Introduction​

It’s time for a deep dive on Sealed-Bid 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 our Sealed-Bid Auction implementation, 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.

Sealed-Bid Auction Characteristics​

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

Sealed-Bid 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 a Sealed-Bid Auction​

A Sealed-Bid 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, Sealed-Bid 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.

Sealed-Bid 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 Sealed-Bid 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. Sealed-Bid 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 Sealed-Bid 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 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. Axis has built a suite of token launch tools 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!​

Axis 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.

Sealed-Bid Auctions​

During Stage Two, projects can discover the market-clearing price for their token using our flagship auction mechanism. We’ll cover how Sealed-Bid Auctions work 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​

Axis 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 Axis solves the Token Launch Trilemma​

Now, let’s review a 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:

Axis 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, Axis 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 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.