Auctions have stood the test of time. History provides evidence as far back as 500 BC in Babylon by the Romans. Today, the ancient institution that has shaped the trading practices of modern-day society continues to reinvent itself. Earlier this year the first-ever digital only artwork at Christie’s closed for a staggering $69m. This record-breaking auction comes as no surprise following the recent explosion around non-fungible tokens or NFTs.
Auctions are beholden to a set of well-specified trading rules, which facilitates a pure marketplace at work in its most basic form. The high level of control offered by this trading engagement opens the door to resolving certain issues within a market by designing the auction rules to suit the specific marketplace. By implementing the correct infrastructure and ensuring sufficient automation, the uptake of advanced auctions may add significant value to both markets and industries.
While traditional exchanges play a major role in defining the market price, recent NFT ventures have made attempts to align digital commodities with physical commodities. The long-term impact of this is unknown but, without scarcity, the value of any given digital asset could plummet.
Finding the correct price for a commodity can prove to be a significant challenge, particularly in an increasingly digital and interconnected world where substitute goods can often be seemingly endless. Fortunately, the blockchain ecosystem has established a strong use case for new auction solutions and the answer lies in strengthening the legitimacy of digital auctions.
An auction’s trading rules define how information is shared and what information is kept confidential (e.g., sealed bids) or shared among participants (e.g., open bids). The outcome of an auction is down to ensuring the correct mix of public and private coordination of bids and other information. This level of information control poses a strong set of requirements for the ideal digital infrastructure for online auctions.
The integration of blockchain technology into the auction process offers a unique digital infrastructure for trading. Although blockchain is secure and immutable, there is one challenge: blockchain itself does not ensure confidentiality. When it comes to auctions, this presents a problem as confidentiality is of utmost importance in most auctions.
By pairing blockchain technology with Multi-Party Computation (MPC) technology, however, it is possible to solve the confidentiality issue. In its ability to operate on multiple nodes, computing directly onto encrypted data while maintaining zero knowledge about the data, MPC solves the privacy issue.
By combining MPC with blockchain technology, parties are provided with transparency about the trading rules and the participants in the auction, a decentralized and enforceable execution of the result of an auction, and automation which allows for more frequent use of auctions. The guaranteed and automated execution provided by blockchain technologies strengthens the legitimacy of auctions by preventing external interference with trading rules and by leveraging the playing field among participants.
The development of an advanced infrastructure that utilizes MPC and blockchain technology could prove instrumental in improving advanced markets, but it may also add value to the simpler use of auctions. For example, an online NFT art auction, similar to those that take place on eBay, where many bidders compete to purchase a single piece of unique digital art, could greatly benefit from the implementation of such technology.
One of the most important factors in the facilitation of a successful auction is to first attract as many participants as possible. Another crucially important factor is to make participation as simple and as brief as possible. This is where privacy and automation improve 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.
MPC technology ensures that the private max bid is kept confidential in a decentralized fashion and the blockchain execution itself provides the automation. This, in itself, is revolutionary.
By combining MPC technology with blockchain, our industry can glean the benefits of an infrastructure that replaces the auctioneer both as coordinator and as trustee, while building on the transparency and trust of auctions. This technology could also provide automated public and private coordination, boosting innovation in market design and decentralized finance, while providing protection for both price and demand. Protecting the ancient process of auctions should be central to their digitization.
Without reliable data protection, we cannot truly replicate the fair trading rules intended for auctions, and it is up to those in our industry to act on this to ensure this better, fairer way of buying and selling becomes a reality.