Did you know, the use case that brought MPC from theory to real-life practice was an auction?
Non-fungible tokens (NFTs) have generated huge global interest in recent months. One of the greatest challenges faced in the digital world is that until now, it has been almost impossible to tell the difference between an original piece of digital content, and a copy.
Recent NFT art auctions, beginning with Beeple’s auction of a piece of NFT for $69.3m at Christies, caught the world’s attention. It illustrates the value added by NFTs — without uniqueness, paying millions of dollars for a digital image that can easily be copied and reshared seems nonsensical.
NFTs allow for the verification of originality and ownership, which may to some extent align digital art with physical art. This provides for scarcity, which is a fundamental tenet of inherent value. With this basic property in place, the next task at hand involves finding the right price. This is clearly not a new problem, however, in the same way that advanced cryptography provides uniqueness to digital assets, it also provides a new technological bedrock for better online auctions.
This blog will focus on how cryptography, as a new technological bedrock, can improve online auctions and be utilized in trading NFT assets such as a piece of digital art.
Finding the right price for a commodity is often a significant challenge. In markets with a lot of repeated trades of the same commodity, a simple adjustment of posted prices might suffice — which is common in any given supermarket. For more unique or complicated commodities, setting the price in a vacuum is difficult. This is where auctions come in handy as it allows the market participants to set the price through a set of trading rules.
Today auctions are used for selling anything of low value, from items like fish, flowers, and sponsored ad-words in online advertisement, to highly valued items like fine art, corporations, drilling rights for oil, spectrum licenses to mobile networks and much more. Since the early 1990s in particular, auctions have been applied in more advanced markets, which constantly challenge practitioners and theorists alike. This development has been boosted by digitalization. Blockchain could promote the use of auctions even further through the application of advanced cryptography, strengthening and protecting the integrity of the trading practice.
Unlike the use of auctions, the theory of auctions is a relatively new discipline that has developed alongside information economics. The interpretation of auctions as a game of imperfect information has been at the core of auction theory for many years. William Vickrey, a pioneer in the design of auctions, suggested that so-called first price and second price auctions that seemed quite different would generate the same revenue to the seller. Vickrey’s insight, known as — a the “revenue equivalence theorem” won a Nobel Peace Prize in 1996. Although the revenue equivalence theorem may suggest the opposite, auction design does matter a great deal. The revenue equivalence theorem relies on assumptions that are seldom fulfilled in real markets. Things like common value, signals about the value, risk attitude, number of participants, number of units for sale can have an influence on the design of auctions.
An auction is a set of well specified trading rules, essentially a pure marketplace at work in its finest form. In fact, this high level of control makes it possible to solve certain market failures by designing the auction rules for a particular market. In 2020, the Nobel Prize for Economics was awarded for work on advanced auctions such as governmental auctions, where a country sells the right to use a spectrum for telecommunication or an oil concession.
While many different types of so-called high-stake auctions hold the potential to improve trade and enhance the allocation of resources in general, to a large extent, they have not been used outside of these highly specialized markets. However, with the right infrastructure and automation, the uptake of advanced auctions may add significant value across markets and industries. The blockchain ecosystem has already established a large collective experiment for new market solutions which has the potential to pave the road for a broad uptake of this deep insight into market design.
Now let’s take a look at the infrastructure and why infrastructure is important for this line of innovation into how commodities and services are traded.
The trading rules utilized by auctions define how information is shared. For example, what information is kept confidential (i.e. sealed bids) and what information is shared among participants (i.e. open bids). Having the right mix of public and private coordination of bids and other information is essential to ensuring the desired outcome of the auction. This high-level of information control defines the requirements for the ideal digital infrastructure for online auctions:
- Integrity — ensuring that everyone follows the trading rules
- Confidentiality — ensuring that private information remains private
- Availability — ensuring that the auction is available to all at all times
Partisia Blockchain provides the ideal infrastructure for trusted, transparent auctions through a combination of Multi-Party Computation (MPC) and blockchain technologies. In fact, auction was the use case that brought MPC from theory to real-life use (see this blog, titled ‘Introducing Partisia Blockchain’ for more).
Where does blockchain come in, and why do we need it?
- Transparency about the trading rules and the participants in the auction
- Decentralized and enforceable execution of the result of an auction
- Automation, which allows for more frequent use of auctions
In addition, it is important to note that in a previous blog titled ‘MPC and Blockchain: A Match Made In Heaven?’, we discussed how blockchain may function as bedrock for orchestrating MPC, which is one of the core elements of Partisia Blockchain.
In fact, as a holistic infrastructure that balances transparency and privacy with no single point of trust at any time, online auctions are an ideal showcase for the added-value that follows from this combination of MPC and blockchain. In addition, the guaranteed and automated execution provided by blockchain technologies strengthens auctions by preventing external interference with trading rules and by leveraging the playing field among participants.
Automation is crucial to broadening the use of auctions. To give an example, consider the market for electricity where the use of renewable energy requires a more active participation from all players in the market. If a lot of end users shut down refrigerators or air conditioning for short periods of time during peak hours, more room for wind or solar energy would become available, adding a lot of value to the energy system as a whole. However, with only a small upside for the individual user, automating is required to keep transaction costs low. Note that this is also an important example of the need for privacy, as automation requires confidential preference information to be available at all times to ensure sound automated decisions.
While an advanced infrastructure like Partisia Blockchain is instrumental in improving advanced markets, it may also add value to the more simple use of auctions. To see this, let’s return to a simple online NFT art auction similar to those carried out on Ebay where many bidders compete about a single piece of unique digital art, and zoom in on two of the most important properties.
Firstly, as in any market, the most important factor is to draw as many participants as possible. While an online auction makes it possible to bring in bidders from all over the world, a blockchain based platform provides the trust needed to secure the basic “exchange game” i.e. that the NFT art is delivered and the payment is transferred.
Secondly, it is essential that participation is made as simple and concise as possible. This is where privacy and automation adds value as the foundation for auto-bidding, where the bidder feeds a bidding agent with a maximal price bid and where the bidding agent bids on behalf of the bidder. Through implementing MPC we can ensure that the private maximum bid is kept confidential through decentralization, and through blockchain, we provide automation.
These two properties can be realized in a trustworthy way through the Partisia Blockchain, by replacing the auctioneer as both coordinator and trustee.
Our vision is that an infrastructure like Partisia Blockchain that provides automated public and private coordination will help boost innovation in market design and decentralized finance. Another important set of features is free movement of data and values (i.e. tokens) across different blockchain platforms and off-chain systems. This provides increased liquidity and ensures that the right information is available at the right time.
In future blogs we will dive into the collaborative aspects of Partisia Blockchain which do exactly that.
I hope you enjoyed this post and stay tuned for the launch of NFT Auctions on Partisia Blockchain!
Kurt Nielsen, President
Partisia Blockchain Foundation
PlatoAi. Web3 Reimagined. Data Intelligence Amplified.
