  Second-price auctions with deposits are frequently used in blockchain
environments. An auction takes place on-chain: bidders deposit an amount that
fully covers their bid (but possibly exceeds it) in a smart contract. The
deposit is used as insurance against bidders not honoring their bid if they
win. The deposit, but not the bid, is publicly observed during the bidding
phase of the auction.
  The visibility of deposits can fundamentally change the strategic structure
of the auction if bidding happens sequentially: Bidding is costly since deposit
are costly to make. Thus, deposits can be used as a costly signal for a high
valuation. This is the source of multiple inefficiencies: To engage in costly
signalling, a bidder who bids first and has a high valuation will generally
over-deposit in equilibrium, i.e.~deposit more than he will bid. If high
valuations are likely there can, moreover, be entry deterrence through high
deposits: a bidder who bids first can deter subsequent bidders from entering
the auction. Pooling can happen in equilibrium, where bidders of different
valuations deposit the same amount. The auction fails to allocate the item to
the bidder with the highest valuation.
