Strategic behavior and market inefficiency in blockchain-based auctions

• Main Authors: KE, Ping Fan, CHEN, Jianqing, GUO, Zhiling
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2021
• Subjects: Blockchain; Auction; Mechanism Design; Transaction Fee; Transaction Capacity; Block Stuffing; Databases and Information Systems
• Online Access: https://ink.library.smu.edu.sg/sis_research/7263; https://ink.library.smu.edu.sg/context/sis_research/article/8266/viewcontent/wise2021_blockchain_auction.pdf
• Institution: Singapore Management University

Blockchain-based auctions play a key role in decentralized finance, such as liquidation of collaterals in crypto-lending. In this research, we show that a Blockchain-based auction is subject to the threat to availability because of the characteristics of the Blockchain platform, which could lead to auction inefficiency or even market failure. Specifically, an adversary could occupy all of the transaction capacity of an auction by sending transactions with sufficiently high transaction fees, and then win the item in an auction with a nearly zero bid price as there are no competitors available. We discuss how to prevent this kind of strategic bidding behavior, also known as block stuffing attack, with auction mechanism design.