Mechanism Design
Daemon uses a reverse VCG auction to allocate projects to members. This page covers how the mechanism works and why it produces truthful behavior.
Standard VCG Recap
In a Vickrey-Clarke-Groves mechanism, agents report valuations, the mechanism selects the socially optimal outcome, and each agent is paid based on the externality they impose on others — not their own report. This makes truthful reporting a dominant strategy.
See: VCG Mechanism, Dominant Strategy
Daemon’s Adaptation: Reverse Auction with Capacity Constraints
In Daemon’s version:
- Agents = cooperative members (labor suppliers)
- Goods = projects to be completed
- Bids = time estimates (“I can do this in X hours”)
- Allocation goal = assign all projects while keeping every member in the 32-40 hour band
This is a reverse auction because members are suppliers bidding costs, not buyers bidding prices. It’s capacity-constrained because each member has a floor (32h) and ceiling (40h).
Why Truthfulness Works
Alice bids 5 hours on a project. Bob bids 7. Carol bids 12.
Alice wins. Her Vickrey price (credited hours) is based on the next-best bid: 7 hours.
- If Alice finishes in 5 hours → she’s ahead by 2 credited hours
- If Alice finishes in 8 hours → she eats 1 hour beyond her credit
- If Alice had bid 10 (overbid) → she’d have lost to Bob and missed the project entirely
The incentive is clear: bid honestly, and the Vickrey price will usually be at or above your actual time. Underbidding risks eating hours. Overbidding risks losing work.
Relevant Literature
- Procurement-VCG (PVCG) — Extends VCG to handle capacity limits in reverse auction settings. Proven to achieve truthfulness, Pareto efficiency, individual rationality, and weak budget balance simultaneously. See: Cong et al., “A VCG-based Fair Incentive Mechanism for Federated Learning” (2020/2024).
- Truthful Job Scheduling (Nisan & Ronen, 2001) — Workers self-report task durations; mechanism assigns work to minimize makespan. Plain VCG performs poorly here (dumps everything on the fastest worker), motivating capacity constraints.
- Balanced VCG (B-VCG) — VCG variants that add budget balance constraints while preserving strategy-proofness.
Two-Phase Allocation
The mechanism operates in two logical phases:
Phase 1: Fill the Floor (32 hours)
Every member must be assigned at least 32 hours. This may require assigning someone work they’re not the most efficient at — that’s a deliberate trade of efficiency for equity. This is the cooperative’s promise.
Phase 2: Allocate Surplus (up to 40 hours)
Any remaining project-hours beyond everyone’s 32-floor get allocated via standard VCG efficiency optimization, capped at 40 hours per member. This is where the mechanism’s efficiency shines — surplus goes to whoever can do it best, priced by externality.