Many forms of auctions exist. Some are effective at optimizing the outcome for a seller, others are effective at efficient price discovery of a unique asset, and others still, are designed to maximize fairness among bidders. Among all of the existing models however, none offer a solution for auctioning allotments of newly created fungible assets among bidders that can be carried out in a fair and secure way while also protecting from bad actors and others who may wish to game the auction. It is most likely the case that such a solution does not exist because until recently, the sale of an allotment of newly created fungible and discretizable assets did not exist.

At risk of delving too deeply into the core beliefs that are the basis of peoples’ understanding or interpretation of “money” or “value”, it is fair to note that prices are generally influenced, if not at least initially, by the “going rate” at which a sufficiently large enough market prices a specific asset or commodity. This is to say that without a reference point, an individual who is unequivocally new to a specific economy, first references a generally accepted range of value for the item that is the subject of trade. This is the basis for their value proposition for that object, upon which the individual also adds their respective utility value, financial ability, the future value expectations of the item and other contributing factors. After enough input and consideration, a price valuation is determined and interaction with the market is possible.

With the advent of cryptocurrencies such as bitcoin and ether, we see this form of valuation occurring as new entrants to the economy first reference market values for the tokens of choice and then chose whether the current market price is advantageous or not to them as an individual. Given the adolescent nature of cryptocurrencies in general, there is much unknown and so prices can vary quite widely even in short spans of time. Individuals with high risk tolerance and optimistic speculation may chose to enter the market, while others who are risk averse may chose to wait for more stable market conditions.

Interestingly, however, is the small detail that this new asset class is most closely related to that of a currency rather than an equity. In the case of the stock market, the value of an individual share is tied to the underlying (/future) value of a company, which can then be translated back into the primary fiat currency, which the company uses for business transactions. With cryptocurrency, there is no backing commodity. Its value is driven only by the primary axioms that lie at the heart of mankind’s utility proposition (and inherent interpretation) of “money”:

Is it transferable

Is it fungible

Is it divisible

Is it scarce

Is it durable

In the case of bitcoin, the supply is limited and has always been introduced to the world slowly over time via mining. As one might expect, the value began at essentially zero and has since grown as social scalability has contributed to increased levels of the properties listed above. The birth of ether and the Ethereum network was slightly different in that initially it was denominated at an arbitrary value relative to bitcoin (1000–2000 ether per 1 bitcoin). After an initial token sale, ether started trading on an open market at a value determined by the market. Both currencies’ values are rooted in the properties outlined above.

Elements of the previously described model in which entrants who are “unequivocally new to a specific economy” (in this case the cryptocurrency economy) can be seen quite clearly with respect to the valuation of these new assets.

Take for example a scenario in which the concept of bitcoin is explained to a person who is otherwise completely unaware of the technology. All elements of the currency are shared with them; that there is a fixed supply of 21 million coins, that they are securely transferrable between anonymous parties without the need for a trusted third party, etc, etc. The person is then asked, “at what price in USD would you value one coin?” To this the individual replies, “I have no idea at what price the market values them and so I cannot give you an informed answer”. It is only after considering the current market transactions in addition to the utility properties that the person is able to built their value proposition and determine at what price the purchase of a bitcoin makes sense to them as an individual.

In addition to bitcoin and ether, many other cryptocurrency tokens have been created. It is often the case that they are initially distributed via an “initial coin offering” (or ICO). The general format of most ICOs is that a team of people announce plans to develop some project, which incorporates a token in some way. In oder to propagate early adoption (and often to fund development work), the team sells a large portion of the tokens to investors. The challenge thus far has been in developing effective ways to carry out this process. Because these tokens are not (typically) backed by equity in the project, nor do many of the projects have history on which to base an initial valuation, and further still nor does the new token (which can be thought of as a “sub-currency”, since it meets all the properties of a general currency but its utility is most likely exclusive to a specific project) have an initial market value, ICOs have struggled in successfully distributing the tokens among investors in a way that is fair and secure and also protects from bad actors and others who may wish to game the sale.

It makes sense that a newly created market with a newly created asset will initially result in excessive volatility. Previous models of ICOs have confirmed this to be true. As stated earlier, an efficient system had until now not been proposed, most likely because newly created asset markets of this nature did not exist before token offerings. The closest example to the mechanics of an ICO in the real world would be trying to sell slices of pizza (sometimes of an undetermined size) to a hungry crowd, but even in this example the crowd has some preconceived notion of what the market value of a pizza is.

The following is an intuitive version (rather than formal mathematical version) of a proposed auction method that can be used to solve the aforementioned challenges. It can best be illustrated via a parameterized example.

Imagine a token sale for a project that plans to create 10 million coins and offer 9 million of them to the public in order to raise development funding. The rules of the sale are as follows:

9 million tokens will be sold

The sale will last for a randomly determined amount of time between 10 and 30 days starting on xx/xx/xx date

Contributors (investors) can contribute any amount of funding they wish

Contributions can be increased or decreased as much as desired until the sale has ended

The total amount raised at any given time as well as the coin value per dollar (or ether) will be made available both publicly and dynamically, but individual bids will remain private, known only to their respective contributors

Once the sale has ended, all contributions are final and investors will be given a portion of the 9 million tokens equal to the ratio of their contribution to the total amount raised. All 9 million tokens are effectively issued in this regard

Note: the end of the sale is designed to fall randomly between 10 and 30 days from the start date in order to prevent investors from “gaming” the sale just before it ends. This also incentivizes investors to commit to accurate contribution amounts in case the sale ends immediately (after 10 days has passed). A ten day minimum was arbitrarily chosen to give ample time for interested parties to become active in the sale, but is not necessarily required.

This model results in investors who will contribute to a project if they A) believe they are getting a sufficient number of coins in exchange for their contribution (if not, they do not invest) and B) believe that the total amount being raised is reasonable for the project (if not, they again do not invest).

The model outlined above essentially gives investors the ability to “vote” on token value without economic consequence, over an arbitrary but sufficiently long duration of time until a Nash equilibrium is reached. Uniquely, this is done before any tokens enter the market. The results of structuring the sale in this way helps to dampen the volatility found in other ICO models today, but without the economic costs since a market consensus is reached before the coins are given to the public. There is also no economic waste since funds are not tied up at any time. Should an investor find a better use for his or her money after committing it to the auction before it has closed, they can easily withdraw the bid.

The above model is in effect an auction of the tokens, but in a unique way solves the volatility and valuations problem that have been seen in recent ICO sales. The model does not, however, solve the “DevTeam Incentive” dilemma, which is a second critical issue of recent token funding methods. Though it is not the focus of this paper, a potential solution to this problem may be an adaptation of the above proposed model, but with sets of sales broken into predetermined, increasingly smaller allotments of tokens sold over a long period of time, presumably years. The team would be incentivized to use their funding to grow the project in order to maintain the market value of the token rather than lose interest and spend the funds on other more enjoyable endeavors, since they receive a market determined amount of funding each time a new allotment is sold.