypto markets. It entails finding an optimum price for sellers to sell off their assets. In Dutch auctions, all bids given by buyers are considered, and a ceiling price is settled upon, which declines as time elapses. It is the exact opposite of English auctions, which are based on the ascending price formula, where sellers set a price and bidders outshine each other until the highest bid wins.
Dutch auctions are exemplary when it comes to selling assets in large quantities. In the case of NFTs, the gradual price drops translate to affordability, thus increasing demand. The auction encourages many small-scale investors to participate, leading to NFT collections sold within shorter periods. Dutch auctions allow entities to dispose of assets on their terms without relying on underwriters to set up rules like traditional auction methods.
One of the reasons that Dutch auctions have gained popularity in the NFT space is gas wars on blockchains. Gas in crypto refers to users’ fees used to process transactions on blockchain networks such as ETH. Therefore, gas wars are spikes in pricing brought about by high-volume transactions in a given blockchain. With the Dutch auction method, different price points are spread across a set period, meaning buyers won’t scramble to buy assets all at once.
Understanding how Dutch Auctions Work
In contrast to conventional auctions, the Dutch method employs reverse bidding, where an asset’s price is lowered until it gets a bid. In this type of auction, sellers take on the role of bidders as they are the ones who set the initial price. The auction then involves a price discovery process where the auctioneer reduces the asking price to a bid convenient to buyers.
In the NFT sphere, the exact auction mechanism is applicable during the time allocated for bidding. Dutch auction durations in NFT marketplaces vary depending on the individual platform. They can be anywhere between days to a few months. On some occasions, they can take up to a year.
Being a relatively new venture in the NFT space, Dutch auctions have proved useful and provide participants with some satisfaction due to their merits. Some advantages of using this type of auction include:
- Enhanced transparency during the bidding process which helps to eliminate wash trading and price manipulations.
- More flexibility compared to the traditional forms of auctioning.
- Promotes a democratic bidding process where all participants engage and contribute equally.
- Small-sized investors can have a shot at previously out-of-reach assets courtesy of Dutch auctions.
There are some shortcomings accompanying Dutch auctions, as explained below.
- Sellers may be disadvantaged as assets and NFTs are sold at meager bid prices.
- Sellers lose the ability to control prices, meaning they have zero influence on the sales outcomes to buyers.
- Items may become underpriced as there are chances of price inefficiency increasing during the bid process.