Front-Running, Smart Contracts, and Candle Auctions: Samuel@web3.foundation

Front-Running, Smart Contracts, and Candle
Auctions*
Samuel Häfner Alistair Stewart
Web3 Foundation, Web3 Foundation
University of St. Gallen
samuel@web3.foundation stewart.al@gmail.com
August 23, 2021
Abstract
Blockchain implementations of auctions have to deal with the problem of

front-running: block production happens at discrete intervals, and anyone can
inspect and react to the incoming bids before they are written on chain. The
presence of smart contracts among bidders, a hallmark of automated blockchain
environments, renders current cryptographic solutions infeasible and essentially
precludes static auctions. Moreover, their transparent nature makes smart con-
tracts susceptible to shill bidding in strategy-proof auctions more generally. As
a remedy, this paper considers an ascending auction with a random ending time
— a so-called candle auction. Time is discrete and in every round, the bidders
bid sequentially and in a fixed order. The bidder with the highest bid at the
end of the decisive round wins the auction and pays her bid. We show that an
appropriately chosen ending time distribution mitigates the main problems of
front-running: low revenue, reduced utility when being front-run, and limited
efficiency.
JEL Classifications: D44, D82, G29, C72.
Keywords: auctions, blockchains, front-running, smart contracts, random

ending time.
* We thank Georg Nöldeke, Marek Pycia, and Haoyuan Zeng for very helpful comments.
Electronic copy available at: https://ssrn.com/abstract=3846363

1 Introduction
This paper considers an ascending auction with a random ending time — a so-called
candle auction. Candle auctions originated in medieval Europe and their name is a
reference to the particular way they were conducted. The auctioneer lit a candle in
sight of all the bidders and accepted increasing bids until the candle went out. The
highest bidder at the moment the candle went out was declared the winner and had to
pay his bid (cf., e.g., Hobson, 1971).
Earliest accounts of this kind of auction date back to 14th century France. In
England, furs were sold in candle auction up to the 18th century (cf. Füllbrunn and
Sadrieh, 2012). Except for the closing auctions on some stock exchanges (Cordi et al.,
2017) and certain procurement auctions in Brazil (Fernandes De Oliveira et al., 2019),
the random ending time is largely out of use today. Google held a patent on a dynamic
auction with a random ending time that expired in 2020 (Patent No. US6665649B1).
Recently, the blockchain interoperability protocols Kusama and Polkadot use a random-
ending auction to determine the set of participating blockchains.
In this paper, we revisit the candle auction and show that its use in a blockchain
environment is no coincidence. Specifically, we show that the random ending time
mitigates some of the issues caused by two hallmarks of automated blockchain envi-
ronments: the presence of front-running opportunities due to latency in block pro-
duction (e.g. Eskandari et al., 2019), and the presence of smart contract bidders (i.e.,
bidders that automate their bidding through publicly visible code that is stored on the
blockchain and executed in a trustless setting).
Front-running opportunities arise in blockchain auctions because any new bid that is
entered into the (peer-to-peer) network securing the blockchain becomes public among
network members almost instantaneously. Yet, a bid counts for the auction’s outcome
only after it is included in a new block. The problem is that new blocks are appended
to the chain at discrete intervals only. Together with the permissionless nature of
blockchain networks this gives tech-savvy bidders an opportunity window to inspect
and react to the bids of other bidders before a new block is produced.
If it comes to static auctions, the problem is quite obvious. For example, in a
first-price auction tech-savvy bidders can inspect other bidders’ bids and outbid them
as they please. The general worry is that this reduces bidders’ willingness to bid or
might even discourage some bidders from participating at all, thus depressing revenue

and hampering efficiency. In second price auctions, spiteful bidders could raise the
payments of the winning bidder at no cost, leading to analogous problems. Moreover,
due to the pseudonymous nature of blockchain environments, the auctioneer himself
could register as a bidder and drive up the winning bidders’ payment (and thus his
own revenue).
A seemingly straightforward remedy to the front-running problem are cryptographic
schemes under which bidders first encrypt their bids and only later, after all bids are
in, reveal them to the auctioneer. Early contributions include Parkes et al. (2008,
2009) who consider both static and dynamic auctions in a non-blockchain context. An
implementation of such a commit-and-verify scheme on the Ethereum blockchain is
described in Galal and Youssef (2018).1 To avoid multiple interactions, Burdges and
Feo (2020) develop so-called time-lock puzzles, allowing bidders to submit encrypted
bids that can be decrypted by the auctioneer after a given amount of time.
While theoretically elegant, such cryptographic solutions do not work when smart
contracts are present among bidders. Smart contracts have become increasingly wide-
spread over the last years, especially in automated settings such as decentralized fi-
nance.2 Further promising use cases of smart contracts include electricity markets
and the internet of things (Wang et al., 2019). For example, in the case of decen-
tralized electricity markets, (end) consumers could automate their bids by means of a
smart contract that takes a reference valuation as input and adapts bidding behavior
according to past consumption or external factors such as weather conditions.
In other words, we can think of smart contracts as bidders just like any other,
although there is a key difference. By construction, a smart contract’s code is publicly
visible to everyone in the network. As a consequence, smart contract bidders cannot
“hide” anything from the other bidders; neither their valuations nor a random seed
that could be used for mixed strategies. So, a smart contract’s actions are perfectly
anticipatable and there is nothing cryptography could do to mitigate this.
The presence of smart contracts, more specifically the common knowledge about
their valuations, gives rise to another issue, which is especially salient in strategy-proof
auctions. Optimality requires a reserve price of at least the highest valuation among
all smart contract bidders. Yet, if the auctioneer sets such a reserve price, the smart
1
Usually, bidders have to lock up the maximum amount of funds they are prepared to bid prior to
the auction. Because these fund are publicly visible on the blockchain, they may be used for signaling.
See Schlegel and Mamageishvili (2021) for a game theoretic analysis of such a scheme.
2
See, e.g., https://www.ibm.com/topics/smart-contracts.

contracts’ profits are equal to zero. This implies that, if there is even the tiniest cost
associated with deploying a smart contract, then smart contracts never participate in
the first place. On the other hand, if the auctioneer sets a lower reserve price, then he
cannot credibly commit not to shill bid. Indeed, because the payment of the winning
bidder only depends on the bids of the other bidders (cf. Nisan, 2007, for an analysis
of the single-good case), it always pays the auctioneer to register (pseudonymous) shill
bidders after learning the smart contracts’ valuations from their code and to drive up
the winning smart contracts’ payment. That is, when smart contracts are present then
standard strategy-proof auctions (both static and dynamic) generally fail to be credible
(in the sense of Akbarpour and Li, 2020).3
To sum up, both static as well as strategy-proof auctions have severe practical limi-
tations in automated blockchain environments. The candle auction is neither strategy-
proof nor static. Motivated by the discrete and incremental structure of the blockchain,
we model the auction to proceed over several rounds. Each round corresponds to a
new block and in every round, the bidders are free to submit new, increasing bids. The
auctioneer can commit to an ending time distribution over a finite number of rounds,
and after every round he announces whether the auction proceeds by one more round
or not.4 The bidder with the highest bid in the decisive round obtains the object and
pays her bid.
Our main analysis, starting with Section 3, focuses on the incentive effects of the
random-termination rule in the presence of front-running opportunities. (We provide
a brief discussion of how to think of shill bidding in the model in Section 6.) In order
to delineate the effects of front running as clearly as possible, we assume that there are
only two bidders, one of which is being front-run by the other one.5 Before bidding
in any of the rounds, the front-running bidder observes the bid of the disadvantaged
bidder whom he can then outbid by submitting a weakly higher bid. The front-running
bidder has a private valuation while the valuation of the disadvantaged (smart-contract)
bidder is publicly known. Our main insight is that an appropriately chosen ending time
distribution mitigates the main problems of front-running: low revenue, reduced utility
3
For example, in the ascending clock auction, a possible shill bidding strategy would be to register
a shill bidder which stays in the race until some moments before the clock hits the valuation of the
highest-valueing smart contract.
4
In blokchain environments, commitment to a random device is usually acheived by means of
so-called verifiable random functions (Micali et al., 1999).
5
That is, we abstract from the issues that arise when several bidders try to front-run each other,
which is likely to happen in reality.

for the player being front-run, and limited efficiency.
In our model, the extreme case in which the auction ends with probability one in
the last possible round corresponds to a hard-closing rule. In such a case, neither of
the players submits any bids except in the last round. Intuitively, the front-running
player would never bid after the disadvantaged player in any of the rounds before the
last round, because that would at least partially reveal her type. But then it is optimal
for the disadvantaged player to never bid except for the last round, either. In the last
round, the front-running player optimally equalizes the bid of the other player only if
having a higher valuation. Consequently, the disadvantaged player trades off a higher
payment in case of winning with the probability of submitting a bid that is higher than
her opponent’s valuation. This outcome is independent of the length of the auction;
i.e., it also corresponds to the equilibrium outcome in the one-shot auction.
In the intermediate case of a random-closing rule, the incentives are quite different.
If the probability of the current round being decisive is sufficiently high relative to
later rounds, then the front-running player does have an incentive to equalize the
current highest bid. This in turn gives the disadvantaged player an incentive to explore
the valuation of the front-running bidder by raising her bid from round to round.
Specifically, we show that whenever the hazard rate of the ending time distribution is
increasing and the ending probabilities are decreasing, then such strategies are part of
a Perfect Bayes equilibrium.6
Among all decreasing ending probabilities, the uniform distribution turns out to
play an important role. First, we show that, for any fixed number of rounds, the
equilibrium utility of the disadvantaged player and expected revenue are maximized
when the ending time distribution is uniform. Second we show that, if we fix the ending
time to be uniform and let the number of periods grow large, then the utility of the
disadvantaged player and total revenue approach those in the truthful equilibrium of
the second-price auction. Moreover, the good is allocated efficiently.7
The remainder of the paper is structured as follows. The next section discusses the
relevant literature. Section 3 presents the model and defines equilibrium. Section 4
analyzes a two-period setup, which allows us to derive the main intuitions regarding
6
For the case of two rounds, we can also show that, if the ending probabilities increase from one
round to the next, then except for the hard-closing rule no Perfect Bayes equilibrium exists.
7
Increasing the number of rounds does not necessarily mean to have an ever longer auction. In
fact, we assume no discounting and see our limit results as an approximation (and given the technical
limits on the speed of block production: idealization) of an auction in which bids are continuously
entered and written onto the chain.

bidder incentives. Section 5 then looks at longer auctions, derives the optimality of
the uniform ending time distribution, and establishes our main limit results. The last
section concludes. All proofs are relegated to an appendix.
2 Related Literature
Historically, front-running refers to a (largely prohibited) trading practice in tradi-
tional financial markets that exploits the knowledge of large, upcoming trades (and
thus: price movements) by other market participants. Such behavior has long been
recognized to destabilize prices and impair liquidity (De Long et al., 1990; Brunnermeier
and Pedersen, 2005). Technical development, especially the advent of high-frequency
trading, has aggravated this problem as traders have started to compete on execution
time rather than prices (Budish et al., 2015).
At least since the advent of decentralized finance protocols, this kind of front-
running has also been recognized as a major issue in blockchain (financial) markets.
Here, front-running can be done by any market participant because the information
about upcoming trades is public information among network nodes and the network is
permissionless and pseudonymous. The technical details and the scope of such front-
running attacks are described, e.g, in Daian et al. (2019) and Eskandari et al. (2019).
Our analysis shows how certain issues with front-running can be mitigated through
design choices, at least when it comes to auctions on blockchains.
Technically, our model can be seen as a multi-stage variant of an auction in which
one bidder has a right of first refusal (Lee, 2008; Arozamena and Weinschelbaum,
2009; Burguet and Perry, 2009; Choi, 2009; Doran, 2018). The focus of these papers
is on agreements between the seller and one of the bidders that receives the right to
buy the good at the highest bid of her competitors. The main results are that in
symmetric environments such agreements typically come at the expense of the seller
but nevertheless increase the joint surplus of the seller and preferred buyer (Burguet
and Perry, 2009; Choi, 2009). This need not be the case in asymmetric settings, where
the seller might gain, too, because the right of first refusal levels the playing field
among the bidders and thus increases revenue (Lee, 2008; Doran, 2018). The focus of
our paper is different because it takes the right of first refusal as a given and asks for
a design that remedies some of its deficiencies.
Our paper also contributes to the literature on dynamic auctions, which primar-

ily analyzes continuous-time models where bidders receive bidding opportunities at
random times. This literature includes Hopenhayn and Saeedi (2015) who consider
a first-price auction, as well as Kapor and Moroni (2016) and Ambrus et al. (2018)
who consider second-price auctions. One of the goals of this literature is to rationalize
sniping; i.e., the strategy of bidding very late in the auction (cf. Roth and Ockenfels,
2002, for a first empirical analysis of this practice). Kapor and Moroni (2016) obtain
sniping equilibria for interdependent values when shill-bidders are present and Ambrus
et al. (2018) construct incremental-bidding equilibria for the case of common values
and complete information. The candle format naturally reduces the incentives to snipe,
because it pressures bidders into submitting bids early on in the auction.
The only paper that we are aware of to also study a dynamic single-good auction
with a random ending time is Füllbrunn and Sadrieh (2012). In contrast to our analysis,
Füllbrunn and Sadrieh (2012) consider the second-price payment rule and assume that
bidders submit their bids simultaneously in every round. In the second-price auction,
it is a weakly dominant strategy to bid the true value whenever there is a positive
probability that the current round will be the terminal round. Their experimental
evidence largely confirms such a prediction.
3 Model
There is one indivisible good on auction that has no value to the seller. Time is discrete
and indexed by t = 1, 2, .... There are two players i = A, B. Each player has a valuation
vi ∈ [0, 1] for the good. The valuation of player A, vA , is common knowledge whereas
the valuation of player B, vB , is drawn from the uniform distribution on [0, 1] and only
privately known to player B. In every round t, the players are allowed to submit a
bid bit ≥ 0. If bidder i decides not to bid, then we set bit = ∅. Bids are submitted
sequentially, with bidder A moving first and bidder B moving second.
The auction has a random end date, T , which has finite support {1, 2, ..., T̄ }. The
auctioneer commits to a distribution over the end dates and after every round (i.e.,
after bidder B submitted her bid) he announces whether the auction ends in that round
or not. For notational convenience, we work with conditional ending probabilities. We
write pt for the commonly known probability that the auction ends in t provided it has
not ended before; i.e., pt = P r{T = t|T ≥ t}. These probabilities are collected in the
vector p = (p1 , p2 , ..., pT̄ ) with pT̄ = 1.

The payment rule is first price. The winning bid in round t is the highest bid
submitted by either of two bidders before and including round t. In case of a tie, we
assume that player B holds the winning bid.8 The current winning bid is publicly
revealed at the end of each round. Whoever holds the winning bid at the end of the
decisive round T wins the object and pays the winning bid. If neither of the players
have bid up to round T , then player B obtains the good and pays nothing.
Both bidders have to either strictly increase the winning bid at the beginning of
a round or refrain from bidding. Before taking an action, bidder B can observe the
whole history of play including the bid of bidder A in that round. Bidder A, on the
other hand, sees a bid of bidder B only if that bid makes B the new winning bidder
in the respective round and observes an empty bid otherwise. This captures the idea
that bidder B is the blockchain expert who can inspect the whole blockchain as well as
the upcoming bids. Bidder A can be interpreted as a regular bidder who has limited
technical expertise and only learns the current highest bid from the auctioneer, or as
a smart contract that can condition its bids only on its own history of play and on the
public information provided by the auctioneer.
Consequently, let hAt = {bA1 , bA2 , ..., bAt−1 } collect all the bids submitted by bidder
A up to period t − 1. More, let hBt = {b̂B1 , b̂B2 , ..., b̂Bt−1 } be all the visible bids of
player B up to period t − 1. That is, b̂Bτ = bBτ if player A held the winning bid in
round τ − 1 and player B holds it in round τ , and b̂Bτ = ∅ in any other case. Then,
the list ht ≡ {hAt , hBt } corresponds to the payoff relevant history of play for player A
when submitting her bid. Further, the list h+
t ≡ {hAt+1 , hBt } corresponds to the payoff
relevant history of play that player B observes when submitting her bid. Throughout
the following we use sup h to refer to the highest value in a generic history h, ignoring
entries that are equal to ∅. Further, we write h = ∅ if all entries in h are empty and
take sup ∅ = 0.
Due to the sequential structure and the tie-breaking rule it is without loss to
only consider pure strategies. For player i a feasible strategy is a finite list βi =
{βi1 , βi2 , ..., βiT̄ } of functions βit that map the history of play and possibly her private
valuation into a feasible bid. Specifically, the bid function of player A in round t after
any feasible history ht has to satisfy βAt (ht ) ∈ (sup ht , ∞) ∪ {∅}. Analogously, the bid
function of player B with value vB in round t after any feasible history h+
t has to satisfy
8
As it is standard, we impose this assumption to guarantee that player B always has a best-
response.

βBt (h+
t , vB ) ∈ (sup ht , ∞) ∪ {∅}.
Finally, we write Ft (x; ht ) for the probability that player A attaches to player B
having valuation x or less in round t after history ht . These beliefs are collected in the
list F = {F1 , F2 , ..., FT̄ }. The equilibrium concept is Perfect Bayes Equilibrium.
Definition 1 (Perfect Bayes Equilibrium, PBE). A Perfect Bayes Equilibrium (PBE)

is a triple {βA∗ , βB∗ , F ∗ } such that:
(a) βB∗ is optimal given βA∗ for every period t, every history h+
t , and every value vB .
(b) βA∗ optimal given βB∗ and beliefs F ∗ for every round t and every history ht .
(c) The beliefs F ∗ are consistent with Bayes rule whenever possible.
This definition of Perfect Bayes equilibrium is standard and follows Fudenberg and
Tirole (1991). Parts (a) and (b) require the strategies to be mutually optimal given
the beliefs and Part (c) requires the beliefs to be consistent. Consistency is required
whenever feasible; i.e., whenever the continuation strategies after a given history allow
to apply Bayes’ rule. This in particular means that beliefs have to be consistent after
any action by player A and after any on-path action by player B. After actions by
player B that are not to be expected from the continuation strategies we can choose
beliefs arbitrarily.
4 The Two-Period Case

We begin our analysis with the two-period case. This will give us first insights into the
incentive effects of the random ending time. For the following, let p ≡ p1 ∈ [0, 1] be
the probability that the auction ends in the first of the two periods.
4.1 Equilibrium
For reasons to become clear shortly, our analysis focuses on equilibria that involve
player B choosing from a class of strategies we call match in the following.

Definition 2 (Match). We say that bidder B plays match, if for all t it holds



 sup h+
t if sup ht < sup h+
t < vB

∗ +
βBt (ht , vB ) ∈ sup h+t ∪∅ if sup ht < sup h+
t = vB
(1)


(sup h , sup h+ ) ∪ ∅

else.
t t
Whenever the current highest bid is below her valuation and was not submitted by
herself, player B equalizes that bid. If her valuation equals the current highest bid then
she either equalizes the current highest bid or refrains from bidding. In any other case,
she either refrains from bidding or submits any feasible yet non-winning bid. Were
the auction to end in the respective period, then such a strategy would make her the
winner in the first case, leave her with no utility in the second case, and leave her as
the loser in the third case.
Whether or not such a strategy is optimal of course depends on the reaction of
player A, which in turn is determined by the inference that player A draws from the
behavior of player B. If player B plays match, then player A, upon submitting bA1 in
the first round, learns that vB ≥ bA1 whenever player B equalizes her bid in the first
round and she learns that vB < bA1 whenever player B does not bid. Because player
B’s strategy is pure, the posterior of player A remains uniform.
Consequently, we can completely describe the strategy of player A by a vector
a = (a1 , a2 ) meaning that she will submit a bid bA1 = a1 in the first round, bids
bA2 = a2 in the second round if player B equalizes her first-period bid, and refrains
from bidding in the second round if player B does not equalize her first-period bid
(because she knows player B’s valuation to lie below bA1 in that case). Then, we can
write the utility of player 2 in t = 2 conditional on the auction not having ended before
as
a2 − a1
U2 (a) = [vA − a2 ] ,
1 − a1
and the utility in round t = 1 as
U1 (a) = a1 [vA − a1 ] + (1 − p)(a2 − a1 )[vA − a2 ]. (2)
In the second period, player A wins if a2 ≥ vB and obtains vA − a2 . In the first

period, player A upon submitting a1 wins for sure in one of the two rounds if a1 ≥ vB
and anticipates winning in the second round provided that round is decisive and a2 ≥
10

vB ≥ a1 . Then, optimality of a2 in t = 2 requires
vA − 2a2 + a1 = 0, (3)
and optimality of a1 in t = 1 requires [vA −2a1 ]−(1−p)[vA −a2 ] = 0. The two equalities
can be solved and the a’s can be written as functions of p,
1+p 2+p
a∗1 (p) = vA and a∗2 (p) = vA . (4)
3+p 3+p
Clearly, both a∗1 (p) and a∗2 (p) are increasing in p. That is, the higher the probability
of the first round being decisive the more aggressive player A bids. Intuitively, the
higher the probability of the first round being decisive the higher is the marginal
return from bidding in that round. Upon seeing player B equalize her bid, optimality
then also requires to bid more in the second round.
Next, we turn to player B. It is clear that in the last round, t = 2, player B
optimally matches the bid of player A whenever her valuation is higher and refrains
from bidding otherwise. In round t = 1, bidder B has two types of deviations that we
need to rule out. The first deviation is to refrain from bidding in t = 1 despite having
a higher valuation than a∗1 (p) and then equalizing a∗1 (p) in the second round. Doing
this yields a payoff of
(1 − p)[vB − a∗1 (p)].
On the other hand, matching the bid of player A in both periods whenever having a
higher valuation yields
p[vB − a∗1 (p)] + (1 − p) max{vB − a∗2 (p), 0}.
Hence, matching the bid of player A in both periods is the (weakly) preferred action
for all vB ≥ a∗1 (p) if and only if
(1 − p) max{vB − a∗2 (p), 0} ≥ (1 − 2p)[vB − a∗1 (p)], ∀vB ∈ [a∗1 (p), 1]. (5)
It is clear that whenever p ≥ 1/2 then above inequality holds for all vB ≥ a∗1 (p).
Yet, for p < 1/2 above inequality is violated for all vB ∈ [a∗1 (p), a∗2 (p)]. This gives us
that matching the current highest bid when having a higher valuation is better than
refraining from bidding in t = 1 and rejoining in t = 2 for all vB if and only if p ≥ 1/2.
11

The second type of deviation consists in bidding strictly higher than the bid of
player A in round t = 1. Excluding this type of deviation requires to specify off-path
beliefs for player A such that equalizing the first-round bid of player A is always the
preferred choice for player B. As we will see, the following assumption yields what we
require both for the two-period model in this section and for the longer auctions that
we analyze later on.
Assumption 1 (Off-Path Beliefs). Let {βA∗ , βB∗ } be part of a PBE, and let H̄t be the
set of histories that have zero probability under {βA∗ , βB∗ }. Pick any t ≥ 2 and ht ∈ H̄t .
(a) If sup hAt ≤ sup hBt , then player A believes that vB ∼ U [sup hBt , 1].
(b) If sup hAt > sup hBt , then player A believes that vB ∼ U [sup hBt , sup hAt ].
Part (a) implies that whenever player B strictly outbids the highest bid of player
A in a round, then the highest submitted bid of player B serves as the lower bound for
the (uniform) beliefs of player A in the following round. Part (b) is the counterpart to
(a) and states that, if player A should be the holder of the highest bid at the beginning
of a round, then she believes the value of player B to lie between her highest bid and
the highest bid of player B.
As the proof to our first result shows, Assumption 1 immediately implies that the
postulated strategy of player A in the following proposition is optimal for any feasible
history of play. In order to show existence, it then only remains to show that player B
never wants to submit another bid in t = 1 than that prescribed by match. This gives
the first part of the following statement:
Proposition 1. Suppose p ≥ 1/2. Then, there is a PBE in which player B plays

match and player A’s strategy is as follows. In t = 1, submit bA1 = a∗1 (p). In t = 2,
submit 
 vA +b̂B1 if vA > b̂B1 ≥ bA1
2
bA2 =
∅ if b̂B1 = ∅ or b̂B1 ≥ vA ,
where b̂B1 is the bid of player B as observed by player A; i.e., b̂B1 = bB1 if bB1 ≥ bA1
and b̂B1 = ∅ otherwise. For p > 1/2, expected utility of player A, expected welfare, and
expected revenue is the same in any other PBE that might exist.
Proving the second part of the statement requires some work and involves showing
that player B types never want to separate for the relevant valuations. The second part
12

implies that it is without loss to focus on the equilibrium described in the statement
and thus allows for the comparative statics of p further below.
Before we turn to the comparative statics, though, it remains the question what
kind of equilibria exist when p < 1/2. The next result asserts that no PBE exists when
p ∈ (0, 1/2). The strategy of the proof is to show that there are histories for which no
mutually optimal continuation strategies together with consistent beliefs exist.
Proposition 2. In case p ∈ (0, 1/2), there does not exist a PBE.
An intuition for this result can be obtained from (5): Suppose player A refrains
from bidding whenever her first-round bid is not equalized. Then, it is a best response
for some types vB just above the first-round bid of player A to refrain from bidding
in t = 1. Taking this into account, it is then optimal for bidder A to raise her bid
whenever her first-period bid was sufficiently low. However, whenever bidder A raises
her bid after player B refrains from bidding, player B has a best response to which
not raising her bid is again a best response for player A. And this gives us the desired
contradiction.
Remark 1. The result does not imply that there are no Nash equilibria when p ∈
(0, 1/2). Indeed, there is a continuum of Nash equilibria in which player B (non-
credibly) threatens to equalize any bid of player A in t = 1 if the bid is below a certain
threshold. In Appendix C we explicitly construct and briefly discuss such an equilibrium.
Remark 2. If p = 0, then we are in a dynamic auction with a hard-closing rule. For

this game, it is straightforward to establish that it is part of a PBE for both players not
to bid in the first round, for player A to bid vA /2 in the second round, and for player
B to equalize that bid whenever vB ≥ vA /2. Unsurprisingly, play in the second round
when p = 0 corresponds to play in the first round when p = 1.
Remark 3. The (Perfect Bayes) equilibrium strategies that we derived for one-sided
incomplete information in Proposition 1 are analogous to the equilibrium strategies
that would obtain in a corresponding game with two-sided incomplete information (i.e.,
player A’s valuation is also private information). The reason is as follows: whenever
player B plays match, then player A would not have an incentive not to reveal her type
in the first round. Conversely, playing match remains a best response for player B.
13

4.2 Utility, Revenue, and Efficiency
We are now interested how the utility of the disadvantaged player A, total revenue,
and social welfare change in p. Given that a PBE exists if and only if p ∈ [1/2, 1], we
restrict attention to this parameter range.
Let us consider the utility of player A first. As seen above, the bids of bidder A in
both rounds increase in p. So, an increase in p induces a higher winning probability in
either of the rounds, but a lower payoff in case of winning. As it turns out, the second
effect always dominates. To see this, observe from (2) and (4) that the equilibrium
utility of player A can be written as
vA2
U ∗ (p) = ,
3+p
which decreases in p. That is, we can make bidder A better off by moving away from a
hard-closing rule with p = 1. In fact, bidder A’s utility is maximized under a uniform
ending probability, p = 1/2.
An analogous conclusion holds with respect to total revenue. Such is not a priori
clear, because increasing p makes bidder A more aggressive and thus revenue might be
expected to increase. To see why this is not the case, consider the following expression
for total revenue,
R∗ (p) = a∗1 (p)2 + (1 − a∗1 (p))(pa∗1 (p) + (1 − p)a∗2 (p)). (6)
Expected revenue is equal to a∗1 (p) in case vB ≤ a∗1 (p) and equal to pa∗1 (p) + (1 − p)a∗2 (p)
in case vB > a∗1 (p). That is, revenue depends on a∗2 (p) only if the second round is
decisive. Since a∗1 (p) increases in p, the probability that vB > a∗1 (p) decreases in p.
That is, having a higher probability that the first round is decisive not only makes
bidders more aggressive, but it also reduces the weight on the higher bid in the second
round. This second effect always dominates, as the following result shows.
Proposition 3. Revenue R∗ (p) decreases in p.
In conclusion, a random-closing rule both makes the auction more attractive for
the bidder being front-run and it yields more revenue than a hard-closing rule. In
particular, the expected utility of bidder A at p = 1 is vA2 /4 whereas it is 2vA2 /7 at
p = 1/2. In any case, it is lower than the expected utility in the truthful bidding
14

equilibrium of the second-price auction auction, vA2 /2. One of the insights in the
following is that we can get player A’s utility arbitrarily close to that value when we
allow for more than two number of rounds.
Last, we turn to the efficiency effects of the random closing rule. To this end, let
∗
W (p) be social welfare; i.e.,
aZ∗1 (p) aZ∗2 (p) Z1

∗
W (p) = vA dx + [px + (1 − p)vA ]dx + xdx.
0 a∗1 (p) a∗2 (p)
If the value of player B is below a∗1 (p) then player A wins, if the value is between a∗1 (p)
and a∗2 (p) then player B wins if and only if the first round was decisive, and if the value
is above a∗2 (p), then player B wins with certainty.
Proposition 4. Social welfare W ∗ (p) decreases in p. Moreover, for every p ∈ [1/2, 1],
there is v̄ ∈ (0, 1) such that W ∗ (p) ≥ vA for all vA ≤ v̄.
Ideally an auction allocates the good to the bidder with the higher valuation. This
will not necessarily happen in the candle auction with front-running, because bidder
A shades his bids in every round and thus, given a round is decisive, player B wins
whenever having a higher valuation than that round’s bid. That is, the front-running
player sometimes wins even though she has a lower valuation. Proposition 4 establishes
that this inefficiency is the worse the higher p. Again, this is not a foregone conclusion,
considering that bid shading on the part of bidder A decreases in p. Yet, as p increases,
so does the probability that the first round is decisive in which bid shading is higher.
The second part of the statement implies that whenever welfare is a sufficiently
strong criterion for the auctioneer and the valuation of player A is sufficiently low, then
an auction is preferred over a direct sale to player A. This result is quite intuitive: For
values of vA close to one, it is always better to give the good to player A, considering
that the expected value of player B is one half. For values of vA close to zero the
reverse is true.
5 Longer Auctions
We now turn to the analysis of the auction with an arbitrary length, T̄ ≥ 2. In view
of the results from Propositions 1 and 2, we focus on PBEs in which player B plays
15

match according to Definition 2.
5.1 Equilibrium
We aim to establish that the following candidate beliefs F ∗ are part of a PBE involving
bidder B to play match.
Definition 3 (Candidate Belief F ∗ ). Fix a round t = 1, 2, ... and a feasible history ht ,

then:
(a) In the first round, t = 1, the belief of player A is given by



 0 if x < 0

Ft∗ (x; ht ) = x if x ∈ [0, 1] (7)


1 else.

(b) After the first round, t ≥ 2, the following holds:
(b.i) If sup hAt ≤ sup hBt , then the belief of player A is given by



 0 if x < sup hBt

 x − sup h
Bt
Ft∗ (x; ht ) = if x ∈ [sup hBt , 1) (8)

 1 − sup hBt


1 else.
(b.ii) If sup hAt > sup hBt , then the belief of player A is given by



 0 if x < sup hBt

 x − sup h
Bt
Ft∗ (x; ht ) = if x ∈ [sup hBt , sup hAt ) (9)

 sup hAt − sup hBt


1 else.
Point (a) just reiterates that the prior is uniform. For any equilibrium in which
player B plays match, the beliefs F ∗ described under point (b) are consistent on the
equilibrium path of play and thus satisfy Point (c) in Definition 1. Moreover, the beliefs
comply with Assumption 1 on off-path beliefs that we have used in the last section.
Given these candidate beliefs, we first determine the best response of player A
to player B playing match. To do so, consider a round t ≥ 1 and suppose player
16

B (i) to hold the current winning bid and (ii) to play match in all future rounds.
We may then characterize player A’s planned future course of action with a vector
a = (at , at+1 , ..., aT̄ ) such that: In all future rounds τ ≥ t, submit a bid bAτ = aτ
whenever player B has equalized the winning bid in round τ − 1 and submit a bid
bBτ = ∅ if not. Then, the expected utility Ut (a) of player A in round t can be written
as
Ut (a) = Ft∗ (at ; ht )[vA − at ] + (1 − Ft∗ (at ; ht ))(1 − pt )Ut+1 (a). (10)
With probability Ft∗ (at ; ht ) player B will not equalize bAt = at in which case player A
wins for sure in one of the remaining rounds. If, on the other hand, player B equalizes
the bid of player A then the game continues, provided the auctioneer does not end it
in the current period.
The proof to the following statement uses the recursive definition of Ut (a) in (10)
together with Definition 3 of Ft∗ to provide a characterization of the optimal plan of
future actions a = (at , at+1 , ..., aT̄ ) in a round t and, thus, of the optimal strategy of
player B.
Lemma 1 (Best Response of Player A). Fix a round t and any history ht . Suppose
player B plays match in round t and thereafter. Let a = (at , at+1 , ..., aT̄ ) be recursively
defined by aτ = fτ vA + (1 − fτ )aτ −1 with initial condition at−1 = min{vA , sup hBt } and
f = (ft , ..., fT̄ ) being part of the unique solution (f, Û ) ∈ [0, 1]2(T̄ −t+1) to
Ûτ = (1 − fτ )fτ + (1 − fτ )2 (1 − pτ )Ûτ +1 (11)

1
fτ = 1 − (12)
2(1 − (1 − pτ )Ûτ +1 )
for τ = t, t + 1, ..., T̄ with ÛT̄ +1 = 0. Then, it is optimal for player A to follow


∗
a
t if sup hAt ≤ sup hBt < vA
βAt (ht ) = (13)
∅ else.
The main insight used in the proof is that, to determine the optimal course of future
1−at−1
actions for player A, it is possible to scale Ut (a) from (10) by a factor (vA −at−1 )2
, which
yields (11). Equality (12) is then the associated first-order condition, which is both
sufficient and necessary for optimality.
The characterization in (11)–(12) reveals that the optimal f only depends on the
17

ending probabilities pt . By construction, this implies that an increase in the initial
condition at−1 yields an increase in all elements of the optimal list a — an observation
that will be important later on and is thus stated as a direct corollary of Lemma 1.
Corollary 1 (Monotonicity of a in the initial condition). Take any t ∈ {t, ..., T̄ } and
let f = (ft , ..., fT̄ ) be part of the unique solution (f, Û ) to (11)–(12). Suppose the
vectors a = (at , at+1 , ..., aT̄ ) and a0 = (a0t , a0t+1 , ..., a0T̄ ) solve aτ = fτ vA + (1 − fτ )aτ −1
and a0τ = fτ vA + (1 − fτ )a0τ −1 with initial conditions at−1 and a0t−1 , respectively. If
at−1 > a0t−1 then aτ > a0τ for all τ = {t, t + 1, ..., T̄ }.
Next, we observe that we can leverage (11)–(12) to obtain a recursive formulation

of f , namely
1
1 − ft = (14)
2 − (1 − pt )(1 − ft+1 )
with fT̄ = 21 . As the proof to the next lemma shows, this formulation allows us to
establish that f is monotone in t whenever the hazard rate pt is increasing.
√
pt
Lemma 2. If pt ≥ pt−1 for all t ∈ {2, ..., T̄ }, then ft+1 ≥ ft ≥ ft∗ , where ft∗ = √ .
1+ pt
With Corollary 1 and Lemma 2 at hand, we can now turn to the optimal choice of
player B. To determine the best response of player B, observe that the utility Vt (a)
of player B with valuation vB in round t (conditional on the auction not having ended
before) when: (i) she plays match in the current and all future rounds and (ii) player
A plays according to a plan of actions a = (at , ..., aT̄ ) as outlined in Lemma 1, is
Vt (a) = pt max{vB − at , 0} + (1 − pt )Vt+1 (a) (15)
with VT̄ +1 (a) = 0. For the following arguments, we observe that because T̄ is finite,
the one-shot deviation principle applies (Fudenberg and Tirole, 1991). That is, it is
necessary and sufficient for match to be optimal if player B does not gain by deviating
in one single period.
Consider again Definition 2 of the class of match strategies. It is clear that player
B is indifferent between all the possible choices in the second and third case in (1).
Thus, as in the example, we have to consider two types of deviations. First, we consider
a deviation in which bidder B submits a bid that is higher than the bid of player A
in that round. If bidder B bids bBt > at in round t, then player A will change her
planned actions to some â = (ât+1 , ât+2 , ..., âT̄ ) satisfying âτ = fτ vA + (1 − fτ )âτ −1 for
18

all τ ≥ t + 1 with initial condition ât = bBt . Such a deviation is not profitable if
Vt (a) − [pt [vB − bBt ] + (1 − pt )Vt+1 (â)] ≥ 0.
Plugging in Vt (a) from (15) this inequality is equivalent to
pt [bBt − at ] + (1 − pt )[Vt+1 (a) − Vt+1 (â)] ≥ 0. (16)
In view of (15), Corollary 1 implies that the difference in continuation utility, Vt+1 (a)−
Vt+1 (â), is weakly positive so that (16) always holds. That is, bidding above the bid
of bidder A is never profitable. The reason is that this would make player A just bid
more aggressively in future rounds, which is detrimental to B’s interests.
Hence, we need to rule out that there is a profitable deviation in which bidder B
refrains from bidding for a round and continues to play match afterward. In that case,
player A changes his plan of action once bidder B rejoins. Specifically, if player B
submits an empty bid in t and resumes with playing match in round t + 1, player A
will adapt his planned course of action in t + 2 to some plan â = (ât+2 , ât+3 , ..., âT̄ )
satisfying âτ = fτ vA + (1 − fτ )âτ −1 for all τ ≥ t + 2 with initial condition ât+1 = at .
Consequently, such a deviation is not profitable if
Vt (a) − (1 − pt ) [pt+1 [vB − at ] + (1 − pt+1 )Vt+2 (â)] ≥ 0. (17)
The proof to the following lemma shows that under the condition given in the
statement the inequality in (17) always holds.
Lemma 3. Suppose we have
(1 − pt )pt+1 ≤ pt ≤ pt+1 for all t ∈ {1, ..., T̄ − 1} (18)
Then, playing match is a best reply to player A’s strategy βA∗ described in Lemma 1.
Lemma 1 and Lemma 3 together imply existence of an equilibrium. We can thus

state without further proof.
Proposition 5. Suppose (18) holds. Then, a PBE {βA∗ , βB∗ , F ∗ } exists in which bid-
der A plays βA∗ according to Lemma 1, bidder B’s strategy βB∗ is match as defined in
Definition 2, and the beliefs F ∗ satisfy Definition 3.
19

Vector f = (f1, f2, . . . , fT) with T = 50 Vector a = (a1, a2, . . . , aT) with T = 50
0.50 0.8
0.45 0.7
0.40 0.6
0.35 0.5
at
ft
0.30
0.4
0.25
0.3
0.20
0.2
0.15
0.1
0 10 20 30 40 50 0 10 20 30 40 50
t t
Figure 1: The left panel shows the values of the vector f = (f1 , ..., fT̄ ) as defined in
Lemma 1 for a uniform ending-time distribution and T̄ = 50. The right panel shows
the vector a = (a1 , ..., aT̄ ) where at = ft vA + (1 − ft )at−1 with a0 = 0 and vA = 0.8. The
graph suggests that, after an initial phase of exploring the value of bidder B, bidder A
bids relatively close to her valuation.
The first inequality in Condition (18) corresponds to the requirement that the un-
conditional ending probability, P r{T = t}, decreases in t. The second inequality states
that the hazard rate of the ending time probability distribution increases in t. These
two conditions play different roles for existence. The second inequality ensures that ft
increases in t (Lemma 2). The first inequality in (18), together with an increasing ft ,
can then be used to show that playing match is indeed a best response for player B
(cf. the proof to Lemma 3).
Figure 1 exemplarily shows a vector f (left panel) in conjunction with the cor-
responding vector a (right panel). In the plots, we used T̄ = 50, a uniform ending
probability distribution (i.e., Pr{T = t} = 1/T̄ for all t ≤ T̄ ), and vA = 0.8. If player
B keeps equalizing the bids of player A, then the behavior of player A shows an initial
exploration phase of player B’s value, in which she first bids low but then escalates
her bidding quickly if B remains in the auction. After that phase, the bids of player A
remain close to her valuation. As we show in Appendix B, this holds more generically.
In particular, for all t < T̄ we have at − at−1 > at+1 − at . Moreover, it is one of the
findings in Section 5.3 below that, as T̄ grows large, this exploration phase becomes
shorter and shorter relative to the phase in which bidder A bids close to her valuation.
While we cannot establish an equilibrium uniqueness result akin to that for the
two-period case, we can show that from the perspective of player A there is no PBE
that is worse. Formally,
20

Proposition 6. Suppose (18) holds. There is no PBE that yields lower expected utility
for bidder A than the PBE described in Proposition 5 does.
We view this result as important because it establishes that the equilibrium delin-
eated in Proposition 5 and further analyzed below yields a lower bound on the utility
of the disadvantaged player in any possible PBE.
5.2 Utility of Player A and Total Revenue

We now turn to the question of how the utility of player A and total revenue depend
on the ending-time distribution. So, let q = (q1 , ..., qT̄ ) ∈ [0, 1]T̄ denote a probability
distribution over ending times; i.e., qt = P r{T = t}. Let Q = {q ∈ [0, 1]T̄ : T̄t=1 qt =
P
1} be the set of all ending time probability distributions. Then,

( )
(1) ∃q ∈ Q s.t. pt = P qt for all t ∈ {1, ..., T̄ },
τ ≥t qt
P≡ (p1 , ..., pT̄ ) ∈ [0, 1]T̄ :
(2) (1 − pt )pt+1 ≤ pt ≤ pt+1 for all t ∈ {1, ..., T̄ − 1}
is the set of all hazard rates such that an equilibrium of the sort described in Proposition
5 exists.
We begin by discussing the utility of player A. As observed in the proof to Lemma
2, we can use (11) and (14) to express equilibrium utility of player A, U ∗ = Û1 vA2 , as
a function of the ending probabilities p as follows:
vA2 1
U∗ = (1 − f1 ), where 1 − ft = (19)
2 2 − (1 − pt )(1 − ft+1 )
with fT̄ = 1/2. Inspection of (19) then immediately yields the following result.
Proposition 7. The hazard rate p∗ ∈ P that maximizes the equilibrium utility of player
A, U ∗ , satisfies (1 − p∗t )p∗t+1 = p∗t for all t ∈ {1, ..., T̄ − 1}. This corresponds to the
uniform ending-time distribution, qt∗ = 1/T̄ for all t.
Next, we turn to equilibrium revenue. Let Rt be expected revenue provided to

auction has not ended before round t. Rt satisfies the recursion

at − at−1 1 − at
Rt = at pt + (1 − pt ) + (1 − pt ) Rt+1 .
1 − at−1 1 − at−1
The expected revenue from round t onward (provided the auction has not ended before)
21

is at if the round ends in t or, if not, the valuation of the bidder B is between at−1 and
at . To this we have to add what the auctioneer can expect in case the auction does not
end in t and the valuation of bidder B is above at . This gives that R1 can be expressed
as
X t
Y
R1 = at [pt (1 − at−1 ) + (1 − pt )(at − at−1 )] (1 − pτ −1 ),
t τ =1
Qt P
with a0 = p0 = 0. Observe that it holds τ =1 (1 − pτ −1 ) = τ ≥t qt , so that we can
∗
write equilibrium revenue, R , more succinctly as
T̄
X T̄
X X
∗
R = at [1 − at ] qt + at (at − at−1 ) qt . (20)
t=1 t=1 τ ≥t
Although we cannot establish it analytically, we have numerical evidence that rev-

enue is maximized when the ending-time distribution is uniform. Part of this evidence
is presented in the two panels in Figure 2, showing values of R∗ for different ending-time
distributions and different auction lengths T̄ , with a value vA = 0.7. The specification
we use is for these graphs is as follows: We assume qt = αt−1 q with α ∈ (0.5, 1] and
q = [ T̄t=1 αt−1 ]−1 . Then, α = 1 corresponds to the uniform ending-time distribution,
P
qt+1 = qt = q and as α → 0 we approach a hard closing auction with T̄ = 1. Crucially,

αt−1
this specification implies pt = PT̄ τ −1
, which increases in t as desired.
τ =t α
In either of the two panels in Figure 2, revenue clearly increases in α. We also
see that maximum total revenue under T̄ = 200 is higher than under T̄ = 20. That
is, revenue in the longer auction is larger than in the shorter auction. This is no
coincidence, as we will see in the next section, where we take a closer look at the
uniform ending distribution.
5.3 Uniform Distribution

In this last section, we derive some limit results regarding utility, welfare, and efficiency
when the number of rounds grows large and the ending-time distribution is uniform.
Our results make use of the following bounds on ft , the lower of which is a direct
consequence of Lemma 2.
Lemma 4. For the uniform ending-time distribution, i.e., with qt = 1/T̄ and pt =
22

Revenue depending on ending time distribution, with T = 20 Revenue depending on ending time distribution, with T = 200
0.44
0.41 0.43
0.42
0.40
0.41
R * (p)
R * (p)
0.39 0.40
0.39
0.38
0.38
0.37 0.37
0.5 0.6 0.7 0.8 0.9 1.0 0.5 0.6 0.7 0.8 0.9 1.0
Figure 2: The two panels parameterize the (unconditional) ending-time distribution

qt as follows: qt = αt−1 q with α ∈ (0.5, 1] for q satisfying q T̄t=1 αt−1 = 1. Then, α = 1
P
corresponds to the uniform ending-time distribution and as α → 0 we approach a hard
closing auction with T̄ = 1. In either case, revenue increases as we move towards the
uniform distribution.
1/(T̄ − t + 1), we have
1 1
√ ≤ ft ≤ √ , ∀t.
1+ T̄ − t + 1 3/4 + T̄ − t + 1
This result allows us to determine the utility of player A as T̄ → ∞ in a straight-

forward way. Recall from (19) that U ∗ = vA /2(1 − f1 ). Consequently, we can state
without further proof,
Proposition 8. If the ending-time distribution is uniform, then player A’s expected

utility satisfies limT̄ →∞ U ∗ = vA2 /2.
The proposition establishes that the payoff to player A approaches that from the
truthful equilibrium in a standard second-price auction as we let the number of periods
diverge to infinity. In the truthful equilibrium of the second-price auction player A bids
vA , thus winning with probability vA and paying the conditional expectation of player
B’s value, vA /2.
An analogous connection between the the candle auction and the second-price auc-
tion holds for revenue. In the truthful equilibrium of the second-price auction, revenue
is vA (1 − vA ) + vA2 /2: In case vA ≤ vB the resulting price is vA whereas in case vA > vB
the resulting price is the conditional expected value of player B, vA /2. As regards
23

revenue in the candle auction, R∗ , we rewrite (20) as
T̄
X X
∗
R = E[a](1 − E[a]) + V ar(a) + at (at − at−1 ) qt .
t=1 τ ≥t
The next lemma describes how the terms in above expression behave as the number
of rounds, T̄ , grows large. For its proof, we rewrite the expressions in terms of f instead
of a and make use of the bounds from Lemma 4.
Lemma 5. Suppose the ending-time distribution is uniform. Then,
(a) limT̄ →∞ E[a] = vA .
(b) limT̄ →∞ V ar[a] = 0.

PT̄ P 2
vA
(c) limT̄ →∞ t=1 at (at − at−1 ) τ ≥t qt = 2
.
Points (a) and (b) reflect the fact that the bidding phase in which player A explores
the valuation of player B — discussed in Figure 1 above — becomes shorter and shorter
relative to the total number of rounds as T̄ grows large. More, when the number of
potentially decisive rounds is large, then bidder A bids close to his value most of the
time. In the limit, bidder A thus comes to win the object if and only if her valuation is
greater than the valuation of player B. Consequently, because her utility approaches
that from a second-price auction (Proposition 8), so must her expected payment, which
is the term in (c).
Points (a)–(c) from Lemma 5 give us that whenever the candle auction grows suf-
ficiently large, then revenue approaches that of a second-price auction without front-
running. Without further proof, we thus have
Proposition 9. If the ending-time distribution is uniform, then auction revenue sat-

isfies limT̄ →∞ R∗ = vA − vA2 /2.
Another implication of equilibrium behavior is that efficiency is fully restored when

the number of rounds, T̄ , grows large. This follows directly from the fact that, as
observed above, bidder A wins if and only if she has the higher valuation than bidder
B, giving us the last of our main results,
Proposition 10. In the limit T̄ → ∞, the candle auction with uniform ending-time
distribution allocates the good efficiently.
24

6 Discussion
Front-running opportunities in blockchain auctions allow certain bidders to gain and
exploit information about upcoming bids. The presence of such opportunities reduces
other players’s bidding incentives. This in turn depresses revenue and hampers effi-
ciency. In this paper, we analyzed how conducting a dynamic auction with a random-
closing rule can mitigate these problems.
Specifically, we analyzed a discrete-time first-price auction that terminates at a
random time. There are two bidders that can place bids in every round. In every round,
the bidders move sequentially in a fixed order; i.e., one bidder is systematically being
front-run by the other bidder. The second, front-running bidder can be interpreted as
the tech-savvy bidder, whereas the first bidder can taken as less sophisticated or as a
smart contract.
We showed that a random-closing time both revenue-dominates a hard-closing rule
and makes the auction for the disadvantaged bidder more attractive. Further, we
showed that under a uniform ending probability, our auction essentially becomes a
static second-price auction when the number of rounds grows large. That is, all three
problems caused by front-running: (1) low utility for the disadvantaged bidder; (2)
low revenue; (3) low efficiency are completely mitigated by an appropriately chosen
random-closing rule.
We deliberately chose a design approach to the problem of front-running rather than
a cryptographic approach. Our main motivation were smart-contract bidders, which
are increasingly widespread in automated blockchain settings and cannot be protected
by cryptographic means from being front-run, because their code is publicly visible on
the blockchain. Furthermore, their transparent nature makes smart-contract bidders
particularly vulnerable to shill bidding: in strategy-proof auctions without an optimal
reserve price (which would leave smart contracts with zero rent), it is hard for the
auctioneer to commit not to engage in such behavior.
Our model does not account for the possibility of shill bidding explicitly, yet one
way to think of it is to presume that the auctioneer can secretly replace and mimic
the second bidder. To do so secretly means that the first bidder puts zero probability
on such an event. That is, shill bidding is taken as an “attack” on bidders that play
equilibrium and are oblivious to the presence of a shill bidder (a similar idea is used in
25

the analysis of Sher, 2012).9
The candle auction makes such shill bidding expensive (as opposed to auctions
with a second-price payment rule), because in the equilibrium that we derived the
only way to raise the price to be paid is by submitting a bid that is winning for at
least one period. Of course, in the continuous limit the shill bidding cost goes to zero,
because the first bidder raises the price up to her valuation almost instantaneously if
being overbid. Nevertheless, for practical purposes, the candle auction will provide a
safeguard against such shill-bidding attempts, as long as the duration of a round is
finite (and there are technical limits to the block production time anyway).
A Proofs
A.1 Proofs of Section 4
Proof of Proposition 1. To show existence, it remains to show (i) that it can never pay
player B to submit a bid bB1 that is strictly higher than bA1 and (ii) that bA2 as given
in the statement is optimal.
First, consider (ii). We know that bA2 is optimal in case bB1 = bA1 or bB1 = ∅. So
consider bB1 > bA1 . Then, by Assumption 1, player A believes that vB ∼ U [bB1 , 1].
Hence, the optimality condition (3) gives that if bB1 < vA , then bA2 must satisfy
vA − 2bA2 + bB1 = 0. If bB1 ≥ vA , then not submitting a bid (which would have to be
strictly greater than vA ) is clearly optimal. Together, we get bA2 as in the statement.
As regards (i), observe that bA2 increases in bB1 . So, bidding higher than bA1 not only
yields lower utility in t = 1 but also in t = 2 and can thus not be profitable for player
B.
Next, we show the claim regarding utility, welfare, and revenue for p > 1/2. To
start, observe that in the last period, t = 2, playing match is clearly uniquely optimal
for player B. We can proceed to show the following auxiliary lemma:
Lemma 6. Suppose p > 1/2. In any PBE, the first-round bid of player B with type
9
There are also existing models of shill bidding that treat it as part of the model (i.e., the bidders are
aware of the potential presence of a shill bidder). See for example Graham et al. (1990); Chakraborty
and Kosmopoulou (2004).
26

vB < vA satisfies 
 b if bA1 < vB
 A1


bB1 ∈ bA1 ∪ ∅ if bA1 = vB (21)


(0, b ) ∪ ∅

else.
A1
Proof of Lemma 6. Consider the last case in (21) first. If bA1 > vB , the only actions
that do not yield strictly negative utility are either to refrain from bidding or to submit
any feasible bid strictly below bA1 , as stated.
Next, consider the case bA1 < vB . In this case, bidder B’s bids that are both
feasible and distinguishable for player A are in [bA1 , ∞) ∪ {∅}. We first show that it
can never be in PBE that types vB ∈ [bA1 , vA ] separate by submitting non-empty bids.
Specifically,
Claim 1 : In no PBE can it be that there are two sets X, Y ⊂ [bA1 , 1] satisfying
inf X, inf Y < vA , and X ∩ Y = ∅ and two bids bids bX Y
B1 , bB1 ≥ bA1 such that, if B
bids bZB1 , then the (correct) belief of player A satisfies P r{vB ∈ Z} = 1 and P r{vB ∈
[inf Z, vA )} > 0 for Z ∈ {X, Y }.
Proof of Claim 1: Before we give the proof, observe that bX Y
B1 6= bB1 for otherwise no
inference is possible. Moreover, because we restrict attention to pure strategies the
posterior is again uniform.
Now, let bZA2 be A’s equilibrium response to bidder B bidding bZB1 for Z ∈ {X, Y }.
First, observe that, for both Z ∈ {X, Y }, it must hold that bZA2 > inf Z: Clearly, if
bZA2 ≤ inf Z then bidder A looses with certainty in t = 2 as player B then plays match.
So, player A can strictly gain by raising her bid in t = 2 to some bid equal to inf Z +
with 0 < < vA −inf Z, because she now wins at least against some types with positive
probability and still pays strictly less than vA (because inf X, inf Y < vA ).
To continue, without loss suppose bX Y X
A2 ≥ bA2 and pick vB ∈ X such that bA2 ≥ vB ≥
bYA2 , which exists by the observation in the last paragraph. Then, submitting a bid bX
B1
in t = 1 yields p[vB − bX Y Y
B1 ] whereas submitting bB1 yields at least p[vB − bB1 ] + (1 −
p)[vB − bYA2 ]. Consequently, optimality requires that
p[bYB1 − bX Y
B1 ] ≥ (1 − p)[vB − bA2 ].
The right side of above inequality is weakly positive. Hence, because bX Y

B1 6= bB1 must
hold, it must be that bYB1 > bX Y
B1 . Now, consider vB ∈ Y satisfying bA2 ≥ vB . Such a
27

type obtains p[vB − bYB1 ] when following the conjectured equilibrium strategy. However,
submitting bX X
B1 yields at least p[vB − bB1 ], which is strictly better. A contradiction.
Q.E.D.
Because all types vB ∈ [bA1 , vA ) must obtain at least zero utility, it thus follows
from Claim 1 that whenever such a type submits a non-empty bid it must be equal to
bA1 (if it were higher, then those types below the bid would obtain strictly negative
utility).
Claim 1 does not, however, rule out the possibility that some types vB ∈ [bA1 , vA )
want to pool with with types vB ∈
/ [bA1 , vA ) by submitting an empty bid. Consequently,
we have so far established that any type vB ∈ [bA1 , vA ) either submits bA1 or ∅. The
next claim establishes that bA1 is the strictly better choice than ∅ for all vB ∈ (bA1 , vA )
Claim 2 : If p > 1/2, then all types vB ∈ (bA1 , vA ) submit bA1 .

Proof of Claim 2: Let V2 be the continuation utility that bidder B obtains in t = 2 if
submitting a bid of bA1 in round t = 1. Then, doing so yields, p[vB − bA1 ] + (1 − p)V2 .
Let V̂2 be the continuation utility of bidder B when refraining from bidding in round
t = 1, giving us that submitting an empty bid yields utility (1 − p)V̂2 . Now, the former
option is strictly preferred over the latter if
p[vB − bA1 ] + (1 − p)V2 > (1 − p)V̂2 .
Clearly, V2 ≥ 0 because bidder B can always refrain from bidding in t = 2. Moreover,

because the winning bid can only increase from t = 1 to t = 2, we have [vB − bA1 ] ≥ V̂2 .
But then, clearly for all vB > bA1 we have
(1 − p)V2 > (1 − 2p)[vB − bA1 ],
when p > 1/2. Q.E.D.
To finish the proof of Lemma 6 we observe that in case vB = bA1 submitting either
bA1 or ∅ yields utility of zero whereas any other higher bid yields negative utility.
For p > 1/2, Lemma 6 implies that any PBE involves bidder B types vB < vA
playing match. Yet, Lemma 6 does not rule out that there might be PBEs in which
some types (or subset of types) vB ≥ vA want to submit an empty bid or want to
separate by submitting a higher bid than player A. In the remainder of the proof we
28

show that the former never happens and that, in any PBE in which the latter happens,
expected revenue, welfare, and utility of player A are the same as in the PBE in which
all types vB play match.
Because only types vB ≥ vA possibly ever separate by submitting a higher bid than
bA1 , it holds in any PBE that for player A it is uniquely optimal to submit bA1 = a∗1 (p)
in the first round, to submit bA2 = a∗2 (p) in t = 2 if player B equalized bA1 in t = 1,
and to refrain from bidding when having observed b̂B1 = ∅. Hence, by playing match
player B of type vB ≥ vA can secure a payoff of at least
p[vB − a∗1 (p)] + (1 − p)[vB − a∗2 (p)].
So, because p > 1/2, it can never be optimal for bidder B with vB ≥ vA to submit an
empty bid in t = 1 and obtain an expected (1 − p)[vB − a∗1 (p)] from round t = 2.
Next, suppose there is a set of types X ⊆ [vA , 1] and a bid b̃B1 > a∗1 (p) such
that player A’s belief is P r{vB ∈ X} = 1 upon observing b̃B1 . If player A believes
P r{vB ≥ vA } = 1, then she can never obtain positive utility and is indifferent between
all bids below vA . So, in order that type vB ≥ vA finds it profitable to reveal himself
by submitting b̃B1 , player A must change her bid in t = 2 to some b̃A2 satisfying
p[vB − b̃B1 ] + (1 − p)[vB − b̃A2 ] ≥ p[vB − a∗1 (p)] + (1 − p)[vB − a∗2 (p)]. (22)
Because b̃B1 > a∗1 (p), above inequality gives b̃A2 < a∗2 (p).
Further, it must not be profitable for any vB < vA to pretend being of a type in X.
This gives
p[vB − b̃B1 ] + (1 − p) max{vB − b̃A2 , 0} ≤ p[vB − a∗1 (p)] + (1 − p) max{vB − a∗2 (p), 0}.
We know that vA > a∗2 (p). So, for vB close to vA , we must have
p[vB − b̃B1 ] + (1 − p)[vB − b̃A2 ] ≤ p[vB − a∗1 (p)] + (1 − p)[vB − a∗2 (p)]. (23)
The inequalities (22)–(23) together imply that, in any PBE in which some types
vB ≥ vA separate, the utility of any of these types cannot be different from their utility
in a PBE in which they pool with the types vB ∈ (a∗1 (p), vA ).
Further, the fact that the behavior of player A is (if ever) only different in case
vB ≥ vA (conditional on which her utility is zero in any equilibrium), implies that the
29

utility of player A, and consequently welfare, is the same in any PBE. And finally, it
is an implication of (22)–(23) that expected winning bids are the same in any PBE,
implying that revenue is also the same in any PBE.
Proof of Proposition 2. To show this, it suffices to show that there is a history ht

such that no continuation strategies together with beliefs that are consistent whenever
possible exist that are mutually optimal for all continuation histories. In the following,
p
we consider a history h+
1 involving bA1 ∈ (0, vA /2). Let bA2 be the bid of bidder A in
case player B does not bid in round t = 1; i.e., if bB1 = ∅. We proceed by making two
claims about any Perfect Bayes equilibrium that we then show to be inconsistent.
Claim 1 : In any PBE, bpA2 = bA1 .
Proof of Claim 1 : By contradiction, suppose bpA2 > bA1 is part of the equilibrium and
consider any type vB ∈ [bA1 , bpA2 ). First, observe that equalizing the bid of player A in
t = 2 is optimal for player B if and only if her valuation is higher than that bid. Going
backward, the expected utility of player B when not bidding in period t = 1 is then
zero (as vB < bpA2 ). On the other hand, the utility from equalizing or raising bidder
A’s bid in t = 1 is p(vB − bB1 ), which is strictly positive as long as bB1 ∈ [bA1 , vB ) and
implies that all vB ∈ [bA1 , bpA2 ) optimally equalize the bid of player A in t = 1.
Consequently, whenever bidder B does not bid in t = 1 then bidder A knows that
bidder B’s valuation cannot be in [bA1 , bpA2 ). This implies that bidder A can do strictly
better by marginally lowering bpA2 in t = 2. Indeed, because bidder B with a value
vB ∈ [0, bA1 ) will never bid in the first round, the probability for player A of not being
outbid in the second round is at least bA1 , which by assumption is strictly above zero.
Because bidder B’s valuation cannot be in [bA1 , bpA2 ), marginally lowering bpA2 does not
change the probability of not being outbid in the second round. It does, however,
strictly increase the payoff when not being outbid. Q.E.D.
Claim 2 : In any PBE, there is v > bpA1 such that any bidder B type vB ∈ [0, v] refrains
from bidding in t = 1.
Proof of Claim 2 : Suppose the claim is false; i.e., there is a neighborhood around bA1
such that all valuations vB ≥ bA1 in that neighborhood do submit a bid bB1 ∈ [bA1 , vB ].
(Clearly, all vB < bA1 optimally refrain from bidding.) Let bm
A2 (bB1 ) be the bid of bidder
A in case bidder B submits a bid bB1 ≥ bA1 . More, let bpA2 be the bid of bidder A in
case bidder B refrains from bidding in t = 1. As established in the first claim above, it
30

must hold bpA2 = bA1 . Then submitting a bid bB1 ≥ bA1 is better than not submitting
a bid in t = 1 if
p[vB − bB1 ] + (1 − p) max{vB − bm

A2 (bB1 ), 0} ≥ (1 − p)[vB − bA1 ]. (24)
Specifically, consider vB = bA1 + with > 0. From above inequality, it must hold
p[bA1 − bB1 ] + (1 − p) max{bA1 + − bm

A2 (bB1 ), 0} ≥ (1 − 2p).
Because p < 1/2, the term on the right is strictly positive. The first term on the
left side is negative. Consequently, the second term on the left side must be strictly
positive. In other words, it must hold for all bB1 ∈ [bA1 , bA1 + ] that
bA1 ≤ bm
A2 (bB1 ) < bA1 + .
Because this must hold for all > 0, we obtain limbB1 ↓bA1 bm m
A2 (bB1 ) = bA2 (bA1 ) = bA1
and, hence, that bm
A2 (bB1 ) is weakly increasing in a neighborhood of bA1 . In view of
(24), monotonicity of bm
A2 (bB1 ) in turn implies that for all vB sufficiently close to bA1 it
is obtimal to submit a bid bB1 = bA1 .
Consequently, the beliefs of player A upon observing bB1 = bA1 are well defined.
In particular, bidder A must expect a period-two bid of bA2 = bA1 in case bB1 = bA1
to be overbid with certainty. Hence bm
A2 (bA1 ) = bA1 cannot be optimal, because bidder
A could marginally raise bA2 and thus strictly increase her payoff. This gives us a
contradiction and thus establishes that in any PBE there is v > bpA1 such that any
bidder B having valuation vB ∈ [0, v] refrains from bidding in t = 1. Q.E.D.
Claim 3 : Claim 1 and Claim 2 contradict each other.
Proof of Claim 3 : If there is v > bpA1 such that all vB ∈ [0, v] refrain from bidding in
t = 1 then bidding bpA2 = bA1 is not optimal. To see this, note that conditional on being
below v, vB is uniform on [0, v]. That is, for bids bpA2 ∈ [bA1 , v], the payoff of player A
is proportional to
bpA2 (vA − bpA2 ),
which has a slope of vA − 2bpA2 . This strictly increases in bpA2 for bpA2 = bA1 < vA /2.
That is, player A could increase her payoff by marginally raising bpA2 . Q.E.D.
Together, Claims 1–3 give us the statement.
31

Proof of Proposition 3. First we compute
dR∗ (p) da∗ (p)

= 1 [2a∗1 (p) − pa∗1 (p) − (1 − p)a∗2 (p)]
dp dp
da∗1 (p) da∗2 (p)

∗ ∗ ∗
+ (1 − a1 (p)) a1 (p) − a2 (p) + p + (1 − p) .
dp dp
Now, observe
da∗1 (p) 2 da∗2 (p) 1

= vA and = vA ,
dp (3 + p)2 dp (3 + p)2
dR∗ (p)
which together with (4) gives that the sign of dp
is equal to the sign of
ρ(p) = p − 3 + vA (1 + p).
Clearly ρ(p) is linear in p. Together with the observations that ρ(0) = −3 + vA < 0
and that ρ(1) = −2 + 2vA ≤ 0 we thus have the claim.
Proof of Proposition 4. Leibnitz’s rule gives
dW ∗ (p) da∗ (p) da∗ (p) da∗ (p)

= 1 vA − 1 [pa∗1 (p) + (1 − p)vA ] + 2 [pa∗2 (p) + (1 − p)vA ]
dp dp dp dp
∗
a2 (p) + a∗1 (p) da∗ (p)

∗ ∗
+ [a2 (p) − a1 (p)] − vA − 2 a∗2 (p),
2 dp
which can be rewritten as
dW ∗ (p) da∗ (p) da∗ (p)

= −p 1 [a∗1 (p) − vA ] − (1 − p) 2 [a∗2 (p) − vA ]
dp dp dp
∗
a2 (p) + a∗1 (p)

∗ ∗
+ [a2 (p) − a1 (p)] − vA .
2
Substituting for a∗1 (p) and a∗2 (p) from (4), as well as using
da∗1 (p) 2 da∗2 (p) 1

= vA 2
and = vA ,
dp (3 + p) dp (3 + p)2
32

this can be rewritten as
dW ∗ (p) 4 1 3 2 1
= pvA2 + (1 − p)vA
2
− vA
dp (3 + p)3 (3 + p)3 2 (3 + p)2
2
vA
=− [7 − 3p] < 0.
2(3 + p)3
To establish the second claim. We observe that for vA = 0 we have W ∗ (p) = 1/2 > vA .
On the other hand, for vA = 1 we it must hold W ∗ (p) < vA because player B has a
strictly positive probability to win. Moreover, W ∗ (p) is continuous in vA and, hence,
the intermediate value theorem applies.
A.2 Proofs for Section 5

Proof of Lemma 1. Clearly, if sup hAt > sup hBt for some t ≥ 2, it is optimal for player
A not to bid in t because she is currently the winning bidder and believes player B’s
value to be below this winning bid. Also if vA ≤ sup hBt then refraining from bidding
is optimal. This gives the second case in (13), and it remains to determine the optimal
bid when the first case holds.
To do so we determine the vector a = (at , at+1 , ..., aT̄ ) that maximizes Ut (a) in (10).
First, observe that sup hBt < vA implies at−1 < vA . Further, observe that as long as
aτ < vA for all τ ≥ t (which we verify at the end), then A’s best response to B playing
1−aτ −1
match is independent of a rescaling of Uτ (a) from (10) by a factor (vA −aτ −1 )2
. Hence,
defining
1 − aτ −1
Ût ≡ Ut (a) , (25)
(vA − aτ −1 )2
we can work with the following reformulation of (10) instead,
Ût = ft (1 − ft ) + (1 − ft )2 (1 − pt )Ût+1 . (26)
Now, we assume (and later verify) that Ût ≤ 1. Then, the right side of (26) is
concave. This implies that f describes an optimal strategy if and only if
∂ Ût
= 1 − 2ft − 2(1 − ft )(1 − pt )Ût+1 = 0.
∂ft
33

Rearranging yields (12). Inspection of (11)–(12) reveals that for ÛT̄ +1 = 0 we
recursively obtain that any solution (f, Û ) must lie in [0, 1]2(T̄ −t+1) . Consequently, the
claim follows if the solution to (11) – (12) is unique. Substituting fτ from (12) into
(11) gives a first-order difference equation with initial condition ÛT̄ +1 = 0. Uniqueness
is then obvious.
Proof of Lemma 2. We first verify (14). To this end, we rearrange (12), to obtain
(1 − pt )Ût+1 in terms of ft ,
1
(1 − pt )Ût+1 = 1 − .
2(1 − ft )
Substituting this into (11), we obtain an expression for Ût in terms of ft ,
1 − ft
Ût = (1 − ft )(ft + (1 − ft )(1 − pt )Ût+1 ) = . (27)
2
Plugging this into (11) then yields (14), as desired.

Next, we need to analyze the function that gives ft from ft+1 , which we call gt :
1
gt (f ) ≡ 1 − .
2 − (1 − pt )(1 − f )
Consider a fixed point ft∗ of this relation; i.e., the value ft∗ for which gt (ft∗ ) = ft∗ . We
have
(1 − pt )(1 − ft∗ )2 − 2(1 − ft∗ ) + 1 = 0
Using the quadratic formula we obtain the solutions

p
2± 4 − 4(1 − pt )
(1 − ft∗ ) = .
2(1 − pt )
The relevant solution satisfies 0 ≤ ft∗ ≤ 1, so

√
1 − pt 1
(1 − ft∗ ) = = √ . (28)
1 − pt 1 + pt
Next, consider the derivative of gt ,
1 − pt
gt0 (f ) = .
(2 − (1 − pt )(1 − f ))2
34

For 0 ≤ f ≤ 1, this is always positive. Also the denominator of this expression is
at least 1 and the numerator is at most 1, and so 0 ≤ gt0 (f ) ≤ 1. Consequently, if
ft+1 ≥ ft∗ then ft+1 ≥ ft = g(ft+1 ) ≥ ft∗ . So it remains to show that ft+1 ≥ ft∗ holds
∗
for all t. Because pt increases in t, (28) gives ft∗ ≤ ft+1 ∗
. Hence, if ft+1 ≥ ft+1 , then
ft+1 ≥ ft∗ . By induction it thus suffices to show that fT̄ ≥ fT̄∗ . But because fT̄ = 1/2
and pT̄ = 1, this holds with equality.
Proof of Lemma 3. As observed in the text, we need to rule out that it is ever profitable
for bidder B with a valuation vB that is higher than the current highest bid of bidder
A, vB > at , to refrain from bidding for a round and then to continue playing match
thereafter.
First observe that in the last round t = T̄ it is clearly always better to equalize the
current highest bid by bidder A. So, consider round t = T̄ − 1. Recall
Vt (a) = pt max{vB − at , 0} + (1 − pt )Vt+1 (a), (29)
and that a one-shot deviation in the form of refraining from bidding once in round t
and then continuing to play match in t + 1 yields
(1 − pt )[pt+1 max{vB − at , 0} + (1 − pt+1 )Vt+2 (â)]. (30)
Now, for t = T̄ − 1, we have Vt+2 (a) = 0 for any a and, hence, playing match is better
than refraining from bidding once and then rejoining by playing match if
[pT̄ −1 − (1 − pT̄ −1 )pT̄ ] max{vB − aT̄ −1 , 0} + (1 − pT̄ −1 )VT̄ (a) ≥ 0, (31)
which holds if (18) holds.

To continue consider any round t ≤ T̄ − 2. From (29), (30), and the first inequality
in (18), it suffices to show that
Vt+1 (a) ≥ (1 − pt+1 )Vt+2 (â),
which is equivalent to
pt+1 max{vB − at+1 } + (1 − pt+1 )Vt+2 (a)

≥ (1 − pt+1 )[pt+2 max{vB − ât+2 } + (1 − pt+2 )Vt+3 (â)]. (32)
35

From the second inequality in (18), Lemma 2 applies. Now, ft+2 ≥ ft+1 together with
vA > at implies at+1 = ft+1 vA + (1 − ft+1 )at ≤ ft+2 vA + (1 − ft+2 )at = ât+2 . Together
with the first inequality in (18), it thus suffices to show that
Vt+2 (a) ≥ (1 − pt+2 )Vt+3 (â),
pt+2 max{vB − at+2 } + (1 − pt+2 )Vt+3 (a)

≥ (1 − pt+2 )[pt+3 max{vB − ât+3 } + (1 − pt+3 )Vt+4 (â)].
From at+1 ≤ ât+2 together with ft+3 ≥ ft+2 and vA > at+1 , ât+2 , we obtain at+2 ≤ ât+3 .
Consequently, we may repeat the argument to obtain more generally that Vτ (a) ≥
(1 − pτ )[pτ +1 max{vB − aτ } + (1 − pτ +1 )Vτ +2 (â)] holds for all rounds τ ∈ {t, ..., T̄ − 2}
provided it also holds for τ = T̄ − 1. For τ = T̄ − 1, we have Vτ +2 (a) = 0 for all a and,
hence, the condition becomes (31), which we know to hold if (18) holds.
Proof of Proposition 6. We show that there is no Nash equilibrium involving player B

bidding below her valuation (both on and off path) that gives lower utility to player A
than the PBE characterized in Proposition 5. Since any PBE is such a Nash equilib-
rium, the claim then follows.
Specifically, let a = (a1 , ..., aT̄ ) be the plan of action of player A characterized in
Lemma 1 and consider the following strategy for player A, which we call β̂A below:
bA1 = a1

a , where n = min{n̂ ≥ t : b̂
n Bt−1 ∈ [supτ <t bAτ , an̂ )} if b̂Bt−1 =
6 ∅
bAt =
∅ if b̂Bt−1 = ∅,
where b̂Bt−1 is the bid of player B in t − 1 as observed by player A. Under profile

{β̂A , βB∗ }, where βB∗ is the match strategy referred to in Proposition 5, the utility of
player A is the same as under {βA∗ , βB∗ }, where βA∗ is player A’s strategy referred to
in Proposition 5. Because β̂A and βA∗ coincide on the path of play against βB∗ and βB∗
is a best response if (18) holds (cf. the proof to Proposition 5), {β̂A , βB∗ } constitutes
a Nash equilibrium (involving player B bidding below her valuation both on and off
path).
36

Now, pick any profile {βA† , βB† } and suppose it is a Nash equilibrium involving B
bidding above her valuation (both on and off path). Then, by virtue of it being a Nash
equilibrium, the utility of player A under {βA† , βB† } is greater than under {β̂A , βB† }.
So, to show our claim, we need to establish that player A’s utility under {β̂A , βB† } is
greater than under {β̂A , βB∗ }. To do so, we show that, keeping β̂A fixed, the utility of
A is minimized for βB∗ among all βB under which B bids at most his valuation (both
on and off path).
We show it pointwise; i.e., for any vB . To this end, let UA be the utility of player A
under profile {β̂A , βB∗ } for a fixed valuation vB . Let k be the lowest integer κ for which
aκ > vB holds (setting k = T̄ + 1 if no such integer exists). For k = T̄ + 1 we have
UA = 0 and for k ≤ T̄ we can express UA as
T̄
X
UA = (vA − ak ) P r{T = t}.
t=k
We want to show that βB∗ maximizes −UA among all βB under which B bids at
most his valuation. In order to do so, we can invoke the one-shot deviation principle
(Fudenberg and Tirole, 1991) and show that the following two one-shot deviations
increase UA : At some t < k,
1. play vB ≥ bBt > bAt ,
2. play bBt = ∅.
Consider (1) first. Let b̃B = (b̃Bt , b̃Bt+1 , ..., b̃B T̄ ) be the vector that A chooses after
such a deviation, and let k̃ be the lowest integer κ for which b̃Bκ > vB holds (setting
k = T̄ + 1 if no such integer exists). Clearly, k̃ ≤ k. If k̃ = T̄ + 1 we are done. For
k̃ ≤ T̄ , we have ak = bB k̂ . Then,
T̄
X T̄
X
(vA − bB k̃ ) P r{T = t} ≥ (vA − ak ) P r{T = t} = UA .
t=k̃ t=k
Next, consider (2). If player B refrains from bidding in period t, then A wins in period
t, which yields an additional
(vA − at )P r{T = t}.
37

If t ≤ T̄ − 1 and player B resumes bidding in t + 1, then at+1 ≤ vB . If t = T̄ − 1 we are
done. So, suppose t < T̄ − 1. If we let b̃B = (b̃Bt+2 , b̃Bt+3 , ..., b̃B T̄ ) be the vector that A
chooses once B resumes bidding in t + 1, then b̃Bτ = aτ −1 for all τ ∈ {t + 2, ..., k + 1}.
Hence, A loses
(vA − ak )P r{T = k}.
Since, ak > at and P r{T = k} > P r{T = t} under (18) we obtain that the utility of
player A is higher than UA under this deviation, too.
Proof of Lemma 4. Noting that

√
pt 1
ft∗ = √ = √ ,
1+ pt 1+ T −t+1
the lower bound for fτ follows from Lemma 2. To verify the upper bound, we first
observe that
1
ft ≤ √ ⇐⇒ 1/ft∗ − 1/ft ≤ 1/4.
3/4 + T̄ − t + 1
For t = T̄ , we have already shown that fT̄ = fT̄∗ = 1/2 and so the right inequality
above indeed holds. To establish that it holds for all t < T̄ , let us define
1 1
et = ∗
− .
ft ft
(1−pt )+(1+pt )/ft+1

Using 1/ft = (1−pt )+pt /ft+1
this can be rewritten as
h i
1
1 (1 − pt ) + (1 + pt ) f ∗ − et+1
t+1
et = ∗
− h i .
ft 1
(1 − pt ) + pt f ∗ − et+1
t+1
Now,
det −(1 − pt )
= −h ii2 ≥ 0.
det+1
h
(1 − pt ) + pt f ∗1 − et+1
t+1
Hence, to establish et ≤ 1/4, it is sufficient to show

h i h i
1 1 1 1
1 1 (1 − p t ) + (1 + p t ) ∗
ft+1
− 4 ∗
ft+1
− 4
∗
− ≤ h i =1+ h i.
ft 4 (1 − pt ) + pt f ∗1 − 14 (1 − pt ) + pt f ∗1 − 41
t+1 t+1
38

√
Recall that 1/ft∗ = 1+ T̄ − t + 1 and pt = 1/(T̄ −t+1) under the uniform ending-time
distribution. So, above inequality is equivalent to
h√ i
3
p 1 (T̄ − t + 1) T̄ − t + 4
T̄ − t + 1 − ≤ h√ i .
4 (T̄ − t) + T̄ − t + 34
We want to show that this holds for all T̄ ≥ 2 and all positive t ≤ T̄ −1. For readability,
we define x ≡ T̄ − t. This gives
√
(x + 1) x + 43

√ 1
x+1− ≤ √ .
4 x + x + 34
Rearranging multiple times,
√ √ √

1 3 3
x+1− x+ x+ − [x + 1] x+ ≤0
4 4 4
√ √ √

1 1 3
⇐⇒ x+1− x+1+ x− − [x + 1] x+ ≤0
4 4 4
h√ √ i √ 1 √

1

⇐⇒ [x + 1] x + 1 − x − 1 + x+1− x− ≤0
4 4
√ 1 √

1 1
⇐⇒ [x + 1] √ √ −1 + x+1− x− ≤0
x+1+ x 4 4
√ √
√ √ 1 h√ √ i

1− x+1− x 1
⇐⇒ [x + 1] √ √ + x+1 x− x+1+ x + ≤0
x+1+ x 4 16
h √ √ i √ √
⇐⇒ [x + 1] 1 − x + 1 − x + (x + 1) x + x x + 1
1h √ √ i 1 h√ √ i
− x+1+2 x x+1+x + x+1+ x ≤0
4 16
x 3 √ 1√ √ 1 √
h √ i
⇐⇒ + − x+1− x x+1+ x+1+ x ≤0
2 √ 4 2 16
x h√ √ 3 15 √ 1√
i
⇐⇒ x− x+1 + − x+1+ x ≤ 0.
2 4 16 16
Thus, we get the claim by observing that

√ h
x √ √ i 3 15 √ 1√

x− x+1 + − x+1+ x
2 4 16 16
√ h
x √ √ i 3 7√
≤ x− x+1 + − x
2 4 8
39

together with the fact that the right side of above inequality is negative ∀x ≥ 1.
Proof of Lemma 5. Using the definition at = ft vA +(1−ft )at−1 , we obtain by recursive

substitution
t−1
Y
at − at−1 = vA ft (1 − fτ ), (33)
τ =1
for all t ≥ 2. Now, take any α ∈ (0, 1) and consider an increasing sequence of final
dates T̄m → ∞ such that αT̄m is an integer for all m = 1, 2, .... We want to establish
that
lim aT̄n − aαT̄n = 0. (34)
m→∞
To do so, observe that from (33) and Lemma 4

t−1
1 1
at − at−1 ≤ vA √ 1− √ .
3/4 + T̄ − t + 1 1 + T̄
Now, clearly, t−1
1 1
at − at−1 ≤ vA √ 1− √ ,
3/4 + 1 1 + T̄
where the right side is decreasing in t. But this implies
" #αT̄m
4vA 1
aT̄m − aαT̄m ≤ (1 − α)T̄m 1 − p .
7 1 + T̄m
So, consider the term on the right side above involving the square brackets, which we
express as √
 √ α T̄m
" #αT̄m " # T̄m
1 1
1− = 1− .
 
p p 
1 + T̄m 1+ T̄m
p
Let x ≡ −(1 + T̄m )−1 . Then, we can write the term in the outer square brack-
1
ets of above expression as [1 + x]− x −1 , which approaches 1/e as x approaches zero.
Consequently, as T̄m grows large, our upper bound approaches
4vA p
(1 − α)T̄m exp −α T̄m .
7
40

Now, applying l’Hopital’s rule twice we obtain
p
T̄m 2 T̄m 2
lim p = lim p = lim p = 0.
T̄m →∞ exp α T̄m T̄m →∞ α exp α T̄m T̄m →∞ α2 exp α T̄m
Next, we establish that limT̄ →∞ aT̄ = vA . The limit in (34) implies that for any > 0
there is T̄ sufficiently large such that aT̄ − aT̄ −1 ≤ . Now, suppose it is an equilibrium
in which there is δ > 0 such that for all T̄ sufficiently large we have vA − aT̄ −1 ≥ δ.
Given that player B has equalized all player A bids before round t = T̄ , the problem
of player A in round t = T̄ is to choose
a − aT̄ −1
max [vA − a].
a>aT̄ −1 1 − aT̄ −1
Optimality gives a = (vA + aT̄ −1 )/2, implying a − aT̄ −1 = (vA − aT̄ −1 )/2 ≥ δ/2, which
contradicts the fact that aT̄ → aT̄ −1 as T̄ → ∞.
Next, pick some α ∈ (0, 1), a corresponding sequence T̄m , and write
αT̄m T̄m
1 X 1 X
E[a] = at + at .
T̄m t=1 T̄m
t=αT̄m +1
The first term of the two terms in above sum is bounded below by zero and bounded
above by αvA . In the limit T̄m → ∞, the second term above approaches (1 − α)vA . We
thus obtain bounds
(1 − α)vA ≤ lim E[a] ≤ vA .
T̄m →∞
Because this must hold for all α ∈ (0, 1) we thus obtain limT̄ →∞ E[a] = vA , giving us
claim (a) in the statement.
To continue, again pick some α ∈ (0, 1), a corresponding sequence T̄m , and write
αT̄m T̄m
1 X 1 X
V ar[a] = [at − E[a]]2 + [at − E[a]]2 .
T̄m t=1 T̄m
t=αT̄m +1
The first term ot the two terms in above sum is bounded below by zero and bounded
above by αvA2 . In the limit T̄m → ∞, the second term above approaches zero. We thus
obtain bounds
0 ≤ lim V ar[a] ≤ αvA2 .
T̄m →∞
41

Because this must hold for all α ∈ (0, 1) we thus obtain limT̄ →∞ V ar[a] = 0, giving us
claim (b) in the statement.
Last, we show (c). From (10) we get that the expected utility for player A can be
expressed as
T̄
X X
[vA − at ][at − at−1 ] qt ,
t=1 τ ≥t
implying that
T̄
X X
at (at − at−1 ) qt
t=1 τ ≥t
corresponds to the expected payment of player A. From the argument establishing (b)
above, it follows that, in the limit T̄ → ∞, player A wins with certainty whenever
vA > vB but loses in case vA < vB . That is, expected gross utility from the auction is
vA2 . Together with the fact that expected net utility is vA2 /2 in the limit T̄ → ∞ from
Proposition 8, we thus get (c).
B A characterization of player A’s bidding behavior

This appendix gives an alternative characterization of the best response behavior of
player A in terms of the vector a = (at , ..., aT̄ ) directly. In particular, we have the
following result:
Lemma 7. Fix a round t and any history ht . Suppose player B plays match in round
t and thereafter. Let f = (ft , ..., fT̄ ) be part of the unique solution to (11)–(12) and
suppose the vector a = (at , at+1 , ..., aT̄ ) solves aτ = fτ vA + (1 − fτ )aτ −1 with initial
condition at−1 = min{vA , sup hBt }. Then, the list a = {at , at+1 , ..., aT̄ } satisfies,
 
T −1
X τ̂
Y
[aτ −1 −aτ −2 ] = (1+pτ −1 )[aτ −aτ −1 ]+1{τ ≤T̄ −1} · pτ −1 [aτ̂ +1 − aτ̂ ] (1 − pτ̃ ) . (35)
τ̂ =τ τ̃ =τ
for all τ = t, ..., T̄ .
Proof of Lemma 7. In any round t, optimality requires ∂Uτ (a)/∂aτ̂ = 0 for all τ ≥ t.
Iterating (10) once and using the beliefs as given in Definition 3, we obtain
(1 − aτ −1 )Uτ (a) = [aτ − aτ −1 ][vA − aτ ]
42

+ [[aτ +1 − at ][vA − aτ +1 ](1 − aτ ) + (1 − pt+1 )Uτ +2 (a)] (1 − pt ). (36)
From this, the list a is optimal if and only if
vA − 2aτ + aτ −1 − (1 − pτ )[vA − aτ +1 ] = 0 (37)
holds for all τ . We now derive (35) recursively. First, for τ = T̄ it holds pτ = 1 and
hence (37) gives
vA − aT̄ = aT̄ − aT̄ −1 . (38)
Plugging this into (37) evaluated at τ = T̄ − 1 then gives
vA − aT̄ −1 = aT̄ −1 − aT̄ −2 + (1 − pT̄ −1 )[aT̄ − aT̄ −1 ]. (39)
Doing the same again for t = T̄ − 2 reveals
vA − aT −2 = aT −2 − aT −3
+ (1 − pT̄ −2 )[aT̄ −1 − aT̄ −2 ] + (1 − pT̄ −2 )(1 − pT̄ −1 )[aT̄ − aT̄ −1 ]. (40)
This can be iterated to obtain more generally,

 
XT −1 τ̂
Y
vA − aτ = aτ − aτ −1 + 1{τ ≤T̄ −1} ·  [aτ̂ +1 − aτ̂ ] (1 − pτ̃ ) . (41)
τ̂ =τ τ̃ =τ
Now, subtracting (41) evaluated at τ from (41) evaluated at τ − 1 yields
[aτ − aτ −1 ] = [aτ −1 − aτ −2 ] − [aτ − aτ −1 ]

 
T −1
X τ̂
Y XT −1 τ̂
Y
+ [aτ̂ +1 − aτ̂ ] (1 − pτ̃ ) − 1{τ ≤T̄ −1} ·  [aτ̂ +1 − aτ̂ ] (1 − pτ̃ ) ,
τ̂ =τ −1 τ̃ =τ −1 τ̂ =τ τ̃ =τ
[aτ − aτ −1 ] = [aτ −1 − aτ −2 ] − [aτ − aτ −1 ]
43

  
XT −1 τ̂
Y
+ (1 − pτ −1 ) [aτ − aτ −1 ] + 1{τ ≤T̄ −1} ·  [aτ̂ +1 − aτ̂ ] (1 − pτ̃ )
τ̂ =τ τ̃ =τ
 
XT −1 τ̂
Y
− 1{τ ≤T̄ −1} ·  [aτ̂ +1 − aτ̂ ] (1 − pτ̃ ) ,
τ̂ =τ τ̃ =τ
or
 
T −1
X τ̂
Y
[aτ −aτ −1 ] = [aτ −1 −aτ −2 ]−pτ −1 [aτ −aτ −1 ]−1{τ ≤T̄ −1} ·pτ −1 [aτ̂ +1 − aτ̂ ] (1 − pτ̃ ) .
τ̂ =τ τ̃ =τ
Rearranging then yields (35).
Now, it is obvious from (35) that as long as vA > at−1 we have aτ − aτ −1 > aτ +1 − aτ
for all τ ≥ t. This implies, as claimed at the end of Section 5.1, that bidder A increases
her bid by most in the first round and then reduces the increment over time. In a
sense, she decreases experimentation as the auction progresses.
C Example: A Nash equilibrium when p ∈ (0, 1/2).

In this appendix we reconsider the two-period setup and construct a Nash equilibrium
for the case p ∈ (0, 1/2) that is not a Perfect Bayes equilibrium. Let bit be the bid
player i = A, B submits in round t = 1, 2 and consider the following strategy of player
B,

 b if bA1 ≥ vA /2 and vB ≥ vA
 A1


∗
βB1 (h+
1) = bA1 if bA1 < vA /2


∅

else,

sup h+ if sup h+ ≤ v
∗ 2 2 B
βB2 (h+
2 ) =
∅ else.
Player B will equalize the bid of player A if her value is above that of player A and
player A submits a bid above half her value, vA /2, or if player A submits a bid below
vA /2. In any other case, player B will not submit any bid.
44

As regards player A, consider the following strategy
∗ vA
βA1 (h1 ) =
2
vA vA
∗

2(1−p)
if bB1 ≥ 2
βA2 (h2 ) =
∅ else.
Clearly, the strategy of player B is not optimal in the subgame after player A
submits bA1 ∈ (0, vA /2). Hence, the strategies βA∗ and βB∗ cannot be part of a Perfect
Bayes equilibrium. Nevertheless, we can establish the following claim.
Proposition 11. The strategies βA∗ and βB∗ constitute a Nash equilibrium.
Proof of Proposition 11. We first verify that the strategy of player B is a best response
to that of player A. In period t = 2, it is clearly always a best response to equalize
the current highest bid and play bB2 = sup h+
2 as long as the valuation vB is higher.
So, let’s look at period t = 1. Because the bid of player A in t = 2 only takes on two
values, depending on whether bidder B raises the current highest bid or not, player B
will rationally never bid more than the current highest bid in t = 1. Consequently, the
question for player B is to either match the current highest bid or to pass. Since, the
winning bids are non-decreasing over time, player B with vB < bA1 = vA /2 will always
pass. For, vB ≥ vA /2, matching the current highest bid gives

h vA i vA
p vB − + (1 − p) max vB − ,0 ,
2 2(1 − p)
whereas refraining from bidding gives

n vA o
(1 − p) max vB − , 0 .
2
Comparing above expression gives that, for all vB ∈ [vA /2, vA /(2(1 − p))], it is
always optimal to refrain from bidding. For values vB > vA /(2(1 − p)), matching the
currently highest bid is optimal if
h vA i vA
vB − ≥ ,
2 2
which clearly holds for all vB ≥ vA . Because vA /(2(1 − p)) < vA whenever p ∈ (0, 1/2),
45

we thus get that the strategy of player B is a best response to that of player A.
We next verify that the strategy of player A is a best response. We start with t = 2,
assuming that player A adheres to his conjectured equilibrium strategy in t = 1 and
submitted bA1 = vA /2. Suppose player B played bB1 = bA1 . In that case, player A
knows that vB ∼ U [vA , 1]. Thus, she will earn zero whenever bidding bA2 < vA and
(weakly) negative utility whenever bidding bA2 ≥ vA . Hence, bidding
vA
bA2 = < vA
2(1 − p)
is a best response. Next, suppose bB1 = ∅. In that case, player A knows that vA ∼
U [0, vA ] and, hence, her utility when submitting any feasible bid bA2 ∈ (vA /2, vA ] ∪ {∅}
is 
 bA2 (v − b ) if bA2 ∈ (vA /2, vA ]
vA A A2
.
 vA if bA2 = ∅
4
It is readily verified that b∗A2 = ∅ maximizes above expression.

So, turn to t = 1. To determine the utility for any bA1 ≥ 0 we first have to determine
what happens if bA1 < vA /2. Upon submitting bA1 < vA /2, player A would expect
player B to always equalize that bid and, hence, to learn nothing about player B’s type.
Adapting the argument in the last paragraph, the best that player A could then do is
to submit bA2 = vA /2 in the second round, which yields utility of vA2 /4. On the other
hand, if bA1 > vA /2, then the arguments from the last paragraphs yield that bidder A
optimally submits bA2 = ∅ if player B refrains from bidding and bA2 = vA /(2(1 − p))
if player B equalizes her bid (in which case expected winning probability and, hence,
expected utility is zero). Consequently, the problem in t = 1 is to choose bA1 so as to
maximize 
pv (v − b ) + (1 − p)b (v − b ) if bA1 ≥ vA /2
A A A1 A1 A A1
(42)
(1 − p)v 2 /4 if bA1 < vA /2.
A
Taking derivatives we get


−pv + (1 − p)[v − 2b ] if bA1 ≥ vA /2
A A A1
(43)
0 if bA1 < vA /2.
Together, (42) and (43) imply that b∗A1 = vA /2 is the optimal choice.
46

To conclude this section, we note that the utility of player A is
vA2 v2
UA∗ (p) = p + (1 − p) A .
2 4
As we reach p = 1/2 from below, this utility is higher than the utility player A gets
in the PBE at p = 1/2. This is not surprising, because in t = 1 player B bids less often
than she does in the PBE; i.e., instead of equalizing the bid whenever having a higher
value than the bid by player A, player B only equalizes when having a higher valuation
than that of player A. This also implies that in t = 2, if player B did not equalize in
t = 1, the game presents itself to player A as a one-shot auction with front-running.
References
Akbarpour, M. and S. Li (2020): “Credible Auctions: A Trilemma,” Econometrica,
88, 425–467.
Ambrus, A., Y. Ishii, and J. Burns (2018): “Gradual Bidding in ebay-like Auc-
tions,” Working Paper.
Arozamena, L. and F. Weinschelbaum (2009): “The Effect of Corruption on

Bidding Behavior in First-Price Auctions,” European Economic Review, 53, 645–
657.
Brunnermeier, M. K. and L. H. Pedersen (2005): “Predatory Trading,” The

Journal of Finance, 60, 1825–1863.
Budish, E., P. Cramton, and J. Shim (2015): “The High-Frequency Trading

Arms Race: Frequent Batch Auctions as a Market Design Response,” The Quarterly
Journal of Economics, 130, 1547–1621.
Burdges, J. and L. D. Feo (2020): “Delay Encryption,” Cryptology ePrint Archive,

Report 2020/638.
Burguet, R. and M. K. Perry (2009): “Preferred Suppliers in Auction Markets,”

The RAND Journal of Economics, 40, 283–295.
Chakraborty, I. and G. Kosmopoulou (2004): “Auctions with Shill Bidding,”

Economic Theory, 24, 271–287.
47

Choi, A. H. (2009): “A Rent Extraction Theory of Right of First Refusal,” The
Journal of Industrial Economics, 57, 252–262.
Cordi, N., E. Félez-Vinas, S. Foley, and T. Putninš (2017): “Closing Time:

The Effects of Closing Mechanism Design on Market Quality,” Working paper.
Daian, P., S. Goldfeder, T. Kell, Y. Li, X. Zhao, I. Bentov, L. Brei-

denbach, and A. Juels (2019): “Flash Boys 2.0: Frontrunning, Transaction Re-
ordering, and Consensus Instability in Decentralized Exchanges,” arXiv preprint
arXiv:1904.05234.
De Long, J. B., A. Shleifer, L. H. Summers, and R. J. Waldmann (1990):

“Positive Feedback Investment Strategies and Destabilizing Rational Speculation,”
the Journal of Finance, 45, 379–395.
Doran, N. (2018): “Asymmetric, Right of First Refusal Auctions,” Working Paper.
Eskandari, S., S. Moosavi, and J. Clark (2019): “Sok: Transparent Dishonesty:

Front-running Attacks on Blockchain,” in International Conference on Financial
Cryptography and Data Security, Springer, 170–189.
Fernandes De Oliveira, A., A. Fabregas Masllovet, and M. Fazekas

(2019): “Auction Length and Prices: Evidence from Random Auction Closing in
Brazil,” Policy Research Working Paper 8828, The World Bank.
Fudenberg, D. and J. Tirole (1991): Game Theory, MIT Press.
Füllbrunn, S. and A. Sadrieh (2012): “Sudden Termination Auctions—An Ex-

perimental Study,” Journal of Economics & Management Strategy, 21, 519–540.
Galal, H. S. and A. M. Youssef (2018): “Verifiable Sealed-Bid Auction on the

Ethereum Blockchain,” in International Conference on Financial Cryptography and
Data Security, Springer, 265–278.
Graham, D. A., R. C. Marshall, and J.-F. Richard (1990): “Phantom Bidding

against Heterogeneous Bidders,” Economics Letters, 32, 13–17.
Hobson, A. (1971): “A Sale by Candle in 1608,” The Library, 5, 215–233.
48

Hopenhayn, H. and M. Saeedi (2015): “Dynamic Bidding in Second Price Auc-
tion,” Working Paper.
Kapor, A. and S. Moroni (2016): “Sniping in Proxy Auctions with Deadlines,”

Working Paper.
Lee, J.-S. (2008): “Favoritism in Asymmetric Procurement Auctions,” International

Journal of Industrial Organization, 26, 1407–1424.
Micali, S., M. Rabin, and S. Vadhan (1999): “Verifiable Random Functions,” in

40th annual symposium on foundations of computer science (cat. No. 99CB37039),
IEEE, 120–130.
Nisan, N. (2007): “Introduction to Mechanism Design (for Computer Scientists),”

in Algorithmic Game Theory, ed. by N. Nisan, T. Roughgarden, and E. Tardos,
Cambridge University Press, 209–242.
Parkes, D. C., M. O. Rabin, S. M. Shieber, and C. Thorpe (2008): “Prac-

tical Secrecy-Preserving, Verifiably Correct and Trustworthy Auctions,” Electronic
Commerce Research and Applications, 7, 294–312.
Parkes, D. C., M. O. Rabin, and C. Thorpe (2009): “Cryptographic Combinato-

rial Clock-Proxy Auctions,” in International Conference on Financial Cryptography
and Data Security, Springer, 305–324.
Roth, A. E. and A. Ockenfels (2002): “Last-Minute Bidding and the Rules for
Ending Second-Price Auctions: Evidence from eBay and Amazon Auctions on the
Internet,” American economic review, 92, 1093–1103.
Schlegel, J. C. and A. Mamageishvili (2021): “On-Chain Auctions with De-

posits,” arXiv preprint arXiv:2103.16681.
Sher, I. (2012): “Optimal Shill Bidding in the VCG Mechanism,” Economic Theory,
50, 341–387.
Wang, S., L. Ouyang, Y. Yuan, X. Ni, X. Han, and F.-Y. Wang (2019):
“Blockchain-Enabled Smart Contracts: Architecture, Applications, and Future
Trends,” IEEE Transactions on Systems, Man, and Cybernetics: Systems, 49, 2266–
2277.
49

Front-Running, Smart Contracts, and Candle Auctions: Samuel@web3.foundation

Uploaded by

Copyright:

Available Formats

You might also like

Front-Running, Smart Contracts, and Candle Auctions: Samuel@web3.foundation

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Front-Running, Smart Contracts, and Candle Auctions: Samuel@web3.foundation

Uploaded by

Copyright:

Available Formats

Front-Running, Smart Contracts, and Candle

August 23, 2021

Blockchain implementations of auctions have to deal with the problem of

JEL Classifications: D44, D82, G29, C72.

Keywords: auctions, blockchains, front-running, smart contracts, random

Electronic copy available at: https://ssrn.com/abstract=3846363

Electronic copy available at: https://ssrn.com/abstract=3846363

Electronic copy available at: https://ssrn.com/abstract=3846363

Electronic copy available at: https://ssrn.com/abstract=3846363

Electronic copy available at: https://ssrn.com/abstract=3846363

Electronic copy available at: https://ssrn.com/abstract=3846363

Electronic copy available at: https://ssrn.com/abstract=3846363

Electronic copy available at: https://ssrn.com/abstract=3846363

Definition 1 (Perfect Bayes Equilibrium, PBE). A Perfect Bayes Equilibrium (PBE)

4 The Two-Period Case

Electronic copy available at: https://ssrn.com/abstract=3846363

U1 (a) = a1 [vA − a1 ] + (1 − p)(a2 − a1 )[vA − a2 ]. (2)

In the second period, player A wins if a2 ≥ vB and obtains vA − a2 . In the first

Electronic copy available at: https://ssrn.com/abstract=3846363

p[vB − a∗1 (p)] + (1 − p) max{vB − a∗2 (p), 0}.

Electronic copy available at: https://ssrn.com/abstract=3846363

Proposition 1. Suppose p ≥ 1/2. Then, there is a PBE in which player B plays

Electronic copy available at: https://ssrn.com/abstract=3846363

Proposition 2. In case p ∈ (0, 1/2), there does not exist a PBE.

Remark 2. If p = 0, then we are in a dynamic auction with a hard-closing rule. For

Electronic copy available at: https://ssrn.com/abstract=3846363

R∗ (p) = a∗1 (p)2 + (1 − a∗1 (p))(pa∗1 (p) + (1 − p)a∗2 (p)). (6)

Proposition 3. Revenue R∗ (p) decreases in p.

Electronic copy available at: https://ssrn.com/abstract=3846363

aZ∗1 (p) aZ∗2 (p) Z1

Electronic copy available at: https://ssrn.com/abstract=3846363

Definition 3 (Candidate Belief F ∗ ). Fix a round t = 1, 2, ... and a feasible history ht ,

(a) In the first round, t = 1, the belief of player A is given by

(b) After the first round, t ≥ 2, the following holds:

Electronic copy available at: https://ssrn.com/abstract=3846363

Ûτ = (1 − fτ )fτ + (1 − fτ )2 (1 − pτ )Ûτ +1 (11)

for τ = t, t + 1, ..., T̄ with ÛT̄ +1 = 0. Then, it is optimal for player A to follow

Electronic copy available at: https://ssrn.com/abstract=3846363

Next, we observe that we can leverage (11)–(12) to obtain a recursive formulation

Vt (a) = pt max{vB − at , 0} + (1 − pt )Vt+1 (a) (15)

Electronic copy available at: https://ssrn.com/abstract=3846363

Vt (a) − [pt [vB − bBt ] + (1 − pt )Vt+1 (â)] ≥ 0.

Plugging in Vt (a) from (15) this inequality is equivalent to

pt [bBt − at ] + (1 − pt )[Vt+1 (a) − Vt+1 (â)] ≥ 0. (16)

Vt (a) − (1 − pt ) [pt+1 [vB − at ] + (1 − pt+1 )Vt+2 (â)] ≥ 0. (17)

Lemma 3. Suppose we have

(1 − pt )pt+1 ≤ pt ≤ pt+1 for all t ∈ {1, ..., T̄ − 1} (18)

Lemma 1 and Lemma 3 together imply existence of an equilibrium. We can thus

Electronic copy available at: https://ssrn.com/abstract=3846363

Electronic copy available at: https://ssrn.com/abstract=3846363

5.2 Utility of Player A and Total Revenue

1} be the set of all ending time probability distributions. Then,

Next, we turn to equilibrium revenue. Let Rt be expected revenue provided to

Electronic copy available at: https://ssrn.com/abstract=3846363

Although we cannot establish it analytically, we have numerical evidence that rev-

qt+1 = qt = q and as α → 0 we approach a hard closing auction with T̄ = 1. Crucially,

5.3 Uniform Distribution

p[bA1 − bB1 ] + (1 − p) max{bA1 + − bm