A Framework for Single-Item NFT Auction Mechanism Design
Published in ACM CCS DeFi, 2022
Lately, Non-Fungible Tokens (NFTs), i.e., uniquely discernible assets on a blockchain, have skyrocketed in popularity by addressing a broad audience. However, the typical NFT auctioning procedures are conducted in various, ad hoc ways, while mostly ignoring the context that the blockchain provides, i.e., new possibilities, but at the same time new challenges in auction design. One of our main targets of this work is to shed light on the, vastly unexplored, design space of NFT Auction Mechanisms, especially in those characteristics that fundamentally differ from traditional and more contemporaneous forms of auctions. Our main focus is on the case that bidders have a valuation in mind for the auctioned NFT, i.e., what we term the single-item NFT auction case. In this setting, we formally define an NFT Auction Mechanism, give the properties that we would ideally like a perfect mechanism to satisfy (broadly known as incentive compatibility and collusion resistance) and prove that it is impossible to have such a perfect mechanism. Even though we cannot have an all-powerful protocol like that, we move on to consider relaxed notions of those properties that we may desire the protocol to satisfy, as a trade-off between implementability and security. Specifically, we define the notion of an equilibrium-truthful auction and an asymptotically second-price auction. We showcase why these two are very desirable properties for an auction mechanism to enjoy, and construct the first known NFT Auction Mechanism which provably possesses such formal guarantees.