NFT is without doubt one of the most rapidly-growing sectors in decentralized economies. This is evident by the incredible successes that have been achieved since NFT was introduced to the mainstream.

Notably, the first NFT experimentation was recorded around in 2014 when Kevin McCoy reportedly minted the first NFT token – “Quantum (NASDAQ:).” However, the rapidly-emerging NFT market was largely overlooked and only truly started gaining prominence in 2017. Since then, the market has changed dramatically to be what it is today.

Auctions, in particular, are a key aspect of NFT markets that have undergone several dynamic changes over the years.

For instance, while the earliest NFT marketplaces adopted the conventional, or classic auction method as it is largely known, modern marketplaces like GhostMarket are exploring additional mechanisms including “Fixed,” “Dutch,” and “Reverse” auction mechanisms.

The Dutch auction system appears to offer more flexibility and dynamism than the NFT market. This article will focus on it. But before that, let’s quickly go back in time and see how the act of auctioning was invented and practised.

Auctioning: The History

Auctions are a practice that dates back 500 BC. Auctions were used to get a woman married.

It was against the law for women to marry without going through an auction. However, the auction was considered legal and a valid marriage right.

In terms of the auction process, the first auctioneer started it with the women he considered the most beautiful. Participants were asked to make their bids until all the women present had been taken. The classic auction as we know it was officially started.

In the modern day, the auctioning process has significantly evolved, leading to the three new additions as mentioned earlier – Fixed, Dutch and Reverse.

The Dutch Auction Mechanism: Understanding it

In a typical auction scenario, the seller is required to set a floor/minimum price for a valuable item, while collectors place bids higher than the item’s given floor price. The auction session usually ends with the highest bidding buyer securing the spot to purchase the valuable item.

Dutch Auctions, by contrast, are the opposite of traditional auctions. It is reverse bidding where an item’s value is decreased until someone offers it.

The seller is essentially playing the role of the bidder, determining the cost, and the buyer (i.e. This allows the seller to determine the cost of the item, while the buyer (i.e. the bidder) can try to get the item at the most reasonable price.

This auction mechanism, also known as the ‘price discovery process,’ allows the auctioneer or seller to begin with their highest asking price, gradually lowering it until the corresponding bid can cover the total offer amount.

While this is a common approach in the traditional market (e.g. during IPOs) as well as offering treasury bonds, notes, and bills, it has now been adopted in various sectors of the crypto industry. NFT markets have seen an increase in adoption of the Dutch auction system, which seems to bring more flexibility and dynamism.

The Dutch Auctions in the NFT Market: How they Work

NFT markets began with traditional auctions. This meant that sellers would have to wait until collectors placed their bids before selling the items to the highest bidder.

With the implementation of the Dutch auction, which is also known as a price-reduction auction, NFT markets are now in a drastic transition.

The Dutch auction system allows the NFT seller to open bidding at the beginning price. This doubles as the highest and then decreases incrementally until it reaches the floor price. This system allows interested parties, in contrast to traditional auctions, to bid for the best price among the available downsized offers.

In other words, the price of theitem will be gradually reduced over the course of the auction’s duration. This can vary depending on where the item is listed. It could take 30 days or more to find a buyer. In rare cases it may even last a whole year.

Dutch Auction: The pros and cons

The adoption of this bidding method in NFT is in an early stage. This makes it difficult to determine if the mechanism will prove sustainable. However, this bidding system offers greater flexibility than other methods. Other than its flexibility, Dutch Auction is a great option for the NFT market.

• Transparency of bidding processes, particularly in removing the possibility that wash trading could occur, and possible price control for sellers.
• An NFT bidding system that is democratic and open to all, allowing everyone to be involved in what was previously reserved for the wealthy.

The Dutch auction system has many advantages, but there are some downsides.

The Dutch auction ends with all securities or NFTs being sold at the lowest bid price. This can sometimes put the seller in a difficult position. The seller will ultimately decide if something sells at the lowest price. The Dutch auction bidding system has other downsides:

• The elimination of a seller’s ability to control price, which is an advantage for bidders, is one of the downsides of Dutch auctions. This means that bidders lose the ability to control the outcome of the auction.
• Bidding can introduce price inefficiency into the market. It could result in items being underpriced.

The implementation of Dutch auctions on the NFT market creates an opportunity for a power struggle between collectors and creators. But, creators have the option to opt to or not use the bidding process. It allows for some flexibility.

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