BiG DEAL : BiG Auction Model #5 : Dutch Auction

5 min readApr 22, 2022

BAM 5 | DUTCH AUCTION

The Dutch Auction mechanism is useful for products where the availability of the product is not limited, yet the price is non-deterministic. BiG DEAL will avail a platform for the launch of crypto projects and their initial coin/token launches via the Dutch Auction model. In 2019, the Algorand Foundation resorted to a Dutch Auction for their initial token sale. The sole objective was to bring more transparency, decentralization, and democracy to the entire process.

DEFINITION| Amazing for products whose available quantity is high and yet the price is not completely determined (but lies in a range). BiG DEAL will use it for initial coin/token offerings, as well.

MODEL/TYPE | MarketPlace/ICO

DOMINANCE | Skill (skill vs. chance)

BiG DEAL revenue:

Consumption of $BiG Tokens to convert to PLAYs.
BiG DEAL platform listing fees.
Success price revenue percentage

Applicability:

Sell services | Low
Sell goods | High
Sell experiences | Low
Sell digital assets (NFTs) | High
Launch initial tokens | High

Multiple | Everyone who bids before the inventory runs out is a claimant

WIN WIN WIN applicability | High

Auctioneer wins | Offer in the most transparent and fair way. | Get much more than the expected price.
House wins | Revenue from sale of $BiG Tokens and success fees and listing fees.
Winners win | Almost all of them get the product at a much lower price than anticipated.
Non-winners win | They don’t actually lose anything, except very few PLAYs.

In 2004, Google decided to go with a Dutch Auction initial public offering process (IPO). In its regulatory filings, Google’s documents stated: “Many companies going public have suffered from unreasonable speculation, small initial share float, and stock price volatility that hurt them and their investors in the long run,” and “we believe that our auction-based IPO will minimize these problems, though there is no guarantee that it will.” Google was able to raise 1.67 billion US Dollars using the Dutch Auction model.

The scenario remains the same with initial offerings of tokens by various crypto projects. BiG DEAL believes that an open auctioning system for ICOs is a fair, decentralized, and transparent mechanism for pricing the token right.

So, what exactly is a Dutch Auction, and why do we believe that it can be one of the most effective ways to hold a token sale in today’s crypto environment. The name

‘Dutch Auction’ comes from the Tulip auctions craze of the late 1600s in the Netherlands. At the time it was believed that the most efficient way to buy and sell tulips was through as few bids as possible given the short timeframe that tulip bulbs could be dug up and transported.

A Dutch Auction, as defined by Investopedia, is a public offering auction structure in which the price of the offering is set after taking in all bids to determine the highest price at which the total offering can be sold. In this type of auction, investors place a bid for the amount they are willing to buy in terms of quantity and price”. In this type of auction, instead of buyers purchasing an offering at a fixed price, the process allows anyone to bid their own chosen quantity and price they are willing to pay.

In a Dutch Auction, the auctioneers set 2 prices upfront:

1. The minimum reserve price, where all bids would be accepted not below this price, and

2. The initial (highest) price, where all bids would be accepted not above this price

Unlike traditional auctions, the price of the asset continues to fall until the winning bid is made. The final price will fall between the reserve price and the initially offered highest price. In the case of a Dutch Auction, the price with the highest number of bidders becomes the offering price.

There is a high level of fairness in Dutch Auctions as the price of the product eventually becomes the same for everyone, with the market determining the ‘right’ price for the product.

For any ICO using the Dutch Auction model, there usually will be a series of auctions that would be held. For each auction:

A fixed number of tokens to be sold is predetermined
The auction runs for a fixed amount of time
As the auction starts at the initial highest price, and it periodically decreases till all tokens (as up for sale) are sold or the reserve price is reached.

Example | Consider for a token auction that there are three participants — A, B and C.

Reserve price of the token is $1
Highest price of the token is $10
Total number of tokens on sale is 500

As the auction starts, it will begin at the highest price, which is $10 in our example. Let’s say there will be a total of 10 rounds in the auction where the price of the token will be reduced by $1 on each round, starting from $10 to $1.

Round 1 | Price $10 (as auction starts):

Round 2 | Price $9:

Round 3 and 4 | No one bids anything.

Round 5 | Price drops to $5:

A | No bids, but at this point, B places a bid committing $150. And since B has placed a bid, A will get tokens at new rate.
B | Amount committed: $150 | Tokens got: minimum 30.
C | No bids.
Token tally | Supply left 500 — A(= 430/5 = 86) — B(150/5=30) = 500–86–30 = 384.

Round 6 and 7 | No one bids anything.

Round 8 | Price drops to $2:

A | No bids, but at this point, C places a bid committing $500, so A will get tokens at new rate.
B | No bids, but B will get tokens at new rate of C.
C | Amount committed $500 | Tokens got: minimum 250.
Token tally | Supply left 500- A (430/2 = 215) -B(150/2 = 75) — C(500/2 = 250) = 500–215–75–250 = -40.

*Since it is a negative value, C will only get 210 tokens instead of 250, taking the token count to zero. The bidding stops here, since the available tokens are zero or less than zero.
Now A,B, and C get tokens at the rate of $2 and the total amount raised = 1000$.

Please note:

The auctioneer gets a higher price than the reserve price of $1.
The price is dropped automatically every few minutes (let’s say a $1 drop every 2 minutes, and the entire auction will be 20 minutes).
The bidders don’t know how many tokens are left and how many people have bid at each price point — and that’s the reason that not all bidders will wait to bid at the lowest price because they might not even get any tokens and the auction might just end in less than the total time of the auction.

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BiG DEAL : BiG Auction Model #5 : Dutch Auction

BAM 5 | DUTCH AUCTION

Written by BiG Deal