Dutch Auction
Written by Bennett Bookstein
Introduction
A Dutch Auction is where the bidding for an item begins with the price starting at its highest asking amount but is systematically lowered until someone makes the winning bid and the item is sold. In a token sale, a bid reserves that amount of tokens, and it ends when all are accounted for. All participants then pay the same price which is the lowest bid.
As an example, a new cryptocurrency holds a Dutch Auction to sell their coin and determine the price. When John Doe places a relatively high bid on the coin, the auction does not necessarily end. Instead, as long as there is still a supply of coin left, the auction continues and the bidding price of the coin decreases. John Doe’s bid will remain the same but the amount of coin that he will receive increases with each decrease in coin price. If he bids $100 at the asking price of $5, John Doe would receive 20 coins. If the price drops down to $4, he would receive 25 coins. This continues until all coins are bought, thus setting the clearing price.
Remember, John Doe is not the only participant in the auction; the amount of coin that he would receive only takes away a portion of the entire supply. As more and more participants bid, they each receive coin proportional to the amount they bid until the supply is cleared at a certain price, thus ending the auction.
Dutch Auctions are used in the crypto space because it is a decentralized and democratic way of determining the price of a company’s coin. By starting high and then continuously lowering the price, companies can gauge how much each participant of the auction is willing to pay. The practice of the Dutch Auction directly contrasts that of traditional IPO’s in which the bidders/investors are part of an exclusive and institutionalized group (ie investment banks) that determine the price. Dutch Auctions allow smaller party investors to place bids and play a part in setting the price.
An example of a successful Dutch Auction was held by The Algorand Foundation on June 19, 2019 in which they sold 25 million algos at a clearing price of $2.40.
Another example is DutchX, a decentralized exchange maintained by Gnosis, that allows the trading of various cryptoassets through the use of Dutch Auctions.
Suggested Reading
Big crypto projects are using Dutch Auctions for their token sale — here’s why - Anthony Zhang
Dutch Auction by James Chen
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