Introduction​

Auctions have been a cornerstone of economic transactions for centuries because they reliably facilitate price discovery for illiquid assets. This holds true in DeFi, where auctions already help secure and manage billions of dollars across various use cases. However, existing token launch strategies, which typically use traditional auctions or mechanisms with auction-like features, operate in open bidding environments that come with significant tradeoffs. These open formats can alter bidder behavior and negatively impact price discovery — arguably the most important outcome.

Some strategies lead to projects launching at predatory valuations, others create PvP dynamics among participants, or both issues occur simultaneously. Consequently, we often see charts turning red post-launch followed by extreme volatility, which is not ideal for both buyers or sellers. To address these issues we built Origin’s flagship product, EMP Auctions. This sealed-bid batch auction system excels in accurate price discovery through bidder privacy.

Examining Open Auction Formats​

Open auction formats have a tendency to lead to FOMO launches, where the visibility of other participants’ behavior leads to a surge in demand as participants ape in. This was certainly the case for early auction formats on Ethereum such as the notable Gnosis sale. The Dutch auction was designed for tokens to grow less expensive over time, encouraging participants to purchase later in the auction. However, the sale did not go as planned due to a max cap at $12.5m that skewed the bidding incentives. Instead of gradual buying, the auction ended in less than 15 minutes as bidders rushed in and filled the capacity of the auction. This resulted in only 5% of the tokens being sold while still raising 250k ETH.

To address the shortcomings of the original $GNO launch, Gnosis introduced a batch auction system where tokens are allocated to bidders starting high to low by price with the clearing price set by the last successful bid. However, the lack of bidder privacy in this system results in inherent PvP dynamics. As bids are visible to all participants, the optimal strategy becomes waiting until the end of the auction to marginally outbid the last successful bid. This gives other participants an unfair advantage, undermining the auction's fairness and preventing true price discovery.

Liquidity Bootstrapping Pools (LBPs) aim to address some of these issues by implementing a dynamic pricing model that adjusts based on supply and demand. Initially, the token price is set high and gradually decreases as the weight of the token in the pool is reduced over time. However, LBPs still face challenges with PvP dynamics due to information asymmetry among participants. More informed participants can time their purchases to exploit price fluctuations, while less informed participants often buy in regardless of the current price to avoid missing out. This behavior leads to tokens launching at predatory valuations as the initial price is driven up excessively.

Sealed-Bid Auctions​

For liquid tokens, price discovery naturally occurs due to factors like project track record, previous trading activity, and available liquidity. However, for illiquid assets like newly launched tokens, determining the correct market price is more challenging since these tokens are at the start of their lifecycle. Participants must determine a fair valuation on their own, making it essential for the auction structure and rules to facilitate price discovery by providing an environment where they can place bids at their true valuation.

Sealed-bid auctions offer a robust solution to these challenges as all bids are submitted privately and are not revealed until the auction ends. No peeking, no sniping, no unfair advantages — participants must submit honest bids. Real world use cases help paint the picture:

• 195,000 BTC seized from the Silk Road Marketplace has been sold by the U.S. Marshals Service using sealed-bid auctions.
• The IRS uses sealed-bid auctions to liquidate seized property.
• Government contracts are sold using sealed-bid auctions.
• Real estate and automobiles are often sold using sealed-bid auctions.
• U.S. Treasury Bills are sold using sealed-bid auctions.

Origin's Sealed-Bid Implementation — EMP Auctions​

Origin’s EMP (Encrypted Marginal Price) Auctions are designed to address the inherent challenges of token launches by leveraging the advantages of sealed-bid auctions. While we won’t cover technical specs in detail in this post, it’s important to understand the characteristics of EMP Auctions:

• Multi-unit: Multiple identical items auctioned simultaneously.
• Batch: Bids are grouped together and settled at the end of the auction.
• Encrypted: Participants’ bids are sealed and not visible to others.
• Marginal Price: All winning bids pay the price of the last, marginal bid included.

The process begins with participants submitting their bids privately. These bids are encrypted and stored via a hybrid encryption scheme called ECIES until the auction ends. Once the auction ends, bids are decrypted and sorted high to low by price to determine the clearing price. Tokens are allocated starting from the highest bid down until the total capacity is expended, and the last bid to fill the capacity sets the clearing price (i.e. the uniform price that all winning bidders pay). Users that bid above the clearing price will receive more tokens than their initial bid amount, while anyone below this clearing price will not receive tokens and be able to claim a refund.

Closing Thoughts​

EMP Auctions ensure that participants can submit honest bids based on their true valuations, resulting in price discovery that reflects genuine market demand. As blockchain infrastructure evolves, the possibilities for privacy-preserving auction mechanisms like EMP Auctions are endless. If you’re interested in launching on Origin, we invite you to apply here or try out EMP Auctions on testnet.

Welcome to the first edition of our monthly newsletter, where we'll be sharing recurring updates on Axis, the fundraising landscape, and other relevant topics.

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In May, we focused on tasks that are critical for our upcoming launch.

The completion of our Sherlock Audit Contest in late April enabled us to prioritize launching V2 of the Origin Testnet dApp. This version features updated contracts, audit fixes, and other improvements for users. We also opened public access to our Discord and Testnet. If you're interested in participating, checked the pinned announcements in our Discord for the testnet guide.

We launched a new landing page with updated information about the protocol's auction and derivative modules, features like callbacks and allowlists, and ways for users to contribute. This also includes our self-hosted blog and documentation.

Our current priorities are finalizing the production designs and upgrades for the Origin dApp, reviewing our new implementation for Fixed-Price Auctions, and onboarding curators and launch partners.

The fundraising landscape in May remained consistent with the last six months. Over $1B was raised across 156 rounds — a good indicator that no steam has been lost and investor interest remains strong heading into Q3 2024. The chart below via CryptoRank shows fundraising statistics from May 2023 to May 2024.

The most notable fundraises across crypto in the past month were:

• Farcaster: $150M | Social Network Protocol | Series A | Led by Paradigm
• Babylon: $70M | Bitcoin Staking | Undisclosed | Led by Paradigm
• Securitize: $47M | Real-World-Assets | Strategic | Led by BlackRock
• Sophon: $60M | Ethereum Layer 2 | Node Sale
• Polymarket: $45M | | Prediction Market | Series B | Led by Founders Fund + participation from Vitalik
• Humanity Protocol: $30M | Web3/Digital Identity | Seed | Led by Kingsway Capital
• Arbelos Markets: $28M | Trading Firm | Led by DragonFly Capital

Since this is our first newsletter edition, this section also includes all content released prior to May to catch you up:

• 2/27/24: Our first post was a thread introducing Axis, the history of auctions, and our native dApp Origin.
• 3/1/24: Oighty published a blog covering the complexities of on-chain auctions, the importance of bidder privacy, and our exploration of different sealed-bid implementations
• 3/20/24: I posted a thread highlighting the revenue opportunity for Referrers and Curators.
• 3/27/24: I posted an infographic that illustrates how EMP Auction are settled.
• 4/4/24: Tex and I published Introducing the Token Launch Trilemma, which explains the three pillars that are impossible to maximize for any token launch. Read the blog here or the thread here.
• 4/17/24: Tex and I published Solving the Token Launch Trilemma, which explores the shortcomings of legacy launchpads and how Origin's multi-stage launch sequence tackles these issues. Read the blog here or the thread here.
• 4/18/24: Tex dives into how insights from previous token launch mechanisms and Vitalik inspired Axis in this thread.
• 4/24/24: I posted a thread highlighting how each feature of Origin can shape a token launch.
• 4/24/24: I posted an infographic covering the three stages to a balanced token launch using Origin.
• 4/30/24: Our frens at Baseline hinted at our upcoming integration.
• 4/30/24: I posted a thread with more in-depth info about becoming a Curator.
• 5/14/24: I posted a promo video of the new Axis landing page.
• 5/23/24: Tex published The Mechanics of EMP Auctions, which covers the full life cycle of our flagship token launch mechanism, from creation and configuration to bid encryption and settlement process.
• 5/31/24: I published Why Direct-to-Liquidity is Essential, which highlights how this key feature could've prevented over $120M in losses from rug pulls.

Introduction​

In an ideal world, every token launch would be led by honest teams and users could trust that their funds would drive development and growth. Unfortunately, reality is different. Each bull market brings a new wave of rug pulls, tarnishing our industry and deterring many retail users. Despite this ongoing issue, few solutions using smart contracts have been widely adopted as a standard.

This is where we step in. Axis is a permissionless infrastructure layer that enables developers to build auction-driven applications. At launch, our native dApp Origin will provide a suite of tools for token launches. One key feature, Direct-to-Liquidity, was designed to directly address this issue.

Origin’s Launch Framework​

Before continuing, it’s important to understand the primary token launch mechanisms of Origin.

Fixed-Price Auctions are a straightforward mechanism that allows participants to purchase tokens at a set price on a first-come, first-served basis. This enables projects to acquire initial capital, reward early adopters, and gauge market demand at a predetermined price.

EMP Auctions, Origin’s flagship product, uses a sealed-bid system that allocates tokens to the highest bidders with the clearing price set by the last successful bid to be filled. This enables projects to acquire initial liquidity and discover the market-clearing price.

While projects can use each mechanism independently, they can also be used in stages for a balanced token launch. Fixed-Price Auctions and EMP Auctions serve as Stage One and Two, while Direct-to-Liquidity serves as Stage Three to improve the post-launch dynamics. For more context, read our post on Solving the Token Launch Trilemma.

Understanding Direct-to-Liquidity​

Axis offers a variety of callbacks, which are advanced functions that allow additional features based on specific conditions or actions. Direct-to-Liquidity is one such callback used to enhance security and enable price discovery beyond the initial auction phases.

Direct-to-Liquidity automatically seeds a liquidity pool with auction proceeds, a process that is traditionally prone to errors and malicious intent. By automating this process, a layer of programmatic security is added for participants. This feature can be configured at auction creation to deploy liquidity to a DEX, allocate a specific percentage of the auction proceeds, add vesting to liquidity tokens, and more.

One of our core ethos is that deploying an auction should be as easy as deploying a liquidity pool. Vice versa, this is true as well. While specific details are still being finalized, we plan to have ready-to-use, audited Direct-to-Liquidity callbacks for a variety of DEXs to make this process as easy as possible for projects.

The Potential Impact of Direct-to-Liquidity​

According to ImmuneFi’s Crypto Losses Report, 2023 saw over $103 million in losses due to rug pulls alone, followed by an additional $19 million from the start of 2024 until now. Keep in mind that pre-2023 reports did not distinguish between different types of fraud, while reports from 2023 onward only use rug pull losses for fraud. These figures underscore the persistent vulnerability of users due to inadequate security measures post-launch.

Most, if not all, of these losses could have been prevented with Direct-to-Liquidity. Although implementing this feature is optional, we expect most users to require it for participation. This requirement would allow them to trust the code and guarantee that funds will be utilized transparently and as intended.

Closing Thoughts​

Direct-to-Liquidity is a significant advancement in protecting users and maintaining the credibility of on-chain token launches. It allows launch buyers to trust permissionless contracts to direct the proceeds of the launch instead of trusting teams to execute directly.

If you’re a project interested in leveraging the benefits of Direct-to-Liquidity, consider launching on Origin. Reach out to us to learn more about how you can integrate this powerful feature into your token launch strategy.

Introduction​

It’s time for a deep dive on Encrypted Marginal Price (EMP) Auctions — our flagship token launch mechanism.

To recap, our previous posts on the Token Launch Trilemma Trilemma highlighted the need for solutions to balance Accessibility, Participation, and Valuation. Axis addresses this with the EMP Auction, a multi-unit batch auction mechanism. To further understand the importance of bringing sealed-bids on-chain and our system design, readers may want to review On Auctions, Privacy, and Blockchains.

EMP Auction Characteristics​

Auction mechanisms differ based on factors such as the number of units auctioned, bid visibility, settlement rules, pricing mechanisms, and information availability.

EMP Auctions have the following characteristics:

• Multi-unit: Multiple identical items auctioned simultaneously.
• Batch: Bids are grouped together and settled at the end of the auction.
• Encrypted: Participants’ bids are sealed and not visible to others.
• Marginal Price: All winning bids pay the price of the last, marginal bid included.

This auction type is particularly powerful for price discovery with fungible ERC20 tokens. By awarding tokens to the highest bidders, it allows for an open and accessible bidding environment. However, this naturally compromises the certainty of participation for bidders.

Life Cycle of an EMP Auction​

An EMP auction begins when a seller calls the ‘auction’ function from the Auction House. At this point, the auction setup has been configured and the auction will start at a specified time. Before the auction begins, the seller has the option to cancel it. However, once started, EMP Auctions cannot be canceled.

At the start time, the auction goes live and accepts sealed-bids from participants. Bidders commit an amount of bidding tokens and specify the maximum price they’re willing to pay for the tokens being auctioned. When the user submits their bid, the maximum bid price is encrypted using the auction’s public key (see note below) and their bid amount is transferred to the auction contract. Other bidders can see the bid size transferred (e.g. 1,000 USDC) but cannot know the bid price (e.g. 10 USDC per XYZ). Bidders can submit multiple bids and cancel their bids at any time before the auction concludes.

Encryption Strategy​

Axis uses a hybrid encryption scheme called ECIES to encrypt bid prices. ECIES makes it possible to decrypt bids on-chain using Ethereum’s native elliptic curve precompiles. Axis provides a key management service that holds each auction’s private key and publishes it once an auction concludes. This service is optional; sellers can still use the smart contracts while retaining custody of their auction’s private key.

This design introduces trust assumptions related to key management, but alleviates some of the UX challenges posed by commit-reveal schemes. We plan to address this trade-off in future iterations and new auction types.

EMP Auction Settlement​

Once the auction concludes, there is a dedicated settlement period. During this time, anyone can call the decrypt and settle functions. The first step is decrypting the bids by submitting the private key to the EMP auction module, which validates the key and decrypts the bids. Once decrypted, the bids are sorted from highest to lowest in preparation for settlement.

The auction settles by finding the marginal price, assigning winning bids, and distributing the auction proceeds to the seller. EMP Auctions are settled at a uniform clearing price — the marginal price of the last bid filled. This is determined by allocating tokens for each bid until the auction capacity is expended. After settlement, winning bidders can claim their tokens while losing bids can claim their refunds.

There are a few edge cases when calculating the marginal price worth highlighting:

• Partial Fill: The last bid may not be filled completely if the capacity is expended with a portion of the final bid
• Intermediate Price: The auction can settle at a price in between the last two bids if there is a significant gap, assuming that intermediate price fills the capacity
• Same Price: If two or more bids are submitted at the same price, and that price is the marginal price, earlier bids are given priority — it pays to be early! This small incentive for early bids helps counteract the tendency of bidders to wait until the last minute. Early bidding can also be advantageous since auction subscription helps participants gauge whether the auction is over or under subscribed.
• Minimum Price: If the auction is under-subscribed but exceeds the minimum filled threshold, it will settle at the minimum price
• Unfilled Capacity: If the auction ends below the minimum filled threshold, it cannot be settled. The marginal price is set to the maximum value and users can claim refunds

Auction Configuration​

Now that we have covered how EMP Auctions work, let’s discuss how to configure one from the seller’s perspective.

First, sellers need to specify the token they want to auction (i.e. Payout Token) and the token they want to receive (i.e. Quote Token). Next, they decide whether to use any of Axis’ optional derivative modules to modify the Payout Token. As of now, Vesting is the sole token derivative offered on Axis.

After selecting the token inputs, sellers schedule their auction with a specified start date and duration. Auctions must be scheduled in advance to give curators time to review the implementation and officially curate the auction.

With the basic inputs set, the seller needs to configure the settlement parameters. The number of tokens being auctioned is set as the capacity. Next, the seller determines the minimum number of tokens that must be sold for a valid auction (i.e. Minimum Fill Quantity). Sellers can also specify a reserve price, which is the minimum price they are willing to accept per token. Another important parameter is the minimum bid size, which must be set to protect against excessive gas costs.

Advanced settings can be configured for any auction on Axis using the protocol’s callback functions. Callbacks must be deployed on-chain prior to auction setup, so this will require additional verification beforehand.

Finally, the EMP public key is provided for auction deployment. As mentioned, a key hosting service is provided by Axis. However, the service is entirely optional and sellers can provide their own private key or hosted solution if preferred. Additional information will be provided about the key management solution and long-term plans to decentralize it

Introduction​

In our last post, we introduced the Token Launch Trilemma by covering the three pillars that are essential to any token launch — Accessibility, Participation, and Valuation. We left off by teasing how Axis, the modular auction protocol that enables users to easily conduct auctions for ERC20 tokens, can solve the trilemma.

Auctions are powerful tools for price discovery and are backed by an entire field of study known as auction theory. Calling back to our very first post, they already help secure and facilitate billions of dollars in crypto:

In the realm of token launches, however, current solutions are poorly optimized and fail to unlock the full potential of the auction design space. Origin, our suite of token launch tools, is here to change that and find an optimal balance within the trilemma.

Where did we go wrong, and why?​

Legacy launchpads have been recycling the same outdated strategies for multiple market cycles, despite their glaring drawbacks. Fixed-price ICOs remain a favorite, but why do we fall back to such methods?

Once again, we turn to Vitalik who specified the problem in his 2021 article about fixed-price sales below market-clearing price. He points to two main reasons: concerns over fairness and the management of community sentiment.

Fairness concerns arise because auction mechanisms inevitably exclude those who bid too low. However, this alone can’t explain why projects still turn to fixed-price launches since they exclude many users when they are over-subscribed. A more compelling explaination is managing community sentiment. Vitalik explains:

Out with the old, in with the new!​

Origin provides a suite of tools designed to navigate these complexities and address the Token Launch Trilemma. While each auction type within Axis can be used independently, a strategic multi-stage token launch that combines the best aspects of different systems may be ideal.

Fixed-Price Sales​

For Stage One in the launch sequence, projects can start a fixed-price sale operating on a first-come, first-served basis. Our smart contracts have optional allowlists that can be implemented to restrict access to a smaller group of early community members. Axis also has the ability to vest tokens to users over a configurable period of time — standard linear vesting is provided while custom or third-party solutions can be integrated. This is key for aligning incentives. Early community members who want to buy below market-clearing price need to earn their tokens over time.

EMP Auctions​

During Stage Two, projects can discover the market-clearing price for their token using Origin’s flagship auction mechanism. We’ll cover the Encrypted Marginal Price (EMP) system thoroughly in our next post. For now, it suffices to say that this system allocates tokens to the highest bidders with the clearing price set by the last successful bid to be filled. Discovering the clearing-price for a token is important because it unlocks Origin’s final stage — liquidity launch.

Direct-to-Liquidity​

Origin’s auctions have a unique Direct-to-Liquidity feature that enables instant DEX liquidity. The proceeds from the auction are used to establish the initial liquidity pool, with the flexibility to use all or a portion of the funds. This feature is optional and customizable, ensuring that bidders are aware in advance of how their funds will be utilized. This adds a layer of programmatic security to a process that is traditionally manual and prone to errors.

It’s also important to note that determining an accurate clearing price of a token requires careful analysis, so users that are not comfortable assessing valuation at auction might even prefer to wait for the DEX launch.

How Origin solves the Token Launch Trilemma​

Now, let’s review Origin’s multi-stage approach within the context of the Token Launch Trilemma:

Going back to Vitalik’s 2017 article that we cited in our first Token Launch Trilemma post, he suggests a strategic trade-off:

Origin embodies these insights by progressively widening participation through its phased launch sequence. Each stage directly addresses one aspect of the trilemma, and all together a balanced strategy is created. This ensures that while some uncertainty in participation and valuation is inevitable, the structure of the launch strategy seeks to optimize overall outcomes for both projects and users.

This approach not only addresses the complexities of the Token Launch Trilemma, but will set a new standard for how tokens can be introduced to the market. By balancing the three pillars, Origin is positioned at the forefront of next-generation token launches.

Introduction​

The Token Launch Trilemma refers to three vital properties that are impossible to maximize for any token launch:

• Accessibility - Ensuring open access for all interested participants
• Participation - Guaranteeing that every participant receives tokens
• Valuation - Establishing a market equilibrium for token price

Trilemmas aren’t new in crypto and have been used to explain important properties of blockchains, stablecoins, and even bridges.

Vitalik described token sale models back in 2017. We expand on his first token sale dilemma by distinguishing between Participation and Accessibility.

Supply and Demand​

When assessing the Token Launch Trilemma, it’s important to keep in mind the basic rules of supply and demand. The initial token distribution is known for most token launches, so the supply side of the equation is fixed. On the demand side, Accessibility and Participation are the driving forces.

Trilemma Pillars​

Accessibility is a core feature of any permissionless product in crypto. However, this inclusivity creates difficulty in anticipating demand for a given token launch.

Many launchpads manage this by restricting access to the launch event, either through allowlists or token-gating platforms. This allows them to fix the launch at some pre-determined price and reward a set of selected users.

Participation is a property of the launch mechanism that ensures each participant receives tokens according to the rules of the launch.

Now, let's use an example to illustrate how Participation can be in tension with Accessibility.

Suppose your token uses a fixed-price sale that is open to all (Accessible) and satisfies bids on a first come, first served basis (Participation). This strategy is susceptible to front-running where a small group captures the full capacity. In fact, this strategy was famously executed during the initial Stargate auction.

Attempting to impose purchase limits per address still leaves the sale susceptible to Sybil attacks. As a result, ensuring that each participant receives tokens according to the rules (first come, first served) actually makes the launch less accessible.

Valuation is the final pillar of the trilemma and is one of the most important outcomes.

With a fixed supply and unknown demand, Valuation is the pillar that suffers the consequences. Although several launch strategies try to optimize for price discovery, existing solutions have notable tradeoffs and flaws that we'll explore in future posts. Some lend themselves to launching at predatory valuations, while others create PvP dynamics between participants.

Closing Thoughts​

The Token Launch Trilemma presents a multifaceted challenge for projects aiming to launch their token successfully. We believe finding a balance within the trilemma is the ideal solution, but this hasn't been achieved... Not yet.

At Axis, we’re building auction mechanisms to address these pillars and power the next generation of smart token launches. Leveraging insights from auction theory and industry leaders, we aim to bring battle-tested auction models on-chain and combine them with DeFi money legos.

Stay tuned for our next post where we’ll explain how Axis Origin solves the Token Launch Trilemma. One hint from Vitalik:

Some valuation uncertainty or participation uncertainty is inescapable, though when the choice exists it seems better to try to choose participation uncertainty rather than valuation uncertainty.