Loss-Versus-Fair: Efficiency of Dutch Auctions on Blockchains

TL;DR

This paper analyzes the efficiency and losses of Dutch auctions on blockchains, extending previous models to include gradual Dutch auctions and providing insights for parameter setting and platform design.

Contribution

It introduces a comprehensive model for Dutch auctions on blockchains, including gradual variants, to evaluate expected losses and execution times, aiding practical parameter choices.

Findings

Expected losses depend on starting price, volatility, decay rate, and block time.

Gradual Dutch auctions offer different tradeoffs between speed and quality of execution.

Model insights can guide practitioners and platform designers in parameter selection.

Abstract

Milionis et al.(2023) studied the rate at which automated market makers leak value to arbitrageurs when block times are discrete and follow a Poisson process, and where the risky asset price follows a geometric Brownian motion. We extend their model to analyze another popular mechanism in decentralized finance for onchain trading: Dutch auctions. We compute the expected losses that a seller incurs to arbitrageurs and expected time-to-fill for Dutch auctions as a function of starting price, volatility, decay rate, and average interblock time. We also extend the analysis to gradual Dutch auctions, a variation on Dutch auctions for selling tokens over time at a continuous rate. We use these models to explore the tradeoff between speed of execution and quality of execution, which could help inform practitioners in setting parameters for starting price and decay rate on Dutch auctions, or help platform designers determine performance parameters like block times.