SIP: Incentivized Reserves to Drive Market Volume

[BEN]

Authur: BΞN & FRΞNS
Status: Temperature Check
Type: Governance
Sponsor: TBD
Implementor: SuperRare
Created Date: June 28, 2022

Summary

We propose a new incentive for Reserve auctions to drive increased bidding activity and higher market volume on SuperRare.

In the proposed setup, a bidder who hits a reserve and is subsequently outbid receives 5% of the final sale price.

Abstract

Additional details are described under Specification

Motivation

Reserve auctions can drive higher sales for artists and higher volume for SuperRare than list prices due to no price ceiling and the opportunity for bid wars. However, they are also less attractive for Collectors than list prices due to the risk of being outbid. As a result, many Reserves are not met and lay dormant.

We can see in this chart that only 10% of interactions with the SuperRare auction contract are settlements, indicating that many reserves are canceled or never met.

The proposed setup makes it a win-win for a bidder to hit a reserve: they either win the piece or get outbid and collect a portion of the sale. We expect that this strategy will drive more bids and faster bids, thus catalyzing market activity on SuperRare. Lowering risk and increasing the upside for bidders will mean that pieces sell faster.

The expected second-order effect is that this incentive structure will motivate more artists to set reserves in lieu of list prices. The expected result is an increase in total market volume, due to reserve prices being more conducive to open price discovery and bid wars.

Specification

We propose that a collector who hits a reserve and is subsequently outbid receives a 5% cut of the final listed sale price. This still applies if the collector places the winning bid after being outbid any number of times.

The 5% could be sourced from either the:

• Seller’s cut, in ETH
• Marketplace cut, in ETH
• SuperRare DAO treasury, in $RARE
• SuperRare DAO treasury, in ETH
• Some combination of the above

There are pros and cons to each approach.

Distributing in $RARE is the simplest option, as it requires no contract-level changes. We propose introducing this approach for a trial period to test the waters. It could be implemented in the same way as collector royalties, with a monthly claim amount for eligible recipients. The downside of this approach is the risk of creating sell pressure for $RARE.

Sourcing from the Seller’s cut is another alternative. On SuperRare, to outbid an existing offer, one must bid at least 10% higher. As such, the final sale price is guaranteed to be at least 10% higher than the reserve, in the event that an original offer is outbid. So in the proposed setup, the seller always takes home more each time an offer is outbid, even if they pay a 5% cut. And if the original offer is not outbid, then there is no haircut outside the standard marketplace fees.

Note: this same incentive structure could be applied to Scheduled Auctions with a Starting Bid Price (reserve). However, to keep things simple, we propose piloting this with reserve auctions and then potentially expanding to Scheduled Auctions.

Benefits

• More reserves are met and met faster
• Higher sales volume on SuperRare: this is a result of the above and a greater utilization of reserves versus list prices
• Improved UX for collectors: they get rewarded for hitting reserves

Drawbacks

• Possible implementation work
• Risk of creating sell pressure, if the reward is distributed in $RARE

Outcomes

The following outcomes would suggest that this change has a positive impact:

• Reserves are hit more often
• Higher total market volume (this is impacted by many factors)

Thank you Keegan Ead for input on a draft and for sharing the chart

[koloz]

overall i think this is a very solid proposal, especially since there are a few possibilities outlined. Without diving too much into the implementation details, having the 5% come from the DAO treasury would be the easiest as we could easily track the information off chain. Adding it to the contract is riskier since we would need to perform an upgrade to track the initiator address and add the payment logic all of which affects the cost of the market operation. If the community feels like it should be done after the trial (or from the get go) then it’s still possible but will take more time.

[superrarezack]

Really liking the thinking on this proposal. My initial take is that the 5% would be best to come from a combination of $RARE + a lower marketplace fee. I really like the idea of $RARE being a component of the payout so that $RARE gets distributed to more current users hands, but I also think 5% of every sale could cause too much sell pressure. Look forward to further brainstorming this proposal with the $RARE community.

[superrarezack]

Would be good to run some numbers to see how much potential $RARE would be required from the treasury to test this program, and whether the increased volumes/revenue for the DAO could make up the value of the program. The DAO could even potentially convert a % of ETH back to $RARE to help with sell pressure.

[derekedws]

This is super interesting – elegant that there’s a skin-in-the-game component (e.g. hit reserve) to this proposal that mitigates edge cases that may result in sub-optimal incentive payoffs.

A time-bound trial period distributing $RARE feels right to test the waters.

A few additional q’s:

What other parts of the SR ecosystem could this mechanic be applied to outside of auction reserves?

Is 5% the optimal number if it’s purely distributed in $RARE vs. seller/marketplace cut?

[BEN]

Thanks guys for all the input so far!

Agree that distributing $RARE from the treasury would make the most sense as a starting point for a pilot program, given ease of implementation. If successful, switching to a seller’s cut could be considered subsequently as a longer-term solution.

I really like the idea of $RARE being a component of the payout so that $RARE gets distributed to more current users hands, but I also think 5% of every sale could cause too much sell pressure…
Would be good to run some numbers to see how much potential $RARE would be required from the treasury to test this program -@superrarezack

From data that Keegan shared with me, approximately 40% of finalized sale types are auctions, and the great majority of these are reserve auctions. Avg SuperRare monthly sale volume is ~6M USD over the past 5 months. So if 40% of total sale volume is from reserve auctions (ballpark estimate) that would mean (6M * .4 * .05 = $120k) in monthly rewards.

This may be tolerable for a pilot period before potentially switching to sourcing from the seller’s cut. Sell pressure may be offset by exposing more dedicated collectors to $RARE. And ultimately, if this initiative is successful, it will drive more ETH into the treasury over time.

This said, the rewards could be reduced and made more efficient based on the following: some reserves are so low or the artist is in such high demand, that the reserve would be hit regardless. In this case, the incentive is unnecessary and may be counterproductive and frontrun by bots.

Potential solutions:

1. make the incentive structure optional. It would be the default but opt-out so that an artist like xcopy who doesn’t stand to benefit from it, can forgo it
2. the incentive is only applied if the reserve is at or above the artist’s avg sale price to date (or say the avg price of their last three sales)

I think either of these approaches would make this program more effective and reduce sell pressure as it would decrease the $RARE payout and select for collectors with LT conviction.

What other parts of the SR ecosystem could this mechanic be applied to outside of auction reserves?
Is 5% the optimal number if it’s purely distributed in $RARE vs. seller/marketplace cut?-@derekedws

It could be applied to scheduled auctions as well as open bidding that contains a minimum bid price. I think Reserve auctions are a simple place to start to test the waters and then potentially expand from there.

I’m not sure the optimal percentage. I think 5% is a sufficient incentive for collectors while being LT sustainable if it is eventually sourced from the seller’s cut. If we start at 5%, it could be calibrated as needed based on market results.

[EdSRL]

@BEN Would love to have you on the next Town Hall for further discussion. Lots of interest and it would be great to have your thoughts.

[BEN]

Thank you. Thinking I’ll let the team/other dao members take it from here if there is sufficient interest, though I appreciate the invite.