Q02. Can you briefly explain how the dutch auction process works?

A. In a Dutch auction investors basically submit private bids stating what price they want to pay and how much they want to invest. Say, the art piece is suggested to be worth $1m.

Investor A submits a bid for $1.1m and wants to invest $100k

Investors B submits a bid for $1m and wants to invest $200k

The formula results in weighted average price of painting to be 1.033 million $

The higher the amount invested the more weight that price has in the formula. This creates a fair distribution and provides a really good way for price discovery. The final price of the artwork will be much more accurate using a Dutch auction than a traditional auction (i.e. highest bid takes all).

However there is a caveat that bids are taken from higher to lower so if the total bid amount exceeds the amount of money to be raised then lower bids may not make it.

Example. if someone wants to sell 40% of a $1m piece then roughly they would want to raise $400k. If bids are received for a total of $2m then chances are many bids will not make it, which is why it’s called an auction: the highest bids win. And because we are using a smart contract for the Dutch auction means that nobody can cheat.

Note that though bids are private, the Dutch auction algorithm will tell you that the final price of the art piece is. A bidder can update his last bid to a higher bid if he/she feels they may loose the bid causing the painting to be priced fairly.