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Dutch Auction Exit
Fair and Controlled Liquidity Release
To keep our liquidity pool strong and sustainable, we use a Dutch auction system for exits. This creates a market-driven, disciplined, and fair process that protects long-term participants and discourages opportunistic withdrawals.
Why a Dutch Auction?
Unlike open liquidity pools where anyone can withdraw anytime, a Dutch auction:
- Prevents sudden value loss or pool drain
- Encourages long-term holding by adding discipline to exits
- Ensures price discovery — exits only happen at a price the market agrees on
Key Principles
1. No Timing Advantage
Everyone can submit their bids before the auction closes. It doesn't matter when you bid — what matters is how low you're willing to go.
2. Price Determines Priority
Those who are willing to exit at a lower price per token (i.e. accept a greater discount) get filled first. If more exits are requested than the system allows, only the lowest-price bids are executed.
3. Capped Exit Volume
Only up to 50% of total liquidity ever contributed (minus past exits) is allowed to leave through Dutch auctions. This cap protects the pool from being drained.
How It Works — Step by Step
1. Bids Are Submitted
Liquidity providers (LPs) submit a request like:
"I want to exit with €500,000, and I'm willing to sell my tokens at no less than €0.092 each."
2. Bids Are Sorted by Price (Low to High)
The system ranks all bids from lowest price to highest — those willing to accept the biggest discount come first.
3. Clearing Price Is Found
The auction accepts bids from the bottom up (lowest price first) until the total exit amount hits the allowed maximum (e.g., €3 million).
The last bid that fits sets the clearing price — everyone who bid at or below this price exits at that same clearing price.
4. Settlement
Successful LPs receive their share of the paired token (e.g., USDC or mg Gold). Others can try again in the next round.
Example Scenario
Let's say:
- Max exit allowed this round = €3 million
- There can be other rules too (e.g., minimum price thresholds)
- LPs submit the following bids:
| LP | Amount | Minimum Price |
|---|---|---|
| A | €500k | €0.088 |
| B | €600k | €0.090 |
| C | €400k | €0.092 |
| D | €700k | €0.095 |
| E | €300k | €0.098 |
| F | €200k | €0.100 |
| G | €500k | €0.105 |
| H | €400k | €0.110 |
After sorting from lowest price to highest, we fill bids starting from the bottom. The system stops when total accepted bids reach €3 million.
Suppose this happens at LP F's bid at €0.100 — that becomes the clearing price.
Result: Everyone who bid €0.100 or lower gets filled at €0.100, even if they asked for less.
Bids above €0.100 are not executed.
Margin Redistribution to Pool Members
The margin between what a bidder was willing to accept and the final clearing price is collected by the pool. This value is then redistributed to all liquidity providers who remain in the pool, proportional to their share of the total liquidity.
Example
- LP A bids to exit at €0.088, but the clearing price is €0.100
- The €0.012 margin per token is collected by the pool
- This margin is aggregated across all filled bids and shared among the remaining LPs
- The longer you hold, the more you benefit when others leave
Why This Works
| Benefit | Description |
|---|---|
| Fair | All successful bidders receive the same clearing price |
| Protective | Exits only happen with a discount, preventing abuse |
| Incentivizing | Remaining LPs gain rewards when others exit |
| Sustainable | Controls liquidity outflow with capped exit volume and loss-based exit mechanics |
Key Takeaways
:::tip Market-Driven Fairness The Dutch auction mechanism ensures that:
- No one can "front-run" or time the market for unfair advantage
- Those most eager to exit subsidize those who stay
- The pool becomes stronger with each exit, not weaker :::
:::info Protection Mechanisms
- Maximum exit caps prevent pool drainage
- Minimum discounts ensure pool sustainability
- Clearing price mechanism ensures equal treatment
- Margin redistribution rewards patient participants :::
:::note Related Concepts This mechanism works hand-in-hand with Position-Based Liquidity Pools to create a fair and sustainable system. :::