BIP #29 Proposal to Replace Fixed End Time with Soft Close in Auctions

#1

BIP: #29

Title: Proposal to Replace Fixed End Time with Soft Close in Auctions

Idea(BRC): (From Vis.ETH) https://discord.com/channels/897709643948761148/1106005192429801513

BIP by: NFTLZ.ETH#0717

Created: 2023-05-20

Status: Community Review

BIP Editor: NFTLZ.ETH#0717(**@**defiandnft)

Background

BendDAO’s NFT collateralized lending feature allows NFT holders to use their NFT assets as collateral and borrow ETH assets. Each piece of collateral has a health factor and when it falls below 1, the collateral will be liquidated and auctioned to repay the debt and protect the interests of depositors.

When the health factor of the NFT collateral falls below 1, anyone can bid to trigger a liquidation auction, which lasts for 24 hours. If the person being liquidated fails to repay 50% of the loan during this time, the ownership of the NFT will be transferred to the highest bidder.

For more details, please refer to Auction - Portal (benddao.xyz).

Summary

Adjust the Fixed End Time in the liquidation auction to a Soft Close.

Motivation

Due to the 20% profit margin between the liquidation auction price of the NFT collateral and the actual market floor price, some arbitrageurs wait until the last moment before the auction ends to become the highest bidder. As shown in the following picture:

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For more auction information, please refer to this page: BendDAO - Auction History

However, as most of the bids are concentrated in the period before the end of the auction, some MEV bots also participate in the auction, turning the auction bidding model into a Gas/MEV bot competition model.

To bring auctions back to a bidding model, it is suggested to adjust the auction end time from Fixed End Time to Soft Close.

Here is ChatGPT4.0’s explanation of the advantages and disadvantages of Soft Close in auctions:

Soft Close, also known as a delayed auction close, is an auction strategy where if there is a new bid just before the auction is about to end, the end time will be extended. Here are some advantages and disadvantages of this strategy:

Advantages:

  1. Prevents auction fever: Soft Close can prevent the phenomenon of “auction fever,” where bidders rapidly increase their bids just before the auction ends in an attempt to win. Therefore, Soft Close can provide a fairer bidding environment for bidders.
  2. Better price discovery: The Soft Close mechanism may help to more accurately reflect the market value of assets, as it gives bidders enough time to react to new bids without missing out due to time constraints.
  3. Prevents sniping: In auctions with a fixed end time, some bidders may bid at the last minute to prevent other bidders from having a chance to react. Soft Close can prevent this behavior because the auction end time will be extended whenever there is a new bid.

Disadvantages:

  1. May extend the auction time: Since each new bid can extend the auction end time, the auction may last for a considerable amount of time, especially in competitive auctions.
  2. Uncertainty: Since the auction end time will change depending on the bids, this may bring some uncertainty to bidders and sellers.
  3. May affect participants’ strategies: In a Soft Close auction, participants may need to adjust their bidding strategies because they need to consider the changes in the auction end time.

Overall, Soft Close is an effective strategy that can improve the fairness and efficiency of auctions in many cases. However, it may also bring some challenges that require participants, sellers, and auction platforms to manage together.

Proposal

To improve the auction bidding mechanism, we propose changing the end time of the liquidation auction from “Fixed End Time(Ends After 24 Hours)” to “Soft Close”:

  • If no new bids are made within 5 minutes after the 24-hour deadline, the highest bidder will receive ownership of the NFT.
  • If a new bid is made within 5 minutes, the auction deadline will be extended by 5 minutes.

These improvements will return the NFT auction to a bidding model, while eliminating the impact of MEV bots on the auction.

The 24h Liquidation Protection for the borrowers remains unchanged. Once the 24 hours is over, the borrower cannot stop the auction and redeem the NFT by repaying a portion of the debt and fine.

For more Liquidation Protection information, please refer to this page: Liquidation Protection - Portal (benddao.xyz)

Test Case

For example, if BAYC #1’s health factor drops to 1 and a user bids, after the 24-hour auction deadline:

  • If no new users bid within 5 minutes, the auction ends, and the highest bidder will receive ownership of the NFT.
  • If a new user bids within 5 minutes, the auction deadline is extended by 5 minutes.

Poll

  • Keep current - Fixed End Time
  • Soft Close

0 voters

1 Like