All About the WOM Token Dutch Auction
TL;DR:
350 million WOM Tokens are available in a Dutch auction. Unlike usual Dutch auctions, participants do not bid on a number of WOM Tokens at a given price. Instead they contribute the amount they are willing to spend. Everyone who participates pays the same final token price, regardless of how early they contributed.
At WOM we’re holding a Dutch auction token sale to launch the WOM Token and kickstart the WOM Economy. The WOM Token fuels the entire WOM Ecosystem and grants content creators, curators, platforms, and brands access to the WOM Protocol.
A Dutch auction has a few distinct advantages over traditional token sales.
Firstly, a Dutch auction enables the market to set the price of the WOM Token, giving token owners confidence that the token price is fair rather than artificial. Many token projects set their own token price, often artificially inflating the price because of founders’ bias which then causes a sharp drop in token price after the token sale.
In a Dutch auction, the market determines a fair price for a fixed amount of tokens and bidders can be confident in their contribution.
Secondly, a Dutch auction prioritizes many participants over just a few large contributors. Since the starting cap of the auction is intentionally high, a few big players cannot come in and buy all the tokens, which would effectively centralize ownership of the WOM Tokens.
Rather, in a Dutch auction, many people can participate, and the WOM Tokens are spread widely among the interested community.
The disadvantage of a Dutch auction is simply that it’s different from the norm and therefore potentially a bit more difficult to understand. This article aims to clarify exactly what the WOM Token Dutch auction is and what it means for you as a participant.
What is a Dutch Auction?
A Dutch auction is sometimes referred to as a reverse auction since the price starts high and then drops, rather than starting low and increasing as in a traditional auction. In a Dutch auction, the price continues to drop until someone bids on (and therefore wins) the item.
Dutch auctions with multiple items for sale, like ours, or like auctions for IPO shares or treasury securities, are even more interesting. Participants bid on a specific number of shares, securities, etc. at a certain price and the price continues to drop until the last item is sold. All successful bidders pay the final bid price, rather than their initial bid. For example, if I bid $100 for 100 shares of SpaceX and the final successful bid is $50, then I receive my 100 shares at $50 rather than $100, same as the final bidder.
How Does the WOM Dutch Auction Work?
The WOM Dutch auction is a bit different than a traditional Dutch auction. Rather than bidding on a certain number of WOM Tokens, you simply “bid” or contribute an amount of money and do not specify a certain number of tokens.
The Dutch auction ends when the total contributions reach the falling cap.
At the end of the auction, the total contributions plus bonuses are divided by the total number of available tokens (350 million) to determine the price of the WOM Token. The effective price of the WOM Token is impossible to calculate before the end of the auction.
Once the auction ends and the WOM Token price is calculated, each participant receives the number of WOM Tokens proportional to their bid. In a very basic example, if you bid $10,000 and the auction raises $70 million, the tokens are worth $0.20 ($70 million/350 million tokens) and you receive 50,000 WOM Tokens.
When is the Best Time to Bid?
Each participant pays the same price per WOM Token, no matter when they bid. Therefore, there is no benefit to waiting for the effective cap to drop to a certain number before bidding. If you contribute ETH on the first day or the fifth day, you pay the same final token price.
Strategically, you should bid when the token is at a price that you think is accurate and fair. If you think that the WOM Token is still overpriced at the end of day one (at roughly a $250 million cap for 350 million tokens), then you should wait for the effective cap to drop further. When the effective cap has dropped to create a token price that you think is accurate, then you should bid.
However, waiting to bid has inherent risks. The Dutch auction ends when the falling effective cap is reached, which could be at any time. Therefore, if you postpone contributing until day 5 and the auction happens to end on day 4, you miss out.
Additionally, the bonus structure naturally favors early participants:
- Day 1: 20% bonus
- Day 2: 15% bonus
- Day 3: 10% bonus
- Day 4: 5% bonus
How Does the Effective Cap Work?
The auction starts at an intentionally-high effective cap of $350 million priced in ETH. As the auction progresses, the effective cap will decrease until the contributions reach the falling cap. The auction ends once the contributions reach the effective cap, or at the end of 15 days, whichever is first. Any bids sent after the auction ends and bids exceeding the effective cap will fail.
The formula to determine the effective cap at a given time is:
y = 33200 / (x + 80) — 65
Where x is the number of hours passed since the beginning of the auction.
Per this formula, the effective cap is approximately $254 million after the first day, approximately $132 after the first week, and approximately $10 million after the fifteenth day. The soft cap of the WOM Dutch auction is $10 million.
If the soft cap of $10 million is not met by the end of day 15, the funds raised during the auction will be returned to the contributors.
The WOM Token Dutch auction will be in ETH. We’ll use the USD → ETH price on the day the auction starts and adjust accordingly throughout the timespan of the auction.
Conclusion
The WOM Token Dutch auction is the most effective way to distribute WOM Tokens at a fair market price to as many participants as possible. No matter when you contribute, you receive WOM Tokens at the final token price with everyone else.
For information about the WOM Protocol and how the WOM Token is used, check out womprotocol.io. You can also check out the WOM Protocol whitepaper here.
