Dutch Auction
What Is a Dutch Auction?
A Dutch auction, also known as a descending-price auction, is a pricing mechanism that works in reverse of a traditional auction. In a typical auction (an “English auction”), bidding starts low and moves higher as participants compete against each other. In a Dutch auction, the seller sets a high starting price, which then drops at predetermined intervals.
This method was famously used in 17th-century Dutch tulip markets to sell perishable goods quickly. In the crypto space, it has been adapted as a popular way to launch new projects, sell tokens (in an Initial Coin Offering or ICO, for example), and mint Non-Fungible Tokens (NFTs).
The primary goal of a Dutch auction in crypto is to achieve fair price discovery. Instead of the seller guessing the price, the market collectively determines the asset’s value as buyers decide at which price point they are comfortable entering.
How Does a Dutch Auction Work?
The mechanics of a Dutch auction can vary slightly, but the core process remains the same. A smart contract typically automates these steps on the blockchain.
First, the seller sets the auction parameters. This includes:
- The Starting Price: an intentionally high “ceiling” price
- The Reserve Price: the lowest possible price the seller will accept
- The Duration: how long the auction will run
- The Price Drop Schedule: dictates how the price will decrease over time (e.g., drop by 0.1 ETH every 10 minutes).
Once the auction begins, it starts at the high starting price. Potential buyers watch as the price automatically drops according to the set schedule. A buyer can then place a bid at any time. For a single item, like a one-of-a-kind NFT, the very first person to bid at the current price wins the auction instantly, and the sale is over.
For multiple items, such as a 10,000-piece NFT mint or a token sale, the auction continues until all items are sold. In this more common crypto-native format, the price at which the last item is sold becomes the final price for everyone. This is also known as a “uniform price auction,” and early bidders who paid a higher price are sometimes refunded the difference, ensuring all participants pay the same final “clearing price.”
