Introducing Decentralized Auctions on Burnt Finance: Part II
As we journey onwards in our mission to enable fully decentralized auctions, we are proud to unveil the next two types of auctions on Burnt Finance: Lottery and Bonding Curve.
In part one of this series, we discussed the distinct characteristics of English and Dutch auctions, two of the most popular auction types supported by Burnt Finance. In order to meet the needs of this rapidly evolving ecosystem, we strive to host every type of auction across the spectrum in a fully decentralized setting.
The Status Quo
As addressed in part one, the current auction ecosystem consists of either entirely centralized or semi-centralized platforms, each with their own set of technical limitations and barriers to entry. Most of these platforms operate on the Ethereum blockchain which unfortunately means that they suffer from exorbitantly high gas fees and slow transaction times.
Most creators and buyers alike are kept out since the high fees often negate any potential avenue for users to enter. In many ways, the current auction protocols today exacerbate the issues prevalent in the world of centralized auction houses rather than helping to solve them.
Centralized structures are directly antithetical to the ethos of crypto and DeFi as a whole. The high gas fees and slow transaction times are simply not sustainable. Therefore it is our goal to provide the foundation of decentralization that is missing from this space, which will open up doors for everyone to participate in every form of finance.
As part of our mission to diversify the auction ecosystem, Burnt Finance will support a wide array of auction types in a fully decentralized setting. Each auction pool includes on-chain functionality such as minting new assets and on-chain governance. In addition to English and Dutch auctions, Burnt also enables Lottery and Bonding Curve auctions, which are explained in greater detail below.
Most of us are familiar with the concept of a lottery. In simple terms, a lottery is a game of chance in which winners are selected at random. Lotteries also play a key role in many decision-making processes, such as sports team drafts.
The first step of a token-based lottery auction on Burnt Finance will be carried out as follows:
First and foremost, the users will enter the lottery process. Future block hashes will be utilized as a way to create a set of randomized numbers, which will then be duplicated (so there are now two sets of identical numbers).
The first set of numbers (Set A) will undergo a distribution and be granted across a group of users who are interested in entering the lottery.
With a smart contract, a random number will be drawn from Set B. The selected number from Set B will be matched with a user holding the identical number in Set A. The match determines the winner in this scenario.
Why are lottery auctions so important? Traditional lotteries face a number of drawbacks, which are easily solved by Burnt’s Solana-based infrastructure. One of the key challenges is the fairness of the game. In a Burnt-based lottery, the lottery is highly visible and transparent from start to finish. Data about participants, winners, and draws are publicly recorded and verifiable on the ledger.
In addition, draws are automated through smart-contracts, which reduces the capacity for the human error to zero. Furthermore, lottery auctions on Burnt Finance are open to users worldwide, whereas access is limited to a local level by even the most top dollar traditional lotteries. This once again goes back to Burnt’s mission to equip all users worldwide for participation in new forms of finance.
A bonding curve is a mathematical concept based around the bancor formula that illustrates the relationship between an asset’s price and supply.
This type of auction is used when there is a limited quantity (i.e a cryptographic token) whereby each sale slightly increases the price of the remaining supply. In the case of a cryptographic token, the price per token will rise as the number of issued sold increases, thereby decreasing total supply. This mechanism rewards the earliest purchasers and encourages fast acting participants.
A bonding curve is a type of auction illustrating changes in supply and demand.
Here’s an example of a bonding curve:
In the example above as the number of tokens sold grows, so does its price. The growth rate accelerates as the number of tokens sold increases.
Bonding curves are vital to the auction ecosystem because their incentive mechanism can be leveraged for a number of use cases, including DAOs, prediction markets, tokenization, and continuous fundraising (vs. one-time ICOs). Burnt is proud to facilitate such a powerful tool that aligns the interests of both users and creators.
Burnt Finance is dedicated to enabling the creation of limitless markets and providing an intuitive user-friendly interface for numerous auction types — from English and Dutch to lottery and bonding curve auctions. This plethora of formats allows up-and-coming artists to sell their works, while new projects can also utilize Burnt’s platform for fundraising.
About Burnt Finance
Burnt Finance is the first fully decentralized auction protocol on Solana. Burnt allows users to take auctions into their own hands, enabling the minting and trading of any asset in an entirely permissionless ecosystem. The platform can support auctions for synthetics, NFTs, digital assets, and much more. Given its unique Solana-based architecture, Burnt is able to achieve unparalleled transaction speeds with negligible fees.