Using Information Symmetry to Strengthen Common and Private Values
1 NFT Price Discovery
There has been increasing attention towards NFT assets in the crypto industry. The uniqueness of NFT assets gives it low liquidity. Evidently, any popularization requires a liquidity solution mechanism, which is why we provide a series of pricing solutions here.
The largest difference between Non-Fungible Tokens and Fungible Tokens is the quantity. In a perfect complete competitive market, FTs price discovery comes from the order books system or AMM, and other markets are the receivers of this price.
At the core of this is the transmission of price information. The pricing solution is the price quoter of the oracle. Undoubtedly, this specific method does not apply to ERC721 or other form of NFTs. NFTs are more similar to real estate, paintings, or phone number segments in the real world. It is of a large number but every piece is unique; scarce but can be supplied and supplemented.
Auction is one of the most common methods for NFT pricing and transactions. For Examples, English auctions that start from a low to a high price and Dutch auctions, based on saving gas fees and adoption of the idea that “a certain period of time to automatically reduce the price until it is accepted.
It is feasible to use those two auction methods as solutions to buy&sell a single item. However, it is not effective to capture the price range or get the common value of one kind of NFTs if we take the final auction deal price as the fundamental reference. There are too many factors that are influencing the final deal price in the auction, such as hype behavior of a single product or the difference in private values expectations, and the limited scope of information disclosure etc.
For Example, when people think about Beeple (one of the top digital artist actively making NFT art pieces), the first impression is “Beeple’s work is worthy of 69 million USD!”. This final deal price for Beeple’s 5000 days collection sold in Christie’s becomes the price label of Beeple.
However, the 69 million is actually the single price that the final bidder who would like to offer for the art, that is to say, this price is merely the private value of Beeple’s work to this specific buyer. Then, what is the common value price for Beeple’s 5000 days? If you are not the participants who watched the whole process of the auction, you might not notice that actually around 1–5 million USD price range was one of the price range that most bidder gave their prices. It is hard to know what is the price range that the common value or say fair value of the Beeple’s 5000 days collection, without analyzing the auction data, therefore, the final price sold should not serve as the reference for normal users who might be interested in Beeple’s new work or any other work available in the market.
Common value of NFTs or other non-standard assets are the price anchor, how do we find this anchor will be further discussed in the later sections.
With the prosperous development of Defi market, NFT market are also given high expectations by investors and users, especially people are waiting for a new price discovery solution that can introduce more liquidity by helping the users to buy and sell their NFTs with fairer deal conditions . PawnHouse is researching a complete set of mechanisms which will realize an accurate price discovery of NFT assets under different holding conditions and expectations. This will provide a valuable reference for investment decision-making and strengthen the liquidity of these non-standard assets.
2 The Oracle for NFTs
The centralized transaction pricing of Fungible Tokens comes from the order book and matching engine. Traders of Fungible Tokens can freely place orders and quotes, making the miners who provide quotes in the oracle design process closely similar to a Price Taker. The processing of heterogeneous data and the pricing completion are accomplished. The quintessential part of the pricing is the relationship between supply and demand. Oracles for Fungible Tokens serves as price porters with the Defi ecology empowered by the AMM mechanism, while Non-fungible tokens are difficult to price because of their unique nature.
As mentioned earlier, a single auction transaction price is insufficient as a price basis for a particular NFT category. However, with abundant data and information generated by real-motivated bidders during the auction could serve as oracle for NFTs.
The key word here is real-motivated bidder! NFTs are different from FTs because the quoter does not have the source of Price Taker as an anchor. Irrelevant comments on price from random people (who do not place real leverage/money in the auction) is extremely irresponsible and the presentation of heterogeneous data will show same results as gambling.
Real NFT evaluation will come from a large number of bids that provide the price acceptance range with a high degree of intensiveness. Furthermore, bidders well-intended and rational bid motives need to be guaranteed.
(The typical FT oracle’s mechanism of punishing heterogeneous quotations is not applicable because NFTs objectively have differences in private values perception.)
3 The Price Corridor of NFT Assets
Derived from pricing and auction theory, PawnHouse believes that any non-standard asset’s value composes of two parts: Common Values and Private Values.
The transaction price of the auction displays the private value of a non-standard asset to an individual. However, quotation of its common values is better suited for the true price range of this category of NFT assets.
For example, to participate in the auction of a 400 square meter piece of real estate, most people quote an acceptable price by considering factors such as geographic location, housing area, and surrounding facilities. However, there will be some people who consider factors such as interior preferences, historical significance (whether an admired or famous person has lived there), and others that raise the price higher. In this case, the final transaction price of the real estate includes common values and private values. However, the price provided by most people will be closer to the common values, and in most cases, will also become the most meaningful price range for real estate.
In most auctions, bidders consider both private and common values. If you are participating in the auction of an apartment, your willingness to pay depends on your recognition of the apartment’s current state, spatial structure or location (private values), and how much profit you can sell for in the future (common values). An energy company that participates in the bidding for natural gas extraction rights not only cares about its natural gas reserves (common values), but is also concerned about the extraction cost (private values, which depends on the company’s technology). Banks that invest in government bonds will consider future market interest rates (common values) and the number of customers who want to buy bonds (private values). Therefore, the biggest difference between the model we designed and the ordinary NFT trading platform is that we do not take the final transaction price as the core or only value for NFT.
We aim to capture all the useful and valuable data and information from the auctions happening on our platform (or in the future maybe draw data from other platform too) during the whole auction process, especially our Simultaneous Multi-Round Auction (SMRA), and use more open and timely information to encourage and strengthen bidding behavior, and build a “Price Corridor” for NFT assets through a real and dense quotation range. All the information captured in the bidding will generate the common value of certain type of NFT, and the common value discovering mechanism is the oracle of NFTs.
Currently, Pawnhouse provides three types of method for investors to get liquidity from their NFTs, and price corridor for NFTs will derive from those methods. The platform’s PawnTicket Circulation, Limited-Time Bidding and SMRA (details are described below) provide bidding scenarios for NFT assets in various situations.
● If an asset holder is curious on the asset price but does not intend to transfer the asset, they can obtain a relatively conservative price corridor through the mortgage loan and PawnTicket circulation.
● If asset holders want to convert their assets into cash immediately, they can obtain an extreme price in the shortest time through a Limited-Time Auction.
● If an asset holder wants to convert assets into cash and is willing to wait for a higher price, they are able to receive more bids and better prices through SMRA.
These bidding forms are completed in an automatic transaction method. In other words, as long as the current bidder can make the previous bidder profit, the transaction will be mandated within the established period or the validity period.
The bidder will also be rewarded with platform tokens for providing quotations. [*For details, please refer to the “Liquidity Mining Algorithm” chapter in “PawnHouse Dual Mining Rules & Algorithm”.]
Considering that the bidder does not have a higher offer after the initial, he must purchase the asset with his offer, which will fundamentally guarantee the goodwill and rationality of his bid.
The active bidding model for a single asset is shown in the figure above: each scatter point represents a quote, namely, a valid price expectation. The area where quotations gather is known as the “price corridor”. Due to the existence of private values, the final transaction price of the asset may not be in the price corridor, but at the highest price of this transaction. But for market or asset holders, the price corridor is extremely referential for subsequent pricing and the market. In particular, the common values range of assets constructs the price discovery mechanism of NFT assets.
PawnHouse’s price discovery solution is based on the research results mentioned earlier on the pricing of non-standard assets combined with the characteristics of NFT assets. Three anticipated pricing mechanisms will be used for NFT assets circulating through the platform.
To further explain the mechanism of the three methods mentioned above, from next section, we will elaborate each as below:
3.1 Mortgage Loan & PawnTickets Circulation
NFT’s pawn contract is a NFT collateralized loan defi product that allows users to borrow or lend money based on their NFT assets or other non-standard assets like financial tickets generated in other defi protocols. “Price inquiry” is essentially the basic cognitive demand of NFT holders, and obtaining income is the basic economic demand of NFT investors.
As a pricing solution for non-standard assets, a large number of rational quotations are required as the “scattered points” in the price corridor. In this situation, the mortgage loan market provides an NFT pricing solution with a higher margin of safety for both asset holders and bidders, compared to the direct transfer of ownership through auction. For example:
If Kevin can use his NFT assets to immediately borrow 10 ETH in the mortgage loan market, there is a high probability that the actual price of the NFT asset will exceed 10 ETH. In comparison with the method of obtaining prices through buying and selling, mortgage loans provide NFT asset holders with effective and efficient market pricing information acquisition channels. Furthermore, the acquisition of this information does not have to be at the expense of losing asset ownership and beneficiary rights.
Compared to traditional pawning, PawnHouse’s contract innovation method is to increase the number of quotations in the loan period through the automatic circulation of PawnTickets, and use the borrower’s Promised Interest as a space for quoters to compete. In the process of quotation and transferring of the PawnTicket, a price corridor is gradually formed.
The platform has established an independent pawn module, which supports free settings, fast loans, PawnTicket generation and automatic circulation. After a mortgage loan order is placed (the borrower provides the mortgage assets, and determines the loan amount and Promised Interest), and users are willing to accept the conditions, the loan can be successfully borrowed.
After the loan is successful, the system will generate an NFT PawnTicket to clarify the ownership of future equity. Before the PawnTicket expires, it will automatically enter into market circulation where any user can bid to obtain the PawnTicket. [*The price reference comes from the daily net value that combines the promised interest and the remaining period.]
Furthermore, lenders who provide liquidity for mortgage assets and investors who participate in PawnTicket circulation can obtain token incentives for liquidity mining.
The core logic is as follows: The greater the difference between the user’s assessment of the value of mortgage assets (from the user’s personal perception) and the actual loan amount, the more willing they are to make short-term arbitrage by reducing returns.
On the one hand, if the borrower has a correct understanding of the true value of his mortgage assets, his willingness and probability of loan default will shrink as the above-mentioned amount difference expands. If the borrower’s cognition is wrong and he does choose to default, the investor’s profit will far exceed the cost he paid (a high-value confiscated collateral is obtained with a few loans).
For example, Kevin mortgaged his NFT in order to borrow 10 ETH, promising to pay 2 ETH as interest. If multiple users believe that the actual value of the assets mortgaged by Kevin exceeds 12 ETH, then the transfer price of this PawnTicket before expiry will gradually approach 12 ETH.
Although a mortgage loan is regarded as a single transaction, the automated PawnTickets circulation greatly increases the number of rational quotations. Based on the information recorded on the chain, this solution will provide sufficient and effective decision-making assistance for asset holders and investments.
3.2 Limited-Time Bidding
For defaulted PawnTickets that fail to repay on-time, a Limited-Time Bidding will automatically open when they expire. Effectively speaking, an English auction in where the total PawnTicket principal and interest are used as the price basis will begin. The transaction is then executed automatically within a limited time, and the highest bidder wins the auction. This model is also suitable for holders who want to convert their NFTs into cash as soon as possible. These users can also complete the disposal of assets by submitting a consignment of Limited-Time Bidding.
Regarding the use of English auctions as part of the solution, the main reason is that its model (starting with a low price and gradually increasing the price until the deal) can help other users obtain product valuation information through price changes, which is conducive to the increase of asset prices. Compared to sellers, English auction bidders have more information, and they are less likely to bid at a price lower than their valuation. In the process, they provide more price information.
However, the process of Dutch auctions (starting with a high price and gradually lowering the price until the deal) does not produce much new information. Therefore, the problem of the “Winner’s Curse” occurs more in Dutch auctions than in English auctions. This result reflects a general principle: the more information the auction format provides, the stronger the information connection between the product and the bidder, leading to a higher deal price.
In our model, NFT sellers only need to set the starting price and auction time limit (1–24 hours) to start the auction. The starting price of the defaulted PawnTickets will automatically set based on the loan amount, interest, and other parameters, with a fixed auction time of 6 hours.
At the end of the auction’s time limit, the highest bidder will receive the asset. If there is a new maximum bid within 5 minutes before the end of the time limit, the time limit will automatically extend by 10 minutes. After the auction is complete, the platform will charge the seller a handling fee.
3.3 Simultaneous Multiple Round Auction
The 2020 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was jointly awarded to Paul R. Milgrom and Robert B. Wilson “for improvements to auction theory and inventions of new auction formats.” The auction they designed effectively solved the winner’s curse and the problem of information provision. SMRA (Simultaneous Multiple Round Auction) is the product of their design.
When the Federal Communications Commission (FCC) first used an SMRA in July 1994, it sold 10 licenses in 47 bidding rounds for a total of 617 million dollars — objects which the American government had previously allocated practically for free. The first spectrum auction using an SMRA was generally regarded as a huge success. Many countries (including Finland, India, Canada, Norway, Poland, Spain, the UK, Sweden, and Germany) adopted the same format for their spectrum auctions. The FCC’s auctions alone, using this format, have brought more than 120 billion dollars over twenty years (1994–2014) and, globally, this mechanism has generated more than 200 billion dollars from spectrum sales.
In order to gather as many quotes from NFT investors as possible and provide multi-dimensional information in the market through information transparency, we used this auction form for multiple asset sales, namely SMRA, for the blockchain, and optimized the implementation method.
SMRA allows users to bid and win on multiple assets at the same time. In each auction, multiple assets of the same or related categories will be auctioned at the same time. [*There will be no distinction between assets in the early stages of the platform’s launch. In order to ensure that the duration of the auction will not be too long, our SMRA only requires 3 assets to start an auction. As the types of transactions on the platform are enriched, the latter will be divided into dimensions such as the chain of the NFT, the platform of minting, and the maker of minting. At the same time, in the governance structure of DAO, the community will provide more classification standards suitable for DEFI.]
The auction is carried out in rounds and all bidders can bid before the countdown. After reaching the standard for starting auctions, the system will automatically lead the countdown the first round of auctions. After the countdown is over, the system only displays the current highest bid for each asset (other bids below this price are not displayed), and starts the next round of bid countdown. When none of the assets gets a higher offer, the auction ends. The highest bidder for each asset wins.
We believe that the behavior of “bidding” itself is part of the formation of commodity prices. Under the traditional English auction, the bidder may try to hide his true intentions in order to avoid the winner’s curse. SMRA has gathered more popularity for assets and provided more comprehensive quotation references. This forces bidders to be active from the beginning of the auction. Comprehensive information and timely disclosure strategies, while avoiding the winner’s curse, also provide the seller with an ideal price to the greatest extent. In the same period, bidding groups with diversified demands (including bidders of multiple NFTs) offer prices for multiple NFTs at the same time. The results are also of the most reference significance for the price discovery of non-standard assets. For Example:
● Situation A: a house with an area of 200 square meters is sold for $8 million, with the average price being $40,000/ square meters.
● Situation B: 3 houses with an area of 100 square meters, 200 square meters and 500 square meters were sold for $5 million, $8 million, and $15 million respectively. After the weighted average, the average house price is $35,000/ square meters.
Evidently, situation B has more reference significance for potential or actual house sellers, and also provides more information on area and average price.
SMRA auction will be applied into NFT auction, we will modify the auction to enable the auctions being organized in a more automatic way to lower down the hardness for crypto holders to participated globally.
PH is the original token of PawnHouse. It is an important element that encourages the normal operation of the system. It is also a certificate for users to participate in the economic rules of the platform for governance, profit distribution, and token repurchase. The total supply of tokens is 1 billion, of which 60% used as mining incentives, including: liquidity mining and staking mining.
4.1 Token distribution
Mining 60% (600 million PH)
The total distribution is as follows: [* For more details, please refer to “PawnHouse Dual Mining Rules & Algorithm]
● 24% in the first year
● 15% in the second year
● 12% in the third year
● Subsequent total 9%
Early team 10% (100 million PH)
Half year cliff, 10% unlock for the first release and 90% will be unlocked within 36 months quarterly.
Financing 15% (150 million PH)
Ecological incentive 15% (150 million PH)
● First year, 7% (70 million PH). 30% (21 million PH) of which will be unlocked after the project goes online. Subsequent PawnHouse unlocks 10% every time the equivalent of 10 million USDT mortgage loan matching is completed.
● Second year, 5% (50 million PH). PawnHouse unlocks 10% of it for every 100 million USDT mortgage loan matching completed.
● Third year, 3% (30 million PH). PawnHouse will unlock 10% of it for every 200 million USDT mortgage loan matching completed.
● If the planned amount of the current year is fully unlocked before the end of the year, no new tokens will be added; if the amount of mortgage loan matching in the current year does not reach all the unlocking requirements, the remaining tokens will be destroyed directly.
4.2 Token Usage
PH, as the original token of PawnHouse, not only represents the rights of the holder, but also has actual use value. PH will be used in scenarios including, but not limited to the following in the future:
● 50% of the platform’s trading fee profit will be used to repurchase PH on a regular basis to promote its deflation and appreciation.
● The contract provides incentives to users who participate in transactions or token staking on the platform during the period on a weekly basis.
● Users can use tokens to deduct up to 50% of transaction fees.
● 6 months after the platform launch, users will be able to participate in proposals and voting governance based on the number of tokens they hold.
4.3 First Adopters Reward Program
We are very happy that version 1.0 of PawnHouse will be introduced in June. Therefore, we have launched the “First Adopters Reward Program”.
At the specified time, we will provide PH token rewards (from the 15% part of the ecological incentive) to the first batch of users who join the platform. In the first year of ecological incentives, 7% of PH tokens will be distributed. 30% (21 million PH) of which will be unlocked after the project goes online. Subsequent PawnHouse tokens will unlock 10% every time the equivalent of 10 million USDT mortgage loan matching is completed.
The details of the First Adopters Reward Program will be announced around the launch date of the platform. For wealth opportunities, please follow our updates.
Especially to users who hold NFT assets on the BSC chain, please do not miss out!
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