Auctions with Tokens: Monetary Policy as a Mechanism Design Choice

Andrea Canidio

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Abstract: I study a repeated auction in which payments are made with a blockchain token created and initially owned by the auction designer. Unlike the ``virtual money'' previously examined in mechanism design, such tokens can be saved and traded outside the mechanism. I show that the present-discounted value of expected revenues equals that of a conventional dollar auction, but revenues accrue earlier and are less volatile. The optimal monetary policy burns the tokens used for payment, a practice common in blockchain-based protocols. I also show that the same outcome can be reproduced in a dollar auction if the auctioneer issues a suitable dollar-denominated security. This equivalence breaks down with moral hazard and contracting frictions: with severe contracting frictions the token auction dominates, whereas with mild contracting frictions the dollar auction combined with a dollar-denominated financial instrument is preferred.

Date: 2023-01, Revised 2025-04
New Economics Papers: this item is included in nep-des, nep-mic and nep-pay
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