NFT Auction Platforms.
In the first article in this series, we gave an overview of the history and most common forms of auctions. In the second and third articles, we took a look at factors that distort auctions from their most optimal outcomes, due to the unconscious or conscious efforts of buyers and sellers respectively. In this article, we’re bringing this context out into the present-day landscape, focusing on auctions for one of the hottest — and most volatile — asset categories in contemporary art and collectibles, Non-Fungible Tokens.
If you thought you’d never see a hilarious music video explaining Non-Fungible Tokens on Saturday Night Live , you’re not alone — and yet, a few weeks ago, that’s exactly what we got, courtesy of Kate McKinnon (channeling Janet Yellen) and the reliably unhinged Pete Davidson. The skit’s very existence demonstrates how NFTs have gone from obscure blockchain concept to pop-culture mainstream in record time, their rise to prominence fueled by high-profile sales of digital art and collectible assets.
In February, Pablo Rodriguez-Fraile, an early NFT collector and co-founder of the Museum of Crypto Art, resold a $66,666 piece by Mike Winkelmann, the digital artist better known as Beeple, for the staggering markup of $6.6 million. A month later, Beeple’s newest NFT “Everydays: The First 5000 Days” sold for a record-smashing $65 million. The Rodriguez-Fraile purchase and resale both took place on Nifty Gateway, one of the earliest and most active dedicated NFT auctions platforms. The “Everydays” sale was handled by legendary art auction house Christie’s, in its first-ever auction of a purely digital artwork.
Meanwhile, NBA Top Shot, an NFT-based collectible card series released by the league, its players and NFT pioneers Dapper Labs, has captured the attention of hundreds of thousands of hoops lovers and speculators by packaging classic NBA video clips as NFTs. Top Shot cards are dropped both in $9 “packs” and, for the rarest Platinum and Ultimate Moments, sold via big-ticket auctions. In April, a LeBron James highlight was resold for $387,600, the highest price yet for the collectible card category.
But the explosion in popularity of NFTs among connoisseurs and fans — with over $389 million in sales taking place in just the first quarter of 2021 alone — puts the spotlight on the critical role of auctions for this new category of digital assets.
As we’ve noted in prior essays, auctions provide a way to aggregate liquidity and establish prices in an uncertain value landscape. NFTs don’t have a clear intrinsic worth — as some have pointed out, it’s not obvious what you’re buying when you purchase an NFT, other than the right to claim ownership over the NFT itself, which some have likened to buying a price tag or catalog entry — and demand for them is diverse, fragmented and volatile. So auctions serve as an ideal mechanism to bring together interested buyers and set value benchmarks for a totally novel asset class.
As we’ve said before, however, not all auctions are the same. And neither are all NFT auctions platforms — with key design decisions having major consequences not just for how their auctions are run, but also the kinds of bidder audiences they draw and the ultimate outcomes of their auctions. In this article, we look at the different strategies major NFT auctions platforms have ended up pursuing and what they say for the future of digital assets marketplaces.
How the unique traits of NFTs shape auctions platform design.
NFTs are a class of blockchain-based tokens that have been created according to a set of standards that renders each of them unique (this is the “nonfungible” in Non-Fungible Token). Variants of NFTs have been around since 2012, when the first “Colored Bitcoins” emerged — fractional slices of Bitcoin (satoshis) that had been tagged with distinctive data pointing to digital or physical assets. The first NFTs to be widely traded, digital tokens for artwork featuring the “Pepe” frog that later would be hijacked by the pro-Trump / alt-right movements, were created using a Colored Bitcoin extension developed by Counterparty, a peer-to-peer trading platform built on top of Bitcoin’s blockchain.
In the decade since then, NFT activity has largely moved to chains that are more purpose-built for programmability, like the Ethereum Network, Dapper Labs’s Flow network, the Worldwide Asset Exchange’s WAX chain, the Binance Smart Chain, and alt-chains like Tron, EOS, Polkadot, Tezos and Cosmos. Meanwhile, the types of digital content that have been converted into NFTs include artwork, collectibles, music (including an entire album by Kings of Leon), books and other text, video clips, and virtual “land” and other game content. In fact, in one of several examples of particularly meta NFT releases, Saturday Night Live’s satirical sketch about NFTs was turned into an NFT and auctioned off on OpenSea for $365,000.
These two factors — the fact that NFTs are bound to specific blockchains, and the vast array of different kinds of items that are collectively being lumped together under the umbrella category of “NFTs” — point to some of the core challenges of designing auctions for NFTs.
Every blockchain has its own token standards and compatible wallets, and auction platforms have to decide which one to embrace, because an Ethereum NFT can’t be sold on a blockchain platform based on Flow, and vice versa. By nature, this fragments the NFT space — which is already fragmented by the diversity of works and asset categories available. Although there are projects like Mochi.Market, Unifty.io seeking to address NFT fragmentation, managing bids and determining a winner on a non-blockchain platform — and only transferring the NFT between seller and buyer after the fact — makes it easier for traditional auctioneers to handle NFTs in a fashion that’s chain-agnostic, since, as can be seen with the example of Christie’s, this segregates the bidding process from the settlement, which can take place on any chain.
The latter has its advantages, but it also, in the eyes of purists, goes against the fundamental concept of blockchain based assets.
What Happened at Christie’s.
The trade-offs implicated by the decision to hold NFT auctions off-chain were illustrated clearly by the Beeple Christie’s sale. Although Christie’s had partnered with NFT auctions platform MakersPlace for the event, they chose to conduct the bidding using their traditional online interface instead of on-chain. This had the advantage of making participation more accessible for non-blockchain-immersed individuals, who could, if they chose, bid for the work using fiat currency (e.g., U.S. dollars) rather than ETH, the native cryptocurrency of the Ethereum Network, on which Beeple’s artwork had been registered (or “minted”). Christie’s underscored their commitment to “accessibility” by setting bidding at an absurdly low starting price, given Beeple’s sales history: Just $100.
During the Beeple auction, 33 bidders placed a total of 353 bids, in both fiat and ETH. But the winning bidder, Vignesh Sundaresan, a seasoned Singapore-based NFT speculator going by the handle Metakovan, paid for the work with 42,329.453 ETH — worth over $110.5 million as of this writing.
But observers noted that the sale took over 24 hours to fully execute, with Beeple transferring ownership of “Everydays” to an escrow account on MakersPlace a day after the sale, followed by a transfer to Metakovan a little over an hour later. If the sale had taken place on-chain, it would have settled automatically via smart contract as soon as the value of the winning bid was transferred.
As blockchain art expert and gallery owner Kelani Nichole said to Artnet, the offline process, delayed transaction and even the presence of Christie’s as a middleman all invalidated the sale as an actual “NFT auction.” “The most celebrated characteristics of ERC-721 smart contracts in the context of ‘digital art’ are on-chain transparency, direct artist-to-buyer relationships, and the promise of artist resale rights in perpetuity,” she said. “None of these technical affordances are at play in the way this sale was executed, precisely because these very qualities make Christie’s obsolete.”
On-chain bidding: benefits and trade-offs.
For those like Nichole, who see adherence to a decentralized and disintermediated process as essential to the basic concept of blockchain, the only legitimate auction process for NFTs is on-chain.
Holding auctions on-chain lends the bidding process many of the benefits typically associated with blockchain-based transactions. For instance, auctions conducted via blockchain are auditable: every bid is public and permanently recorded, which makes bids more secure and transparent. (By contrast, the track record of the Beeple auction — losing bids and all — was erased from Christie’s external facing online auction site immediately after the auction concluded.) On-chain auctions can also be carried out absent the need for a trusted third-party: Without the middleman of the auctioneer, buyers and sellers have a greater sense of ownership over the bidding process and can inspect the smart contracts that calculate fees and handle eventual settlement. Because all historical bids, offers and sales for an NFT can be identified through a block explorer such as Etherscan, there’s also a much greater degree of available information for works auctioned on-chain. (And meanwhile, counter to their tradition, Christie’s chose to assign an “Estimate Unavailable” label to “Everydays.”)
There are major liabilities to holding auctions on-chain, however. Bidding in an on-chain auction on the Ethereum network can result in exorbitant gas fees that may make it unpalatable to participate altogether; at going transaction rates, bidders would need to pay the equivalent of $20 to $150 US for every bid they make , whether the bid is a winner or a loser. That can add significant amounts to the purchase price of a hot-ticket item, should a prospective buyer have to make multiple bids before successfully winning an item. And of course, if a prospective buyer is outbid, the gas fees they’ve spent are still gone. In addition, holding auctions on-chain makes it more difficult to offer bidders the option to bid and settle in fiat currency. Although there’s no technical barrier to converting fiat into crypto in real time, given the volatility of cryptocurrency valuations, it’s possible that the relative value of a crypto bid versus a fiat bid could change significantly even during the course of an auction, potentially complicating determination of a winner.
Off-chain bidding: benefits and trade-offs.
On-chain auctions also almost exclusively require bidding in native crypto. In our analysis of major NFT auctions platforms, only one on-chain auctions platform, Christie’s partner MakersPlace, offers bidding in both fiat and crypto, converting fiat bids into ETH in real-time.
Restricting bids to crypto requires those who don’t already own the blockchain’s currency to take the additional step of setting up a compatible wallet and purchasing a stockpile of it in advance in order to participate, a commitment that makes spontaneous decisions to participate in auctions much less likely. Taking bids in fiat makes it easier to set up bidding accounts through standard mechanisms that are familiar for anyone who’s engaged in ecommerce: Adding a credit card or attaching a bank account for ACH transfer.
Off-chain platforms have the advantage of being far more accessible for bidders who aren’t immersed in blockchain. Bidding in fiat means that prospective buyers aren’t burdened by unclear bid values or compounding gas costs, giving them greater comfort in actively participating. On fully off-chain platforms, buyers don’t even have to manually create wallets on which to store their NFT purchases: For example, the vast majority of Top Shot owners leave their Moments in automatically generated custodial wallets managed by Top Shot itself, buying or reselling (should they choose) on the platform without ever downloading them to personal “cold wallets.” (The latter option is clearly more in keeping with decentralization; holding NFTs in a personal wallet means you and only you have access to the private keys needed to transact with them. But given the horror stories that have made the rounds of people losing access to hard drives, forgetting passwords and otherwise being cut off from their own secure accounts, new participants in the blockchain space have generally been willing to trade off decentralization for the simplicity and customer-service failsafe offered by custodial wallets.)
Off-chain also offers certain clear advantages for auctioneers — giving them a much wider pool of potential bidders from which to draw, and making it easier to track bidder identities, both to adhere to federal Know Your Customer and Anti-Money Laundering regulations and to establish ongoing relationships to encourage participation in future auctions. But without appropriate escrow mechanisms in place, off-chain bids are less enforceable than on-chain bids. For example, Mintable has off-chain bidding and requires that a winning bidder must make their payment within three days of the auction closing. But if a buyer decides to not move forward with the transaction, they are only given a “strike” on the platform; they’re not actually compelled to buy the NFT. While this may have certain benefits for bidders — for example, eliminating “buyer’s remorse” and revoking accidental bids — it creates uncertainty for sellers given the constant possibility of winning bidders reneging on their obligation to pay.
Deep bidder pools versus wide bidder pools.
Because on-chain and off-chain bidding formats offer different relative benefits and trade-offs, they tend to attract a distinct set of participants. On-chain auctions are much more likely to screen for individuals who are immersed in blockchain. Off-chain auctions create much less friction for those seeking to participate, and are less intimidating for those new to the category.
The net result is that NFT auctions platforms have arrayed themselves into two separate clusters, following opposite strategies in marketplace creation.
The first is the “wide” strategy, which involves opening the bidding pool to the broadest possible array of participants, cryptocurrency particularly non-crypto-savvy bidders. This strategy seeks to generate value to sellers by encouraging a greater volume of bids and more competition among a larger pool of bidders. This approach is represented by platforms like Nifty Gateway, which has by far the highest transaction volume of any NFT auctions site.
It also is the approach being pursued by NBA Top Shot, which has been the most significant driver of new participants in the world of NFT purchasing of any platform, and is now the most used NFT Dapp, with around 30,000 active traders driving over $4.25 million in transactions daily. (Though Top Shot doesn’t currently have auctions, it is introducing them soon for drops of its Ultimate packages — ultra-rare Moments that will be released as unique cards or in numbered series of three. Top Shot prioritizes transactions in U.S. dollars “for a faster experience” but also accepts Bitcoin, ETH and several other cryptocurrencies for reloading of stored account balances.)
Designing for a wide bidding pool means off-chain bidding, acceptance of fiat as well as cryptocurrency for payment, and certain other choices, like low auction fees. The positive aspects of this strategy include faster item-sales velocity and greater on-demand liquidity. The negative aspects include a greater burden of customer service — since it’s more likely that some participants are unfamiliar with the process of NFT purchasing and ownership — and more potential for fraud or buyer’s remorse. The wide strategy may also not be a good fit for more narrow “connoisseur” categories of goods, like fine art, which may have limited mass awareness or appeal.
The second option is to pursue a “deep” strategy, creating a relatively closed bidding pool of qualified participants who have essentially been curated for their knowledge of the category and their resources and capacity to bid. This approach consciously limits participation to those who are more immersed in crypto and blockchain, and generates value to the seller through size of bids — based on high reserve prices or estimated values made possible by bidder awareness of market demand and historical pricing.
Designing for a deep bidding pool means on-chain bidding, and generally, accepting crypto only; this approach also emphasizes the need for community infrastructure around the platform, to create a continuing set of active return participants. This strategy may be a better fit for fine art and for collectibles with a distinctive appeal to subcultures already well represented in the blockchain space.
As you can see below, the major NFT auctions platforms do fall into these two clusters, with Nifty Gateway and Mintable leaning into the “wide” strategy and most of the other platforms focused on a “deep” approach.
Other factors that shape bidder pools and auction outcomes.
Auction platforms generally have to sustain themselves commercially, which means that most take some kind of transaction fee, which in our analysis can be up to 30% of sale value, with a median fee being around 10% of the price ultimately paid by the buyer.
There may also be additional fees passed along to buyers or sellers related to asset transfer or crypto wallet may make money payment processing, e.g., fees for credit card purchases or baseline minimum fees used to recoup costs for assets that are sold for a nominal amount. For example, if a platform charges a 10% fee and an NFT sells for $1, the platform would receive only $0.10. But by imposing an additional $0.30 transaction fee on each sale, platforms like Nifty Gateway can ensure they receive a minimum amount for each transaction.
As noted earlier, for on-chain auctions — depending on the chain used by the platform — a certain amount of transaction fees will be charged to sellers and buyers for simply participating. Sellers pay to mint, or register, items on a chain. Bidders pay for every bid they make in the auction. Transaction fees are also charged for any conversions between cryptocurrencies, and for the actual transfer of items between buyers and sellers. Transaction costs are particularly problematic for NFTs on the Ethereum Network, where gas costs are typically so high that the platform is untenable for anything but auctions for very high-priced items.
And since blockchain items can have embedded smart contracts allowing for secondary transaction payments, platform design and bidder behavior can also be impacted by factors like royalties, charged to the buyer to compensate artists/creators on an ongoing basis for secondary market demand. The industry standard royalty is typically 10% of transaction value; however, there are some exceptions. Zora and OpenSea both let creators determine the royalties set for their assets, anywhere from 0% to 100%.
These additional fees all increase friction for bidders, and make it less likely that new bidders or dilettantes will participate in auctions on the platform — making bidder pools narrower and deeper. One might assume that deep and narrow bidder pools reduce the prices ultimately obtained by sellers, but the fact that most of the major NFT auction platforms are clustered around the “deep” end of the pool suggests otherwise. And in fact, some research suggests that for a curated group of informed bidders who are bidding sequentially (that is, in auction after auction), revenues to sellers may sometimes actually decrease when new bidders are added to the pool, because the addition of new bidders with unknown private valuations and bidding strategies boosts overall uncertainty about outcomes, and thus causes veteran bidders to restrain their bids.
There’s also the reality that many bidders who participate in high-stakes on-chain auctions have stockpiles of cryptocurrency that have appreciated greatly since they first acquired them, making it “worth less” to them psychologically. A bidder who might balk at paying $1 million in fiat might not blink at paying 400 ETH, even though the two sums are currently equivalent, because they acquired that ETH in 2015, when each coin was worth around a dollar. Given that, narrowing the bidding pool to a deep well of highly informed crypto enthusiasts is a strategy that makes sense.
However, that strategy is also self-limiting: There are only so many crypto millionaires, and there are many categories of NFT beyond the kind of high-end fine art that has dominated the NFT connoisseur space. People often speak of the “blockchain trilemma,” as first framed by Ethereum Network founder Vitalik Buterin, noting that decisions about blockchain implementation hinge on whether to prioritize decentralization, security or scalability.
As interest in NFTs goes increasingly mainstream, platforms taking a “wide” approach by minimizing friction, making access friendly to new users, and opening up participation to the broadest possible audience — essentially, prioritizing scalability over decentralization and security — will drive adoption and growth.
We’ll take a deeper look at how such platforms are optimizing accessibility to the masses — and the economic implications of that accessibility — in our next post.
Interested in contributing to our Community Economics series? We’d love to hear from you. Comment below or email us at email@example.com.
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