The IdeaFeX Auction Method

Our auction leverages competitive bidding innovatively to secure optimal price discovery. To understand how this works, we need to examine some principles of auctions in general.

The simplest auctions involve one item that can only be sold to one bidder, if it ever gets sold. Usually, this entails either first- or second-price auction, and economics theory teaches us that optimal price discovery is ensured by design in both cases. As we move to multiple items, however, modifications are necessary to optimize price discovery.

Why? Because the auction then runs the risk of leaving different bidders paying different prices. The simplest way to avoid this difference is to let all winning bidders pay the minimum acceptable price — this is an auction method called OpenIPO. We extend this method by allowing bid updates as new information from the bidding process gets incorporated in the decision-making. This market mechanism, thereby, facilitates the achievement of consensus on pricing.

One may wonder, why does the fundraiser not auction off the two items separately? As it turns out, insofar as the two auctions proceed in parallel and are second-price auctions, the outcome would be exactly the same. This remains true as the number of identical items increases (and as the feasibility of multiple simultaneous listings decreases). However, while the outcome would be the same as two auctions in parallel, it would differ from two auctions in series. On the other hand, increasing the number of auctions is impractical when large quantities of tokens are involved. This is where the starting price comes in.

Specifically, the fundraiser sets a starting price (p0). Each bidder i commits both a price (pi) and a quantity (qi). Our system automatically ranks all valid bids in descending order by their prices. Until the sum of all quantities from all valid bids surpasses the total number of tokens to be auctioned off, the starting price remains the current price (p). Once this sum becomes larger than the total number of tokens, the current price becomes the lowest price at which token(s) can still be allocated. All bidders can increase their bids (both price and quantity), but not decrease them, during the auction after the bids are initially placed. As the bidding window closes, the last current price is the final price (P) in the auction. All bids higher than the final price are awarded tokens at the final price, and for all bids at the final price tokens are allocated following the first-come-first-served principle.

This auction method enjoys four qualities:

Price uniqueness: All winners pay the same unique winning price.

Price consensus: All winners would pay (and have bid) at least the unique winning price, and all losers would pay (and have bid) at most the unique winning price.

Competitiveness adjustment: The seller can adjust the starting price in order to gain control over the competitiveness of the auction.

Purchase in whole: It is possible for an investor to purchase the entirety of the tokens in the auction (with the highest bid and a volume equal to the total supply).

By allowing the seller to adjust the starting price, we can protect the fundraiser while allowing the auction of large quantities of tokens. The level of this price should ensure that the price discovery process does not disadvantage the fundraiser, and that investors will be attracted to the auction. We will continually track and study the real-world performance of this parameter and assist fundraisers in choosing it.

#IdeaFeX is the #marketplace for the #financing and #investment of #tokenized real-world assets, in particular #ExoticAssets and #ProductFutures. This Deep Dive series is developed from our Token White Paper.