Illuvium Land Sale - Why Higher Prices are Better for All

By Deraji | ILVFi | 4 Dec 2021


The first Illuvium land auction is coming!  As of now, we expect the first 20,000 plots of Illuvium land to be sold early to mid-January.  Recently, a draft proposal was shared by the developers, indicating the number of plots of each Tier that will be auctioned, along with an initial proposal for starting prices.  Other content creators have covered more of the details elsewhere, so feel free to check out their videos for more information (Vetemor’s coverage here).  I’ll take a different approach until all details are finalized, and share my perspective on why higher starting prices are better for (nearly) everyone involved.

How the auction will work

Before I get into the analysis, here’s a quick summary of how the auction will work.  The auction will occur over 72 hours, with each individual land NFT sold as by Dutch auction.  A total of 278 unique properties will go up for sale every hour.  The starting price will be set by tier, and once the auction for a unit starts, the price will decrease by 2% per minute.  As a Dutch auction, once someone bids, the first bid will be accepted and determine the purchase price.  The longer you wait, the lower the price will go, however as each unit is sold individually, if someone else bids before you, they win.  

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Purchases for land will be made either in ETH or the Illuvium staking reward token, sILV.  The value of sILV is pegged to the value of ILV at the time of the transaction with the DAO, though the tokens have served as a means of retrieving liquidity from those staking ILV, the Illuvium governance token, with an unofficial liquidity pool on Uniswap (I discuss that pool and token more here).  Highlighting three key ideas - first, all transactions can be conducted with either ETH or sILV, but not both!  You cannot pay for the land with a combination of the two tokens.  Secondly, ILV cannot  be used to purchase land.  Lastly, the first auction is almost certainly held on the Ethereum mainnet, so ETH will also be needed for each transaction to cover transaction costs.

As a Dutch auction, the starting price is fixed per tier, and per the recent proposal was set at 0.5 ETH for Tier 1, Tier 2 at 1.5 ETH, Tier 3 at 5 ETH, and Tier 4 at 20 ETH.  The two Tier 5 units will be sold separately by silent auction.  Much of the community was surprised and potentially excited by these prices.  Personally, these prices represented more of a “buy it now” price, which is scary on the Ethereum main net, for reasons I’ll share below.  Based on a recent interview with Kieran, we expect these values to be increased, which has cause some controversy in Discord.  Today, I'll discuss why this is a good  idea for everyone involved.   

What?  Why are you advocating for higher prices?!

There are really three concerned parties when it comes to the land auction.  People that want to buy land, whales, and people staking ILV.  There is absolutely overlap between these three groups, so we’ll refer to the Venn Diagram below.

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First, let’s consider people staking ILV.  Based on the tokenomics of Illuvium, 100% of all revenue is distributed back to eligible staked tokens, so for those staking ILV, there is an interest in the total revenue generated from the land auction being as high as possible.  This group, excluding the overlap with those wanting to buy land, want the purchase price to be as high  as possible.  Also, while only purchases in ETH generate revenue, as sILV used does NOT generate revenue, used sILV represents a liability “off the books” for Illuvium and for each minted sILV, the absolute token supply of ILV is reduced.  All used sILV is burned, and reducing the total possible 10 million ILV for the Illuvium DAO franchise.

Second, let’s consider people that want to buy land.  They obviously want to buy land for as little as possible.  Whale or not, no one likes overpaying for anything.  In the case of the Illuvium land sale, the total purchase price will be a combination of two things; the purchase price, and the Ethereum transaction fees.  Anyone conducting transactions on Ethereum lately certainly knows that transaction fees are far from negligible, and NFT auctions have driven up gas fees in the past, with this likely being no exception.

Now, we have whales.  If history has taught us anything, “whales gonna whale.”  Within Illuvium, there are absolutely some leviathans with huge amounts of ETH and sILV ready to spend to acquire metaverse land.  People were initially either excited or frightened by the proposed prices.  However, at the enticing prices listed, folks likely neglected the second half of the equation; the potential transaction fees.  Here is where whales have the advantage.  Having ample ETH, they can be comfortable with running up the transaction price to ultimately “win” the property over those not willing to spend as much as others.  Low prices actually hurt lower wallet sizes due to this.

What is a gas war?

There are other videos (such as this one) that review and indicate how to win gas wars in more detail than I’ll cover here.  Briefly, here’s how it works.  Imagine yourself at an in person auction.  People sitting around with paddles with numbers on them.  In the case of this Dutch auction, the lot is literally won by the first person that raises their paddle.  But what if two people raise their paddle at the same time?  The person that wins is the one that the auctioneer first recognizes.  This is the power and importance of a Dutch auction.  The idea is to set the price sufficiently high that time passes so that not everyone raises their paddle immediately.  For an auction on Ethereum, raising your paddle will cost you a transaction fee.  What if you raise your paddle at the same time as someone else, but someone else gets the auctioneer’s attention first?  You lose both the auction, and your transaction fee.  Ethereum “fixes” this by setting a gas fees, where you can change your priority fee to cut the line and be recognized first by the blockchain, and thus the auctioneer.  The more you pay, the faster you get recognized.  Anyone who placed their bid and it processes after will literally lose.  This is an absolute Ricky Bobby situation - if you ain’t first, you’re last.

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By setting prices for the various tiers at a “buy it now” level, the number of people losing money to failed transactions will potentially be huge, and will be a negative experience in this first revenue based event with Illuvium.  With 20,000 units sold, we will get a feel throughout the 72-hour auction for the purchase price along with how ridiculous the Ethereum network potentially becomes with gas fees.

The Real Market Price of Illuvium Land

If the auction degrades into a gas war of people trying to cut in line to get to the auctioneer first, the price will realistically be set by the Purchase Price + Gas.  Even whales (who aren’t degenerate idiots) don’t want to overpay for land.  That means the purchase price side of the equation needs to be controlled to start outside of the “buy it now” price for everyone.  If it is too low, the market will dictate that the purchase price should be increased, and it will do so by raising the other side of the equation; gas.

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Here’s why this is bad for everyone, except for maybe whales who aren’t staking ILV.  The market price for land will be what it is, balancing the Price + Gas equation.  However, the DAO wants the Price side of this equation to be as high as possible for several reasons.  Price dictates either the amount of revenue generated, or maximizes the sILV burned.  If too many people bid at the same time, this will increase the amount of ETH lost to failed transactions, costing people that want land but failed to raise their transaction priority enough.  Whales staking ILV and buying land want to maximize the price side of the equation, as the market running up gas offers them no benefit.  This would give people a negative experience, losing money to transaction fees, turning them off of Illuvium, while also shifting value to the side of the equation that benefits miners rather than the DAO.

The market will determine the price of Illuvium land.  Maximizing the price versus the gas side of the equation generates the most value for everyone that’s reading this article.

Not convinced?  Here’s breakdown by Venn Diagram blocks

Illuvium Staker NOT buying land

You want maximum value, but also want people to have a positive experience with Illuvium to come back and spend more money, potentially deciding to “double dip” buying ILV because they love Illuvium so much.  You want the Price side of the market value equation to be as high as possible to generate max revenue/burn max sILV, and you could care less about transaction fees.  Result: Avoid a gas war by maximizing Price to ensure the highest bidder wins with a good experience.

Land Buyer NOT staked in ILV

You want to buy land for as low a price as possible.  You have a budget of ETH and maybe sILV you bought from Uniswap.  You want to make sure your one bid goes through and you don’t have a failed transaction costing you your precious budget to get land.  Result: you want the Price side of the equation to be high enough that you’re the only person bidding, and you get processed by the Ethereum network before anyone else. 

Illuvium Staker buying Land

You’re torn.  You want everyone else to overpay on price to maximize your revenue/burned sILV, but don’t want to overpay yourself.  You fear failed transactions and wasting ETH with nothing to show for it.  While it may cost you more of your hard earned/purchased sILV, you know it’s better to not lose ETH to a gas war.  Result: start the prices higher for everything, you pick the unit you want and jump in a little early with reasonable gas with confidence your transaction will be processed first.

Whales staking ILV and buying land

Hi!  Before I get into your scenario, have you considered giving your Illuvinati council vote to some guy that writes helpful Illuvium content?  Anyway, you know you’re getting land, and its just a function of which one(s) and when.  You still don’t want to over pay, and you want to maximize value for the DAO, and minimize negative experiences.  While losing a little money isn’t a big deal to get what you want, you want to maximize long term value of your Illuvium investment.  As such, it’s better to get more revenue, burn more sILV, and ensure there are fewer people annoyed at losing money to failed transactions.  Result: price higher, pay whatever ensures you go first in your Ethereum transaction, and minimize the discontent from everyone likely to blow up Discord with complaints.  Raise the price side of the equation.

Whale buying land but not staked in ILV

Welcome to Illuvium!  Thanks for your interest (and revenue).  FYI, you’re not reading this, so you’re on your own.  Feel free to overpay on the Price side versus the gas side, as that helps me and my readers more.

Summary

This really may be an ideal time for the DAO to launch the land sale with other metaverse properties going for top dollar at the moment.  While it may suck for those of us looking to buy cheap land with sILV, the market will determine the value of land regardless of what we do.  We might as well do what we can to shift value to the price side of the market price equation and benefit versus see more people lose money to failed transactions.  Unless something changes significantly in the market, this is most likely to be the lowest price, lowest visibility of the Illuvium auctions (not financial advice).


What did I miss?  Where are you at in my Venn Diagram?  Feel free to reach out to me on Discord (Deraji#0798) or leave a comment below.  Best of luck in the upcoming auction, and be sure to vote for the Illuvinati council December 5-7!

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Deraji
Deraji

Crypto curious thinker, amateur economist, geriatric millennial gamer passionate about Illuvium. Happy to share my economic and financial assessment of this unique blockchain NFT Play-to-Earn project. patreon.com/ilvfi


ILVFi
ILVFi

ILVFI focuses on the upcoming P2E game, Illuvium, the first proposed AAA-quality video game based on blockchain technology and NFT ownership. We'll focus on both the game play, as well as the in-game and ILV governance token economics.

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