Auctions — What the Dutch?

Bonding Recap

In our previous article, we covered a brief history of liquidity mining, how bonding improves on liquidity incentives, and the two types of vesting terms that will be available at launch. At a high level, Olympus-style bonds allow protocols to acquire assets using discounted governance tokens. But how is that discount determined? And how is it priced for different tokens and vesting terms? The answer is quite simple:

Bond Protocol implements a novel type of Dutch Auction for pricing vested governance tokens.

Auction Types

There are multiple different types of auction designs, the most popular of which is the English Auction. Also known as an “open” ascending-price auction, English Auctions open at a low price and close to the highest bidder. Importantly, the “open” aspect of the auction means that bids are visible to other auction participants. English Auctions are most commonly used for rare 1-of-1 items that are difficult to independently price.

Dutch Auctions, also known as descending-price auctions, open at a high price that is gradually lowered until a bid is submitted. This style of auction is more useful for items that have an approximate market price (ex: governance tokens). Dutch Auctions also have the benefit of speed, since only one bid is required to close the auction.

When designing on-chain auctions, there are several characteristics that need to be considered:

• Token type: What characteristics need to be considered? For example, fungible vs. non-fungible tokens can require different auction designs
• Capacity: How many tokens are being auctioned?
• Duration: How long is the auction intended to last?
• Bid signal: What happens when a bid is submitted? For example, an English bid signals a price increase while a Dutch bid ends the auction
• Reserve price: Is there a minimum price that needs to be cleared?

Sequential Dutch Auctions

Bond Protocol implements a novel type of Dutch Auction for pricing vested governance tokens. Dutch Auctions in general are a great solution for bonds, since price can be initialized at market value and slowly decreased until a clearing price is discovered. By connecting two money legos, Dutch Auctions and Vesting Tokens, Bond Protocol can unlock price discovery for bond markets on any time horizon. Let’s dive a bit deeper into what makes Sequential Dutch Auctions unique.

Our smart contracts split the capacity of a bond program into a sequence of Dutch Auctions, which algorithmically distribute those tokens over the auction duration. The way this works under the hood is by using a Bond Control Variable (BCV), which is a fancy way of describing the “speed” that tokens are bonded. Our contracts dynamically tune BCV so that markets can run on “cruise control” — no manual adjustments needed. This is a major unlock for Bond Protocol and will allow it to rapidly scale to meet demand.

Another unique aspect of SDAs is that bids on our bond markets are “live” — when an auction participant submits a bid they are able to instantly acquire bond tokens at the given discount. Most on-chain auctions interpret bids as price signals, which can result in failed bid costs. For this reason, English Auctions are poorly suited for blockchain use. Liveness makes our bond markets particularly compelling for bonders to acquire instant discounts on vested governance tokens.

However, liveness does have some trade-offs including the susceptibility of bids to front-running. Bonders can avoid this by using the Flashbots Protect RPC, a feature that is offered natively in the Bond Protocol dApp.

Future Auction Types

Bond Protocol can support new auction modules to be added for different use cases. The design space for blockchain auctions is quite large and we’re excited to share future developments with you.

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