We’re full steam ahead on Planport’s decentralized procurement ecosystem with an initial focus on the reverse auction process. For those not familiar with the concept of a reverse auction, it is just like a regular auction, but reversed, so instead of buyers outbidding one another by increasing the price they are willing to pay, suppliers compete by underbidding one another driving down the price that the buyer will ultimately pay.

Reverse auctions can take a variety of forms, with each type of auction introducing different criteria for pricing for good and services. At planport, we have been developing smart contracts to manage various types of reverse auctions on the Ethereum blockchain.

Current Auction Types

We’ve developed a number of smart contracts for reverse auctions. All reverse auctions feature an end date after which the auction ends. Buyers are not committed to accept the lowest bid; instead, they can manually accept a preferred bidder who may have specified a higher amount.

Reverse Auction — The base auction for setting a price between a buyer and a supplier. The auction is open to bids from all suppliers and each supplier can bid a higher or lower price independent of all other bidders.

Invite Only Auction — A reverse auction which allows only those suppliers invited to bid by the buyer.

Decremental Reverse Auction — An auction where a buyer specifies a minimum decrement amount which bids must match otherwise the bid is invalid. The buyer also sets an initial price which is used to calculate the next lowest bid amount. If a supplier places a bid which is larger than the minimum decrement price, the next bid will be calculated against the previous bid.

For example, buyer B creates a contract which has an initial price of 10,000 PORT and a decrement of 1000 PORT. Supplier A, the first bidder, places a bid for 9000 PORT, the minimum bid allowed based on the decrement amount, making the current auction price 9000 PORT and the next minimum bid price 8000 PORT. Supplier B then places a bid of 7500 PORT, 500 PORT larger than the minimum decrement price. The new auction price is now 7500 PORT and the next minimum bid price is 6500 PORT. Supplier C places a bid of 6750 PORT, which is 250 PORT more than the minimum bid and so supplier C’s bid is rejected.

Additional Auction Types

There are a variety of traditional auction types which can be modified to work in reverse. Some of these include English, Dutch, Japanese and Blind or Private reverse auctions.

Why don’t Planport smart contracts capture more inform about the auction?

Our smart contracts are pretty simple compared to traditional and SaaS-based; there is no information about goods or services, there are no specifications or requirements documents or agreements or contracts. Instead, we move this information to other decentralized systems; IPFS and Swarm for document management, OrbitDB for metadata and other information which would traditionally be stored in a relational database, and all tied together using Web3, the Ethereum Javascript API.

The case against running a reverse auction

Reverse auctions are great for driving down costs and exposing your requirements to many vendors. Auctions can be dynamic and fast-moving, generating excitement and urgency around the bidding process.

However, reverse auctions may not always be the best option for source potential suppliers. Reverse auctions only work if many sellers involved in the bidding process to ensure competitive integrity. There could also be too much of a focus on the lowest bid, leading many buyer to forego quality over price and rewarding weaker suppliers, which could undermine the vendor marketplace.

Because Planport smart contracts can be assigned a particular winning bid which may not be the lowest, procurement specialists can be employed to evaluate bids and choose the most ideal candidate; a candidate who may not necessarily be the cheapest but may provide the most ideal balance of quality and price.

The Future of Reserve Auctions

As the machine learning evolves, the reverse auction selection process will become more automated. Buyers will be able to specific particular selection criteria which intelligent matching algorithms could utilize when choosing the most applicable suppliers. The winning bid would also be automatically determined by a combination of value and quality.

Follow Planport’s progress

You can follow our development at https://gitlab.com/planport/smart-contracts.

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