Fundamentally, auctions have two basic purposes:
- They’re used to determine which buyer or buyers will receive the goods or services being sold in the auction
- They’re used to set the price paid by buyers to the sellers — particularly valuable in situations where valuations are uncertain and there is no standard pricing (because, for example, the item being sold is unique, new to offer or subject to volatile marketplace conditions.
While these are simple outcomes, the paths to arrive at them can be deceptively multi-dimensional.
Both real world and online auctions often have to contend with the fact that auctions aren’t always for single items — they often are held for many interchangeable units of the same good — and in most cases, auctions are not one-time-only events. Multiplying the number of items being auctioned and the frequency of auction transactions stretches the design challenge in significant ways.
One key factor in multi-unit auctions is whether the ultimate price paid by winning bidders is the same (what’s known as a “uniform price auction,” in which the bids of buyers are ranked in order of bid price and their orders fulfilled at a common price, usually the lowest bid that clears all units of the auctioned item) or different (what’s known as a “discriminatory price auction,” in which buyers are ranked and awarded their requested units in order of bid price, paying the price they actually bid). Ethereum gas auctions are discriminatory.
Another relates to how units are distributed: Some auctions may apply quotas to how many units are assigned to each winner proportionately based on bid price, or may fulfill orders completely for higher bidders until they run out, or use other formulas to determine distribution to winners. Ethereum gas auctions usually fulfill orders for higher bidders first, although miners ultimately have discretion to fulfill orders however they choose, creating the potential for abuse.
There’s also another factor to consider in blockchain network auctions: Like many other real-world auctions, they’re sequential, which is to say, they take place on a recurring basis, often with pools that contain at least some of the same participants (on both the “sell” side, that is to say, block processors, and the “buy” side, that is to say, individuals seeking to have transactions processed).
Sequential auctions offer design challenges because each auction is not separate — because outcomes of one auction can impact buyer and seller decisions in subsequent auctions, some buyers may apply strategies that are dependent on sequences of transactions occurring in tandem, and others may use strategies that employ gamification (e.g., sabotaging competitors in one auction in order to win in a subsequent one).
Optimizing auctions under these circumstances requires taking into account all of these factors and more — and each type of auction design has its own benefits and downsides. There’s rarely a single “best” or “worst” auction design, but rather, designs that are beneficial to different, and often mutually exclusive, sets of goals.
Want to learn more about auctions and they affect Ethereum’s gas fees? Read our in-depth article here.