Why you should auction your NFT

NFT creators are leaving money on the table, and it’s in the millions.

MekaVerse had a free-to-enter raffle to buy Mekas on October 7th, with a mint price of 0.2 ETH. Hours after the sale opened, Mekas were selling on OpenSea with a floor price for 5 ETH. Now, five days later, the floor price is 6 ETH. The profit for flipping one Meka would be $17k. The potential profit in flipping all 8,888 Mekas at 5 ETH is 42,662 ETH, or $151 million dollars at today’s exchange rate.

Who profited from this? One tweet suggests that it’s largely botters. I know that my friend and I both failed to win the raffle with our single entries.

What if the MekaVerse team could have captured that profit without harming their users? $100 million dollars goes far in funding a roadmap.

NFTs, or non-fungible tokens, have been exploding in popularity in the last year. Artists have a new avenue to access their fans and are selling unique digital art pieces for cryptocurrency. The most common sales of NFTs have been straight-forward sales: a set amount at a set price. After the sale is over and the NFT images have been revealed, the secondary market explodes. Flippers flip, collectors collect, but prices can go up two to ten times more than what they were sold for.

If you’re getting ready to release your NFT, and you think you’re going to sell out, you should consider an auction. If you think that your NFT won’t sell out, or you plan on selling over a long period of time, then an auction probably isn’t right for you. Let’s dive into the gritty details of auctions.

The 2020 Nobel Prize of Economics was given to Paul Milgrom and Robert B. Wilson for their research into auctions. Milgrom created a new form of auction for simultaneously auctioning different regions of telephone providers, but they both worked on the fundamental economics of auctions.

First, there are four fundamental types of auctions:

• English auction — Bidding starts at a price, and bidders successively raise bids until there’s only one bidder standing. This is the kind of auction used on ebay.
• Dutch auctions — the price starts high, and the auctioneer lowers the price periodically. The first bidder wins.
• Sealed bid auction — this auction can be done asynchronously, with the auctioneer collecting sealed bids over a period of time. The highest bid wins.
• Vickery auction (or “Sealed second-price auction”) — A sealed bid auction like the previous type, but the winner pays the second-highest price. In a multi-unit auction, the winners would pay the highest loser’s price.

What Milgrom and Wilson discovered is that some auction formats suffer more from Winner’s Curse. Winner’s curse is the tendency for a winning bidder to have overpaid for the item they won. If a winning bidder paid more than what other bidders would pay, the winning bidder may question if they valued the item correctly.

In the English auction, bidders receive information from when the other bidders drop out. The winning bidder also doesn’t have to pay above the second-highest bidder much, they simply pay one more increment, as set by the auctioneer, above the second-highest.

The Dutch auction suffers harshly from winner’s curse, because bidders don’t learn when other bidders would drop out and they potentially pay far more than other bidders would have bid. Robert B. Wilson’s takeway was that the Dutch auction and Sealed bid auctions suffer equivalently from winner’s curse. In order to correct for that, cunning bidders have to intentionally bid low in order to avoid winner’s curse. Similarly, English auction and Vickery auctions have the same qualities in regards to winner’s curse: bidders can bid their true estimated value without worrying about overpaying.

We’ve seen single-item auctions being used in the NFT world already. BT’s Metaversal album was auctioned off by track, and Nouns.wtf is auctioning off one noun a day. But how would auctions be used for a multi-item sale of unrevealed NFTs?

First, using an auction would eliminate scalpers and short-term flippers. Since the auction price is set by the market, there is no profit to be made in the short term. Fans and long-term investors will be able to win their NFTs from the first sale.

Ideally NFTs would be bid with an English auction with Vickery rules for the selling price. Users would submit their bid over a period of time, and the selling price would be the highest losing bid. This avoids users overpaying — bidders are paying exactly the amount they would have had to bid to win — and then allows people to bid their true estimated value.

It is important to actually take the cryptocurrency being bid, otherwise the auction risks having an inflated selling price from being tampered with by false bidders.

At the close of bidding, the sale price would be set. Winning bidders would be given their NFTs and the bid amount in excess of the sale price would be refunded. Losing bidders would have their money refunded. There’s also potential for allowing winning bidders to buy multiple NFTs at the sale price.

An objection to the auction format is that users would have to pay a higher price. It’s true: the price would be increased. However, the settled auction price would closely match the immediate price on the secondary markets. With that being the case, scalpers would have nothing to gain from the arbitrage. Scalpers might try to come in early at low bids, but the winning bidders would be genuine fans and long-term investors: the people who would have bought the NFTs on the secondary markets anyway. The NFT creator will hopefully make more ETH with an auction and can give back to their NFT-holders with more content, benefits in future NFT drops, or cryptocurrency giveaways.

There are some ethereum-specific factors to consider with this auction format. Gas is expensive, and returning the crypto of losing bids and excess winning bidders could be costly for the auctioneer. I plan to lay out the smart contract of an English-Vickery multi-item auction in a future blog post.

Hopefully I’ve convinced you that using an auction format, and a fair auction format, will give you and your users the best outcome.

If you are working on an NFT project and need smart contract or web development support, contact us at NorthwestNFTs.com