Digital marketplaces offer several ways to buy NFTs – you can either buy them directly or participate in an auction for a chance to purchase an NFT. One of the most popular types of auctions in the NFT space is the Dutch auction.
But what is a Dutch auction and how does it work? Read on to find out!
What Is A Dutch Auction?
Before we get into Dutch auctions, you need to first understand how the typical English method works. Traditional auctions open bidding at the lowest price, and participants continue to bid until there’s nobody left to counter-bid the winner.
Dutch auction prices work a little bit differently. Participants are allowed to place their bids before the day of trading, and the auctioneer will set a ceiling price for the asset based on the bids received. This ceiling price will then continue to decrease until somebody takes the offering price.
For instance, let’s say an NFT piece opens bidding at 1 ETH. As the auction goes on, this ceiling may reduce by 0.1 ETH every ten minutes until somebody accepts the current price or it hits a predetermined ETH floor. This well-defined price range helps level the playing field between whales and smaller NFT collectors.
While the whales might be able to easily snatch up the NFT piece at 1 ETH, they can also choose to wait until the price lowers to a more acceptable level. On the other hand, smaller collectors who can’t afford the piece at 1 ETH might be able to buy it once the price ceiling hits 0.5 ETH.
Why Is It Called A Dutch Auction?
Despite its name, the descending-price auction format was first used in ancient Babylon, found in the writings of Herodotus. However, it came into prominence in 17th-century Holland where descending-price auctions were used to sell estates and artwork.
This method soon crossed over to England where it was called “mineing”. It’s called such because the auctioneer would start at a high price, then periodically lower the price ceiling until one participant cried out “Mine!”
In addition to estates and artwork, the fast pace of a Dutch auction means it’s a common auction method to sell fast-moving goods like fresh produce and tobacco.
Why Do NFTs Use Dutch Auctions?
So, why are these auctions popular among NFT collectors? Speed is usually cited as the most common cause for people to hold a Dutch NFT auction, but another very important reason is because of gas fees.
Blockchain gas fees tend to spike higher when many transactions are happening. This auction sale format uses these high gas fees to pay the artists more. Alternatively, these auctions channel the gas fees that buyers pay to chosen charities or a community-run DAO. Because of the focus on community building, some collectors are even willing to pay above the asking price for their chosen NFT.
Benefits Of A Dutch Auction
So, why do people choose to do a Dutch NFT auction? Here are three benefits usually found in this type of auction:
Transparent Bidding Process
The floor price of traditional auctions is usually set arbitrarily without any input from auction participants. Meanwhile, a Dutch auction set its ceiling start price based on publicly-made bids – ensuring that everybody knows how much the initial price is before starting.
Faster Auction Process
Traditional auctions have no price ceilings which means bidding wars between whales and rich collectors can go on for a long time. Meanwhile, a Dutch auction only needs one bid at the right time to finish. This means a Dutch auction can finish much faster compared to traditional ones.
Empowers Smaller Collectors
In traditional auctions, bidding wars can get expensive rather quickly, which means smaller collectors can be taken out of the running right off the bat. However, Dutch auctions already have defined price ceilings, which means a savvy small collector can become a successful bidder by bidding before a whale with deep pockets does.
Drawbacks Of A Dutch Auction
With that said, there are two drawbacks of this type of auction for participants:
Traditional auctions take many bids, and you can see how much money a person has to spend by watching their bids closely. However, it only takes one bid to finish a Dutch auction, so there’s no telling how much a person has to spend until they make their bid. This usually makes this type of auction more unpredictable.
Possibility Of Winner Regret
In a Dutch auction, whales can easily bid at the ceiling price right off the bat to win the item. However, this may lead to winner regret when the person realizes they overpaid for the item. This is especially important considering that the initial mint price is typically much higher than the item’s actual value.
Dutch auctions are popular in the NFT space because they finish quickly and don’t escalate into a war between people with deep digital wallets. More than that, a Dutch auction also helps the community because the high gas fees can be funneled back to the artists or charities.
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