A Framework for Single-Item NFT Auction Mechanism Design

TL;DR

This paper explores the design space of NFT auction mechanisms, proposing new formal properties and introducing the first known mechanism that achieves equilibrium-truthfulness and asymptotic revenue guarantees.

Contribution

It formally defines NFT auction mechanisms, proves the impossibility of perfect mechanisms, and introduces mechanisms with desirable equilibrium and revenue properties.

Findings

Proves the impossibility of perfect incentive-compatible NFT auctions.

Introduces the first NFT auction mechanism with equilibrium-truthfulness.

Designs asymptotically second-price auctions with revenue guarantees.

Abstract

Lately, Non-Fungible Tokens (NFTs), i.e., uniquely discernible assets on a blockchain, have skyrocketed in popularity by addressing a broad audience. However, the typical NFT auctioning procedures are conducted in various, ad hoc ways, while mostly ignoring the context that the blockchain provides. One of the main targets of this work is to shed light on the vastly unexplored design space of NFT Auction Mechanisms, especially in those characteristics that fundamentally differ from traditional and more contemporaneous forms of auctions. We focus on the case that bidders have a valuation for the auctioned NFT, i.e., what we term the single-item NFT auction case. In this setting, we formally define an NFT Auction Mechanism, give the properties that we would ideally like a perfect mechanism to satisfy (broadly known as incentive compatibility and collusion resistance) and prove that it is impossible to have such a perfect mechanism. Even though we cannot have an all-powerful protocol like that, we move on to consider relaxed notions of those properties that we may desire the protocol to satisfy, as a trade-off between implementability and economic guarantees. Specifically, we define the notion of an equilibrium-truthful auction, where neither the seller nor the bidders can improve their utility by acting non-truthfully, so long as the counter-party acts truthfully. We also define asymptotically second-price auctions, in which the seller does not lose asymptotically any revenue in comparison to the theoretically-optimal (static) second-price sealed-bid auction, in the case that the bidders' valuations are drawn independently from some distribution. We showcase why these two are very desirable properties for an auction mechanism to enjoy, and construct the first known NFT Auction Mechanism which provably possesses such formal guarantees.