Editor's Note: This article comes fromorange bookEditor's Note: This article comes fromNinos Mansororange book

(ID: chengpishu), author:, Compile: Feng Answer, released with authorization.In a previous article, we joined Algorand's founding team

Chatted about their atypical philosophy of decentralization

, and for many users, they are more concerned about:

Today we bring arrington’s analysis on Algorand. Arrington is a tokenfund founded by the founder of TechCrunch. I believe that after reading it, you will have a better understanding of Algorand’s Dutch auction.

The following is the text, enjoy:

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1 Put Options & Three Strategies

The 90% cost buyback is an important reason to attract many players to participate in this Dutch auction. It is essentially a put option. You have the right to sell it back to the project party one year after you buy the algo.

Call option is a relatively high-level financial tool, which makes algo's Dutch auction completely different from the previous ico and ieo. It is a means of market making and risk hedging. In the medium term, this method will guide users to discover value and help the secondary market find effective prices.

Let's give an example to illustrate:

Today, Bob bought 1,000 algos at a price of $2, which means that 90% of Bob’s risk has been backed up. Before the 90% redemption comes, we can think about A’s possible trading behavior within a year:

1. The market price of algo has always been higher than Bob’s subscription price, so he has two choices: sell algo, make money and leave, or hold algo for a long time

3. Algo has been lower than Bob’s subscription price for a long time. Opportunities similar to the second one also exist. Bob should set a risk line. Once the price falls below 1.8, he should sell it in the market immediately, and then sell it in the market below 90% of the transaction price. The price is to buy back the algo and wait for 90% of the principal to be paid after one year. With this strategy, the previous 10% of the risk is also hedged.

Of course, in the third strategy, there is a situation that the price of Algo has been in a low and stable state for a long time, and a reasonable hedging point may not be found.

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2 Everyone is a market maker

Above we discussed the situation of only one auction, and the possible behavior of most users participating in the auction. However, Algorand’s auction lasts for five years, which means that each auction will have a transaction price.

There will be a lot of Bobs, and they may use the above three strategies to deal with the algo in their hands, which also means that each auction will have an impact on the liquidity of the algo, and the final price of the algo may be based on Weighting for different price models.

This also explains why we say that in addition to public offerings, algo's auction also has the functions of risk hedging and market making.

Imagine that Alice's auction price is $2, and Bob's auction price is $3. What will happen when it is close to 90% payment?

P = 90% x (A1P1+A2P2+...+AnPn)/(A1+A2+...+A2)

Here we take a look at the possible situations after each auction is weighted (for the convenience of calculation, we default to 90% redemption, that is, the auction transaction price is greater than 1 US dollar):

Weighted average price after auction:

where An = the number of algos sold in each auction

Pn = the final transaction price of each auction

If these are included, the final model will be more complicated, but at present, this calculation is a good reference. As for the price of algo, it will be a very interesting thing.

All users participating in the auction are playing a game. This game will theoretically have a minimum price over time, and each participant will have his own price to judge whether the current price is high or low, so In an algo auction, everyone is a market maker.

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3 What kind of user are you

This mechanism will greatly improve the liquidity efficiency of algo, and can operate the market more effectively. Compared with EOS or ETH, it is more like the traditional foreign exchange market. Most currencies have their own independent liquidity instead of following BTC fluctuates with fluctuations.

Notably, Smart Trader will also be involved. If the auction provides real data (actually, the data is on the chain), they can deduce a relatively effective price according to the model, then the deviation of the price constitutes the arbitrage space of algo, and you can imagine that the market may The misjudgment of "price" is just like usdt is not at a 1:1 level for a long time, and "smart trader" will take advantage of the phased panic of usdt for arbitrage.

As you can imagine, these users will use algo's economic model to price algo, track the settlement date and current price of each auction, they will price inefficiency, and eliminate volatility over time. For example: the closer the refund date is, the more likely these models will work, because the demand for arbitrage by speculators will increase.