A Framework for Single-Item NFT Auction Mechanism Design

What is it about?

Non-Fungible Tokens (NFTs) are digital assets accessible on a blockchain that have unique properties that make any one of them distinguishable from any other. They have become popular in recent years, but the current methods used to auction NFTs are either off-chain and require trust in some third party, or are on-chain and vulnerable to manipulation. In this paper, we explore the full design space for on-chain NFT auctions. We define the ideal properties that an auction mechanism should have to not be vulnerable to manipulation by anyone, but show that it is impossible for any mechanism to have all of these properties. We then introduce the first known NFT auction mechanism that has almost all of these desirable properties, such as the ability to prevent bidders and the seller from gaining an unfair advantage by acting dishonestly.

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Why is it important?

As NFTs surge in popularity around the world, it is important for people and market designers to understand the auctioning options offered to them. Our framework helps to inform the public of advantages and drawbacks of common auctions. At the same time, our work offers a structured approach to designing NFT auction mechanisms that market designers can use in practice. The specific mechanism that we provide can help to ensure that these auctions are conducted in a fair and transparent manner. In this way, it both offers robust economic guarantees and prevents abuses of the system.