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Offline biophil

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I'm going from the explanation of the auction mechanism that's given in the video; correct me if something has changed or I've missed some details.

For people unfamiliar with the proposed auction, it goes something like this: money from the opening bid is burned as dividends. Then the next bid is split into 3 parts:
1) The amount of the previous bid is returned to the previous high bidder.
2) 50% of the remaining amount is also returned to the previous high bidder.
3) The rest is burned as dividends.
I assume that the point of this is that it attracts people who like a good gamble, and that gamblers will create bidding frenzies that raise the price way up. Unfortunately, this auction mechanism has a lot of problems.

I'd like to write this up more formally, but alas, I'm not going to have time to do that for the next couple weeks. So here are a couple casual observations:
1. The only rational opening bid is 0 (or the minimum initial bid). If I bid minimum, then I maximize my potential revenue from the next bidder. As a result, the maximum profit for shareholders is only 50% of the total auction revenue.
2. There is no explicit incentive to place high bids, because at every stage, the lower I bid, either the less I pay for the domain name (because I am the winner) or the more profit I make from the next bidder. The only situation where it makes sense to bid higher than the minimum is when it's a high-profile auction with a low price and I'm afraid that if I only bid minimum, 100 other people also will, so I try to outbid them at this stage. This will make low-profile or end-stage auctions crawl along at a snail's pace.
3. Bidders have an explicit incentive to lie about how much they value the name. There are two kinds of bidders: a) the kind who wants to win, and b) the kind who doesn't care about the name, but just wants to make a quick buck bidding.
4. This mechanism creates all kinds of opportunities to game the system, and this can cost shareholders a lot of money. Example: I value "biophil.p2p" at 1000 DNS, but I'd obviously love to get away with paying less. So I start the auction at 0, and then the very next block, I enter a bid of 1500 DNS from another address. Notice that now, I've only paid 750 (because my first address got half the bid increase), but anybody who wants in now has to pay at least 1500. How is this good for shareholders? I would have been willing to pay 1000, but because the mechanism is so easy to game, I've essentially stolen 250 from the shareholders by a tiny bit of cleverness.

Some of these problems go away if you move to an ebay-style sequential 2nd-price auction, because then everybody's best move (dominant strategy) is to report their value truthfully. 2nd-price auctions have their faults also; if you really want to keep this system of paying bidders back for their bids, would you please consider decreasing the 50% part? You could change this to 10%; then shareholders get 90% of the total revenue, and the gaming-attack I talked about in 4 is much less profitable for the attacker. The attack is still possible, but it doesn't hurt anybody very much. Even 10% is an incentive for speculators and gamblers to come try to create bidding frenzies.

Another idea: condition each bidder's payout by how much larger his bid was than the previous bidder. Example: The bid is at 10. If I bid 11, and then the next guy bids 12, I get 0.5 profit. You could change this to one where if I only bid 11 (which corresponds to a 10% increase), then the most profit I can make is 5% of the next bid increment. But say I bid 15 (a 50% increase): now I'll get 25% of the next bid increment. My numbers don't work (the payout function has to be sublinear), but you get the idea. Now, I'm explicitly incentivized to bid more than the minimum bid at each stage. If you think this is interesting, I'll put a little more thought into it and design a bidder-payout-function that works.

That was a mouthful.

TL;DR: 50% bidder-payout is ripping the shareholders off.

Offline toast

I'm ok with much lower bidder/dividend ratio, decreasing bid minimum (both w.r.t. % difference like you said and also absolute total (relative to total supply)).

Quote
If you think this is interesting, I'll put a little more thought into it and design a bidder-payout-function that works.
Would love it!
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Offline biophil

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I'm ok with much lower bidder/dividend ratio, decreasing bid minimum (both w.r.t. % difference like you said and also absolute total (relative to total supply)).

Quote
If you think this is interesting, I'll put a little more thought into it and design a bidder-payout-function that works.
Would love it!

All right, I'll see what I can put together.

Offline biophil

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I'm ok with much lower bidder/dividend ratio, decreasing bid minimum (both w.r.t. % difference like you said and also absolute total (relative to total supply)).

Quote
If you think this is interesting, I'll put a little more thought into it and design a bidder-payout-function that works.
Would love it!

All right, I'll see what I can put together.

Ok, this didn't take too long. Goal, in words: assign payouts that are higher for bidders who enter large bids. In math: given a sequence of 3 bids b={bi-1, bi, bi+1}, we want the payoff of bidder {i} to be ui(b)=f(bi-1,bi)*(bi+1-bi), where f(bi-1,bi) represents the fraction of the next bid increment paid to bidder {i}.

One candidate: let r=bi/bi-1, so r=2 means that bidder {i} increased the bid two-fold. Then f(r) = 0.5*(1-ea(1-r)) works for any a>0. If a = 0.693, then a 10% bid increase only gets 3.3% of the next bid increment; a 50% increase over the last bid earns 14.6% of the next bid increment, and a 2x increase over the last bid gets 25% of the next bid increment. The largest share any bidder can receive of the next bid increment is 50%.

The attack I mention in point 4 in my OP is still possible, but it would require an extra step. Note that f(r) is concave, so it provides a larger incentive for a few large bids than for many small ones, so it should speed auctions up.

One of the big drawbacks to the arbitrary exponential function is that it's unintuitive. We'd have to put a thing in the GUI that would let the bidder type in a bid, and then the GUI would spit out the fraction of the next bid increment that it would be worth; that way bidders could see exactly what they're getting themselves into.

Offline toast

Should the minimum bid % increase over time or does the fact that it's compounding mean practically any rate is ok (auctions will not drag on forever)?
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Offline biophil

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Should the minimum bid % increase over time or does the fact that it's compounding mean practically any rate is ok (auctions will not drag on forever)?

I think as long as the minimum bid is a fixed percentage, it should be fine. Near the end of an auction, the speculative bidding will die down because most speculators won't actually want to win; the end of the auction will mostly just be price discovery between people who honestly want the domain. I think this is ideal, because in my view we'd actually rather not have speculators win; the purpose of the speculators is just to push the price up initially and then let the honest bidders sort out the price.

It'll be interesting to see how often people get caught with their pants down. Gamblers are going to love this, because we're incentivizing risky bidding - you want to bid it as high as you can because that increases your payout, but you don't want to win because then you get no payout and you have to figure out what the hell to do with oops-i-didnt-mean-to-win.p2p. Should be fun to watch :)

 

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