Auctions with Tokens: Monetary Policy as a Mechanism Design Choice

TL;DR

This paper analyzes a blockchain-based auction mechanism where tokens serve as payments, showing how monetary policy influences revenue timing and volatility, and comparing token and dollar-based auctions under different contracting frictions.

Contribution

It introduces a novel auction model with tradeable tokens, demonstrating how monetary policy affects revenue outcomes and establishing equivalences and differences with dollar auctions.

Findings

Token auctions yield earlier, less volatile revenues.

Burning tokens optimizes revenue in blockchain auctions.

Contracting frictions determine the preferred auction form.

Abstract

I study a repeated auction in which payments are made with a blockchain token created and initially owned by the auction designer. Unlike the ``virtual money'' previously examined in mechanism design, such tokens can be saved and traded outside the mechanism. I show that the present-discounted value of expected revenues equals that of a conventional dollar auction, but revenues accrue earlier and are less volatile. The optimal monetary policy burns the tokens used for payment, a practice common in blockchain-based protocols. I also show that the same outcome can be reproduced in a dollar auction if the auctioneer issues a suitable dollar-denominated security. This equivalence breaks down with moral hazard and contracting frictions: with severe contracting frictions the token auction dominates, whereas with mild contracting frictions the dollar auction combined with a dollar-denominated financial instrument is preferred.