Second-Price Dutch Auction is a relatively new model of the token sale. So far this model has been applied only by three projects: Gnosis, Polkadot and Raiden Network.
In the traditional token sale, the price of the token is fixed, so all buyers also receive tokens at the same price. The exception is a bonus or a discount.
Traditional Dutch auction and Second-Price Dutch Auction
A traditional Dutch auction, the most famous example is an auction of flowers in the Netherlands, is as follows: the auction begins with the announcement of the highest price of the lot, after which the seller step by step reduces the lot price until one of the buyers first agrees to buy it . Such an auction can be held with a hidden price: the auction participant must pay to find out the current price, and after each such individual viewing the price decreases.
Auction of the second price assumes that the winner pays not the price offered by him, but the price announced by the other participant on the previous round. Usually, the auction of the second price is an English auction, where the winner, who named the highest price, pays the second-largest price, called the other participant. Auction of the second price can be open or closed, conducted in one or several rounds.
Token sale is organized according to the principle of the Second-Price Dutch Auction.
Dutch Token Sale
Firstly, there is no single winner in the Dutch token sale, the one who gets the right to buy all the tokens – tokens are received by all bidders who made bets. Accordingly, the “stakes” at such an auction are also different. In a traditional auction, only the winner spends his bet on the purchase of the lot, and the other rates remain unused. In the Dutch token sale, the “bet” is the amount of money that a token seller sends to a smart contract to purchase tokens. Secondly, the “second price” means the “equilibrium price”, on which the token sale is closed.
The equilibrium price in the traditional market model is the price at which the volume of demand equals the volume of supply. In the Dutch token, the “equilibrium price” is equal to the demand price.
The price of the offer in this case is the price at which the organizers of the token are ready to sell tokens at the moment. Since this is a Dutch auction, this price is reduced according to the initial formula.
The price of demand is the price at which buyers are currently ready to purchase tokens. This price is calculated by the formula “the sum of all the bids made / the offer of tokens at the auction”. Buyers can enter their bets at any moment of token, and each new rate increases the price of demand.
Dutch token sale versus “traditional” token sale
Proponents of the Dutch token sale say that such model has several advantages over the traditional model of the token sale. The traditional model in this case is the sale of a fixed number of tokens at a fixed price. The same price for all token sale participants ensures greater fairness, a gradual decrease in the offer price softens the rush, and a fixed number of tokens put up for auction gives buyers of tokens greater certainty.