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Loss-Versus-Fair: Efficiency of Dutch Auctions on Blockchains

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  • Ciamac C. Moallemi
  • Dan Robinson

Abstract

Milionis et al.(2023) studied the rate at which automated market makers leak value to arbitrageurs when block times are discrete and follow a Poisson process, and where the risky asset price follows a geometric Brownian motion. We extend their model to analyze another popular mechanism in decentralized finance for onchain trading: Dutch auctions. We compute the expected losses that a seller incurs to arbitrageurs and expected time-to-fill for Dutch auctions as a function of starting price, volatility, decay rate, and average interblock time. We also extend the analysis to gradual Dutch auctions, a variation on Dutch auctions for selling tokens over time at a continuous rate. We use these models to explore the tradeoff between speed of execution and quality of execution, which could help inform practitioners in setting parameters for starting price and decay rate on Dutch auctions, or help platform designers determine performance parameters like block times.

Suggested Citation

  • Ciamac C. Moallemi & Dan Robinson, 2024. "Loss-Versus-Fair: Efficiency of Dutch Auctions on Blockchains," Papers 2406.00113, arXiv.org, revised Jul 2024.
    • Handle: RePEc:arx:papers:2406.00113
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    References listed on IDEAS

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    1. Jason Milionis & Ciamac C. Moallemi & Tim Roughgarden, 2023. "Automated Market Making and Arbitrage Profits in the Presence of Fees," Papers 2305.14604, arXiv.org.
    2. Lo, Andrew W. & MacKinlay, A. Craig & Zhang, June, 2002. "Econometric models of limit-order executions," Journal of Financial Economics, Elsevier, vol. 65(1), pages 31-71, July.
    3. Hasbrouck, Joel, 2007. "Empirical Market Microstructure: The Institutions, Economics, and Econometrics of Securities Trading," OUP Catalogue, Oxford University Press, number 9780195301649, December.
    4. Eric Budish & Peter Cramton & John Shim, 2015. "Editor's Choice The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(4), pages 1547-1621.
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