CIP - Auction Contract

This Counterparty Improvement Proposal outlines how auctions can be implemented.

WHY
It has become popular to sell NFTs on auctions. With an upgrade to Counterparty we can do this directly on the blockchain relatively easy, with low fees and no third party risk.

OVERVIEW
Seller initiates an auction lot. The protocol puts the lot on escrow. Bidder sends a dust amount of BTC to the seller to indicate intention to buy. The protocol waits N blocks for a higher bid. If no higher bid received, the winning bidder makes the payment within N blocks and the protocol transfers the auction lot over to him.

SETTING UP AN AUCTION
The auction lot is always the entire account balance - i.e. all tokens and asset ownerships. Once an auction is up, the address is frozen until the auction is over or cancelled.

The auction parameters are:

  • Starting price in satoshis
  • Step size; integer; 1-100 implies percentage, >100 implies satoshis
  • XCP escrow (optional); penalty if winning bidder doesn’t make the payment
  • Deadline; number of blocks; sets both hammer time and settlement time

Hammer time is the number of blocks to wait for a new higher bid. If none is made, the auction ends.
Settlement time is the number of blocks after auction ends in which the winner must make the settlement.

Hammer and settlement times are generally the same. Except the hammer time is minimum 0 (buy now) and settlement is minimum 20 blocks (consistent with btc_pay). If the deadline parameter is set below the minimum, the hardcoded minimum overrules.

BIDDING
To place a bid you simply send a dust amount of BTC to the seller’s address. A magic number of 0.00000600 BTC is defined as a new bid. This number is slightly above the minimum of 546 satoshis.

The bid will automatically become

  • the starting price if it’s the first bid
  • or the previously highest bid + 1 step

It’s also possible to place a bid xx steps above the starting price by sending 0.000006xx BTC where xx is a number 01-99. This makes sense if you want to prevent an expensive and tiring bidding war.

Example A: Auction lot has starting price 0.2 BTC and step size 0.05 BTC. Alice sends 0.00000600 BTC and gets the leading bid of 0.2 BTC. Bob sends 0.00000600 BTC and takes the lead at 0.25 BTC. Alice yet again sends 0.00000600 BTC and no new bids are made. Alice wins the auction at price 0.3 BTC.

Example B: Auction lot has starting price 0.01 BTC and step size 100%. Alice fears a bidding war if she places a low bid. She sends 0.00000606 BTC to make a bid of 0.64 BTC (= 0.01*[1+100%]^6).

SETTLEMENT
The winner of the auction makes the payment before the deadline and the protocol returns the auction lot in addition to any XCP escrow.

The payment must be made from the same address as the winning bid was made from. The deadline is in general the same as the hammer time but can never be less than 20 blocks.

If the winner fails to make the payment, the auction restarts. Any escrowed XCP goes to the seller as compensation.

CANCEL AUCTION
The auction can have fours states

  • Open (no bids yet)
  • Active (bids registered, waiting new bids)
  • Won (waiting settlement)
  • Closed (has been settled or cancelled)

An Open auction can be cancelled anytime. If an Active or Won auction receives a cancel request, the request is set on hold. The auction is cancelled only in case the winning bidder fails to make the settlement.

COMPARED WITH DISPENSER
The dispenser has one huge advantage; send BTC, get tokens directly in return. The auction requires at least two BTC transactions (and more if a bidding war develops).

However, a dispenser is risky when few tokens are left and the seller is unknown. This is not very suitable for high value NFTs. An auction, in contrast, requires no trust as the buyer can only lose funds if he messes up the settlement himself.

The other main difference is that bidding, although somewhat costly and time consuming, is a very popular tool for price discovery. There’s a reason why art is usually auctioned at Christy’s or Sotheby’s.

Now we have a chance to make a fully decentralized blockchain auction house - in line with Counterparty’s original vision.

EXAMPLES
A. You own an ultra valuable vintage Pepe card. You want to stay anonymous, i.e. no one will buy from you unless the transaction is risk free. You open an auction at the market price of 1 BTC with a deadline of 0. This is equivalent to ‘buy now’ or a dispenser with one essential difference. The buyer sends first 0.00000600 BTC and gets heads up from the protocol. He doesn’t need to risk a collision where another buyer front-runs him. He safely sends the 1 BTC and gets the special card in return.

B. You want to sell a token including its issuance right. You transfer both to a new address and set up an auction. Both are automatically included in the auction lot.

C. You registered a full set of names of sport clubs. All names are on one address, and you auction them all off in one lot.

D. You own a fairly low value name you regret registering. You set up a buy-now at 0.5 XCP in hope of recovering your fee.

E. You want to sell a large lot of XCP which would have pushed the market down quite a bit. You put up a lightning auction with deadline at just 5 blocks. The starting price is 5% below market, but if you are lucky some whale investors with the opposite problem will push the price above market.