Auction mechanism

When an operator joins the protocol, they are asked to set a standing bid by selecting the values above. Upon finalising these, the bid is recorded as a smart contract on the blockchain and the operator enters the auction set. The auction set describes the group of node operators actively seeking work, i.e. waiting to be slotted into a DVT cluster, ranked by their auction score.

The reason why the auction score and not the bid is the defining criterion for selection is that the Byzantine Finance protocol seeks to maximise both profits and stability. Stability increases with more reputable operators and longer operating periods, which is why auction score moderates the bid to prefer reputable and loyal operaters.

As soon as an auction is triggered, the top $n$ node operators are selected from the auction set to build a DVT cluster and operate the validator.

If an operator is part of this group, their smart contract will trigger: Their total auction bid is collected and a number of validation credits are minted for them equal to the number of days in their desired staking period. If insufficient funds are available in the wallet associated with the operator, this operator is skipped (and his bid is deactivated) and the next-highest-ranked operator in the auction set is selected instead.

Once the auction contract collects a bid from an operator, it, as well as the associated VCs, are held by the contract. They are only released once the strategy vault requesting the node operators notifies the auction contract about the DVT cluster's onboarding signatures.

If all signatures are collected and the DVT cluster successfully begins operation, VCs are released to the node operators and bid prices are sent to the vault.

If signatures were not successfully collected, the strategy vault returns the addresses of the offending node operators. Their paid bids are returned to them, they return to the auction pool, and the VCs they were meant to receive are burnt. In addition, this counts as a strikeable offence.

Technical details

Value	Explanation
Auction score	The value that determines final auction success, influenced mainly by the VC bid price, but also prefers operators bidding for longer periods of time and those with a better reputation.
VC bid price	Desired price per day the operator wants to validate for.
Auction bid	The VC bid price multiplied with the number of days an operator wants to validate for. This is the price an auction winner would pay.

For detailed formulae and explanations, see Auction math for econ nerds.