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Optimal Bidding Strategy for Maker Auctions

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  • Michael Darlin
  • Nikolaos Papadis
  • Leandros Tassiulas

Abstract

The Maker Protocol is a decentralized finance application that enables collateralized lending. The application uses open-bid, second-price auctions to complete its loan liquidation process. In this paper, we develop a bidding function for these auctions, focusing on the costs incurred to participate in the auctions. We then optimize these costs using parameters from historical auction data, and compare our optimal bidding prices to the historical auction prices. We find that the majority of auctions end at higher prices than our recommended optimal prices, and we propose several theories for these results.

Suggested Citation

  • Michael Darlin & Nikolaos Papadis & Leandros Tassiulas, 2020. "Optimal Bidding Strategy for Maker Auctions," Papers 2009.07086, arXiv.org, revised May 2021.
    • Handle: RePEc:arx:papers:2009.07086
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    References listed on IDEAS

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    1. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521536721.
    2. Samuelson, William F., 1985. "Competitive bidding with entry costs," Economics Letters, Elsevier, vol. 17(1-2), pages 53-57.
    3. Guillermo Angeris & Tarun Chitra, 2020. "Improved Price Oracles: Constant Function Market Makers," Papers 2003.10001, arXiv.org, revised Jun 2020.
    4. Paul Klemperer, 2004. "Auctions: Theory and Practice," Online economics textbooks, SUNY-Oswego, Department of Economics, number auction1.
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    Cited by:

    1. Kaihua Qin & Liyi Zhou & Pablo Gamito & Philipp Jovanovic & Arthur Gervais, 2021. "An Empirical Study of DeFi Liquidations: Incentives, Risks, and Instabilities," Papers 2106.06389, arXiv.org, revised Oct 2021.
    2. Massimo Bartoletti & James Hsin-yu Chiang & Alberto Lluch-Lafuente, 2020. "SoK: Lending Pools in Decentralized Finance," Papers 2012.13230, arXiv.org.

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