How Latency Affects Competition in Onchain Auctions
Summary
This document examines whether decentralized auctions can remain competitive when one bidder can submit later and act on fresher market information. It models an order-filling auction with two bidders: an early bidder whose offer is hidden, and a later bidder who observes updated asset value but cannot see the first bid. The later bidder gains positive expected profit, while the early bidder earns zero in expectation; some value still reaches the seller, so the auction does not collapse entirely.
The analysis interprets the later bidder’s payoff through financial options. With no reserve price, it resembles an exchange option; with a reserve, it can be represented as a portfolio including range options and binary calls. The authors use this framing to relate the advantage to volatility and latency, and compare competitive bidding with a monopolist’s incentives to delay. These conclusions are model based: the document describes a stylized two-bidder setting and does not provide empirical measurements. It also notes that privacy and censorship protections, as well as auction designs that reduce timing advantages, could change the practical outcome.
Key ideas
- A bidder with later access to market information can gain expected profit without observing an earlier bid.
- The timing advantage transfers some surplus from the seller while leaving the auction competitive enough to preserve seller value.
- Without a reserve price, the later bidder’s payoff is interpreted as an exchange option.
- With a reserve price, the payoff can resemble a portfolio of exotic options, including range options and binary calls.
- Competitive and monopolistic bidders have different incentives to delay, especially when the auction has no reserve.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.