As part of our “owner-forgiving” partial common ownership auction system, current licensors are able to reject an incoming bid by paying a penalty equal to a configurable % of the incoming bid. This setup gives current licensors more confidence they won’t have their “land taken overnight,” but the incentives for honest self-valuation and a healthy market still need to be balanced. This topic is to explore the levers we have under this system to get the balance right.
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With the bid rejection penalty structure implemented, we have two configurable values to set that can dramatically alter the character of our PCO market:
- Penalty Rate (% of the incoming bid value that the licensor must pay to reject a bid)
- Beneficiary of the Penalty (who and what split of the penalty payment goes to the network vs the bidder)
A 100% penalty rate would effectively nullify the benefit that bid rejection hypothetically offers the current licensor (the amount they’re paying = the value they could buy it back on the open market). A 0% penalty would eliminate all incentives for licensors to be honest about their self-valuation.
At launch, we’re targeting a 10% penalty rate. This is equal to our starting yearly Network Fee rate, so the licensor effectively pays 1 year’s worth of Network Fees to reject a bid. We’ll study this over time and governance decisions can be made to lighten or strengthen the penalty depending on how the market is working in practice. 10% could be at the high end of reasonable penalty rates, but I am pretty comfortable with it as a starting point.
The more interesting or unsettled variable for me is where that penalty fee is allocated. Currently, 100% of the penalty is set to go to the Geo Web treasury. This seems like a pretty low-risk starting point.
If we find that our owner-forgiving modification is leading to systematic underpricing of parcels and the rejection rate is also high, then bidders may lose their incentive/desire to place rival bids—my bid is just going to be rejected anyway so why place it and incur the cost and lockup? In this scenario, we could start to allocate some percentage of the penalty fee to bidders. This effectively creates a bounty for finding underpriced land assets. We don’t want bidders to constantly be griefing land owners, so we want to be really careful with this. I’m comfortable launching with the rejected bidder’s reward starting at 0%, but I want to put this out there as a possible tweak to think about and monitor going forward.
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In the scenario where the current licensor is a squatter on a highly visible location and the incoming bidder really is the most productive licensor (think of a sports team & their stadium or similar), the penalty allocation lever seems especially appropriate/effective.
The whole network benefits when an “anchor tenant” can utilize their corresponding Geo Web parcel, but their visibility could lead to speculators getting big eyes and attempting to hold out through rejections. The point of the penalty fee is to put limits on that, but having those fees go to the bidder (who already has a higher true economic valuation of the parcel) further strengthens their position and decreases the probability they opt out of the Geo Web entirely.
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A 100% penalty doesn’t nullify the benefit the bid rejection offers because there is a variable transition cost in losing and re-purchasing that cannot be known at the time of rejection.
I would default to 100% or alternatively switch the conceptualization of this system from a “penalty” to an “auction resolution period” where an incoming bid triggers a period for the current owner to respond with a higher bid. Each subsequent bid increments the response period by a predetermined, fixed amount of time. This isn’t dissimilar from how a fine art auction works at Sotheby’s or Christie’s: each subsequent bid gives the underbidder the opportunity to rebut.
I can see the benefit of “owner forgiving” because the newness of the system, but believe an adequate notification system & the principal of having “skin in the game” should quickly ensure leasor’s are in the habit of responding to bids. Otherwise, this does violate credible neutrality by preferencing existent-leasors and whoever is setting the penalty rate.
Yeah if we went with a 100% rejection penalty, there would be better ways to implement/frame the system. I don’t think that escalating/extending auctions for always-on-sale assets is practical at this point with smart contracts though. It may work for fine art and even NFT drops, but those are scheduled as “special events” and advertised in advance. The transaction/monitoring costs and technical/educational complexity aren’t worth it IMO. (I worry already that our system is too complex.)
To take a step back, our goal in implementing the system that we did was to explicitly help overcome fear-based resistance to PCO adoption. None of this matters if we aren’t able to convince a sufficient number of people to adopt and invest in the Geo Web. I’d rather err on leniency to start and know that we’ve given the protocol flexibility to adapt as appropriate.
I think your definition of credible neutrality here effectively makes it an impossible standard. Any design decision made for any mechanism will have different implications for different people. Why do these PCO property rights even exist in the first place? Isn’t that unfair for one person to have access and the rest of the world not?
As usual, Vitalik has a quote that I think applies, “And any mechanism that corrects for coordination failures has to make some assumptions about what those failures are, and discriminates against those whose coordination failures it underestimates. But this does not detract from the fact that some mechanisms are much more neutral than others.”
We might be favoring the incumbent licensor relatively more compared to a “pure” PCO system, but that would be the case even if there’s just a resolution period too. We’re trying to address the coordination failure that “no one adopts PCO and sticks with private property rights” with this modification.