Overview

No auction, no problem!

When the demand for a certain good exceeds its supply, market forces raise the price of the good such that it equals the willingness to pay of those who want it most. When the quantity of a good is highly limited, but price is variable, auctions are often the most effective mechanism for revealing an individual’s willingness to pay.[xvii]

But in the case where both quantity and price are fixed, such as in a limited release ‘drop’, auction mechanisms are no longer effective, as there is no differentiation among buyers whose willingness to pay is higher than the fixed price which must be set.

Most of these sales are therefore first come first serve, a model easily gamed through technology or collusion by those who seek to capture economic rent from these limited goods by buying then reselling them at inflated prices.

One method to overcome rent-seeking resellers is through a time-bounded raffle mechanism.[xviii] Buyers willing to pay the fixed price enter the raffle and are chosen at a set time by random chance. However, it does not address degree of preference of each buyer, and can still be gamed by technology and collusion.

Therefore, we propose a hybrid model combining a raffle with an individual’s Composite Preference for a limited good. Composite preference is one’s willingness to pay - signaled by the premium they would pay on top of the price of that good, combined with a measure of non-monetary value one is willing to exchange for the good – in this case signaled by hype-generating brand interactions.

To accomplish this, we propose a blockchain based system following the following first principles:

1. Anyone can create a lottery or participate in one (permissionless).

2. No centralized authority runs the platform.

3. Lottery creators have full control over the parameters of their lottery, which are fully transparent to the lottery participants.

4. Lottery outcomes are assured by verifiable randomness.

The first three can be made inherent to a blockchain protocol; for the last, oracles can be used for randomness and off-chain computation. Properly designed, this system disincentivizes Bots yet incentivizes the participation of primary consumers. These primary consumers stake money through a no-loss mechanism – either they win and automatically purchase the item at their stake price, or do not win and receive their money back. The winners are randomly selected with their individual odds determined by the strength of their overall preferences.