Tutorial 3: Basics of Handshake auction and bidding
A quick guide on understanding how the auction and bidding process works
We recently received a number of questions related to Handshake auctions and bidding. So we developed this tutorial to help you understand the ins and outs of bidding on Namebase.
Before we get into the core functions and how-to’s, let’s first understand how the Handshake auction works. Handshake auctions are Vickrey-style auctions.
What's a Vickrey auction?
A Vickrey auction is a type of sealed-bid auction. Bidders submit their bids without knowing the bid of the other people in the auction. The highest bidder wins but the price paid is the second-highest bid. This is really important to understand. For example, if you bid 10 HNS for nakamoto/ and someone else bids 5 HNS, you’d win the auction and only pay 5 HNS for nakamoto/. This means that you don’t spend more HNS than you need to when you win an auction.
How does the auction work?
Handshake names are released sequentially each week according to their hash for one year after launch. You can place a bid with Handshake coins (HNS) anytime after a top-level domain is released.
Bids can take on any value and you can optionally add a blind to your bid to hide the true value of your bid from others.
Your bid + blind is called your lockup, which is what the other bidders (and the rest of the network) sees.
Your HNS lockup will be non transferable for the duration of the auction, but the blind will be returned to you regardless of whether or not you win the auction.
After the first bid, bidding is open to everyone for 5 days.
After the bidding period ends, the reveal period begins.
Everyone will have 10 days to reveal their bid price — Namebase does this automatically for you so if you’re a Namebase user you won’t need to worry about this step. Your blind is immediately returned to you once your bid is revealed.
The winning bid is chosen after the 10 day reveal period and the winner pays the second highest bid amount while the other bidders get their coins back.
The winner’s payment is burned by the network, so the winner doesn’t pay bids to anyone per se. This creates a deflationary effect on the network.
The winner gets to use their Handshake top-level domain however they wish (Namebase helps you manage its settings without being a programmer) and the rest of the bidders can continue trying their luck on other top-level domains!
What's a lockup?
Your lockup is made up of = your bid + blind (optional).
Basically your funds are locked up so you can’t spend what you lock up until after the auction ends.
This is to prevent people from bidding more than they can spend and to prevent people from bidding on more names than they’re willing to actually purchase.
It's important to note that the blind is optional, which means that the bid amount can be anywhere from 0 to the actual lockup amount.
It's not necessarily the same as the lockup amount because if that was the case then everyone would know everyone else’s bids and it wouldn’t be a blind auction anymore.
Importantly, the amount you actually bid can’t be updated after you submit it. You can submit additional bids but your previous bid will still be locked up. I.e. if you bid 1000 HNS, then 10,000 HNS, 11,000 HNS will be locked up for the duration of the auction.
So the bid you first place is the maximum you’ll pay if you win the auction, though in practice you’ll pay less than your bid because it's a second price Vickrey auction (you pay the second highest bid price).
Another way to look at it is if you want to bid 10 HNS for a name you truly want, but are concerned about potential competitors, you could add a 20 HNS blind. This lockup of 30 HNS (10 HNS bid + 20 HNS blind) would be publicly visible. If you win, you still wouldn't pay more than your bid of 10 HNS. The other 20 HNS would be returned to you.
What happens when you win/lose?
If you lose, your funds are returned in full (minus the Handshake Mining Fee) after the reveal period ends. If you win, congrats! You're now one of the first owners of decentralized top-level domains on the internet.
Companies regularly pay more than $200k to register top-level domains with the ICANN, so it's pretty cool that you own your own top-level domain.
You can now point your top-level domain to a personal webpage, set up subdomains for your top-level domain (coming soon), or sell your top-level domain to someone else for a profit (coming soon)!
What happens when you "Watch"?
Namebase will email you when top-level domains you watch are released for bidding. This is useful because names are released over the course of the year, so if you find a name you want to bid on you can watch it through Namebase instead of setting a reminder manually to check back in later.
Now that you know how ‘auctions’ on Namebase work, let’s get into how ‘bidding works’
How bidding works
Because these are Vickrey auctions and the amount you lockup is publicly visible, an optional blind can be used to mask your actual bid. Regardless of whether your win or lose the auction, the blind will be returned to you.
The bling is basically obfuscating your real bid. For e.g. say you bid 1HNS, with a blind of 1000 HNS. Your bid appears as 1001 HNS but it is actually 1. This is to prevent someone from griefing your bid higher and higher. The blind hides your real intended bid.
After you've bid, you can't update it. This means you should bid the maximum you're willing to pay for a domain. You can also see the masked bid/lockup of other bidders, but this doesn't tell you what their actual bids are.
When bidding ends, the reveal period begins. During this time all bidders reveal their bids (Namebase manages this for you). After the reveal period ends:
If you've won, you'll pay the second highest price. All extra HNS (unused bid amount + blind) will be returned to you. The domain will appear in your Namebase account and you can start to manage it.
If you've lost, everything you locked up will be returned to you.
What's the miner fee I see when I try to bid?
Miners ensure the integrity of the Handshake network. Every transaction (like bidding) they validate involves a small fee paid to them in HNS. 100% of the fee is paid to the miners. Miners are independent parties who are not associated with Namebase. At the current price of HNS, mining fees for each auction amount to a few cents at max.
Can I bid 0 HNS on a domain?
Technically yes. However you must have a blind greater than 0 if your bid amount is 0.
When will I receive my lockup back?
You’ll receive your blind amount immediately after Namebase reveals your bid during the reveal period. If you win, an amount equal to the second highest bid will be burned and the rest will be returned to you, otherwise if you lose your entire bid will be returned after the reveal period ends.
Can I follow an auction even if I haven't bid yet?
Yup! Just add it to your watchlist.
Hope you found this tutorial useful. If you have any questions, please reach out to us via live chat in the product or on Twitter @namebaseHQ
Tutorial 1: What is Handshake and HNS
Tutorial 2: How to mine HNS
Tutorial 3: Basics of Handshake auction and bidding
Tutorial 4: What is Namebase and how does it work
Tutorial 5: Difference between handshake domains and traditional domains
Tutorial 6: Buying a Handshake domain on Namebase (registrar overview)
Tutorial 7: How Handshake domains are released for bidding
Tutorial 8: How to register a domain and publish content while staying anonymous
Tutorial 9: Ways to run a resolver OR visit a Handshake domain
Tutorial 10: What use cases will Handshake and Namebase solve.. and can the names be seized
Thanks for reading!