Augur Prediction Market Review
- Welcome to the world's first decentralized prediction market!
- Built on the Ethereum protocol, Augur allows users to establish prediction markets as smart contracts and gives rewards to those who report on the events.
- $5.2 Million in capital raised and tremendous hype in the cryptocurrency marketplace means that Augur could have inroads to substantial liquidity.
- Not only could Augur transform the prediction market, their success might provide a glimpse into the future of smart contracts.
What is Augur?
Augur is a prediction market platform allowing users to wager on the outcome of future events, with a mechanism that balances probabilities based on the popularity of each particular outcome with the crowd. The probabilities determine the cost of a prediction contract, which expires as either true or false, a correct contract delivering 100% of value, a false contract delivering zero.
Augur is also the first major (hopefully of many) decentralized application (DAPP) utilizing Ethereum, and represents a major proof of concept for this underlying technology. We will examine the reasons that Augur would choose to utilize the Ethereum protocol below, but we emphasize here the decentralized nature of the application. Decentralization ensures that Augur cannot be censored by governments that view prediction markets as gambling, whilst ensuring that no Augur executive or ownership exists to be arrested or otherwise coerced, or to embezzle from the company.
The decentralized nature of Augur has the potential to be truly groundbreaking as it unleashes a new mechanism for ensuring honesty in reporting the outcome of events, utilizing the wisdom of a crowd containing individuals who might have an interest in reporting falsehoods. It will be truly interesting to see if Augur is successful in delegating reporting this way, as it would provide an interesting proof of concept that most certainly could be utilized elsewhere. To this point Vitalik Buterin, founder and lead developer of the Ethereum network, wrote an interesting article about the role that "oracles", or those reporting on real world events, might play in the future deployment of smart contracts.
Why does Augur use Ethereum?
Augur gambled in utilizing the Ethereum protocol considering Ethereum hadn't yet launched, it was unproven in terms of security, and the value of its underlying asset Ether had the potential to make bitcoin value look stable by comparison. The decision was made because using Ethereum allowed Augur to build a fully integrated prediction market ecosystem, with an imbedded coin and blockchain to record markets and transactions - in a seamless fashion not possible elsewhere (i.e. on a sidechain). Ethereum has since launched and has so far proven secure, though the jury is still out in terms of relative price stability.
We spoke with Augur Marketing Director Tony Sakich (tonysakich.com) about this issue, and he had this to say: "I feel that the best prediction market will win and that the platform it’s developed on isn’t nearly as important as the final product. I had a long talk with Joey and Jack [Augur co-founders Jack Pedersen and Joey Krug] about why Ethereum was chosen over Bitcoin and the response echoed one that I have heard from many other Bitcoin developers. The response was - and I'm simplifying because I am not a developer - that developing on Ethereum is just much simpler and the platform is more developer friendly. Additionally, being one of the first high-profile dApps in development on Ethereum gives us a direct line of communication with the Ethereum team, which has been invaluable."
What is reputation? How does Augur ensure honest reporting?
In August of 2015, a crowdsale was held distributing 80% of a total 11 million coins called Reputation (REP) to investors. To call REP a coin is somewhat misleading. Generally speaking, when a coin is issued by a particular product - by product in this context we mean something that has a purpose above and beyond simple issuance and trading of a coin - it is required for the actual trading of the product. We'll first explain this traditional interaction, which should help to better explain how Reputation works in the Augur ecosystem.
Take, for example, Storj, a peer-to-peer file sharing company utilizing the Counterparty protocol. Storjcoin was sold in an initial coin offering, and was then used as the currency required to buy and sell storage space on the platform. This has two effects, at least theoretically.
First, as demand for storage space rises, the cost of the coin should rise in corresponding fashion. In that way, there is a direct correlation between the success of the company and the price of the coin, which may be bought and sold on third party exchanges. Second, coin holders act as an engaged community bolstering the product, through direct usage as well as through a sort of evangelical effect.
As opposed to Storjcoin, REP is not the currency with which bets are placed on Augur's prediction market. Bets are actually meant to be placed with Ether, the native currency of the Ethereum platform on which Augur sits, and eventually with bitcoin. Holders of REP are instead compensated with a cut of the fees generated, or 2% of the bets made, according to the amount of REP they hold. The amount of fees collected will rise alongside the growth of Augur, and so there is a direct relationship between demand and the profit of REP holders, just as was the case with Storjcoin in the example above.
REP holders are also relied upon to perform the reporting of events. Failure to do so - or inaccurate reporting - results in losing some of your REP holdings, while successfully reporting on events is compensated with an additional percentage of the fees generated. This requires an engaged REP holding base, and might be a deterrent for some. This might lead to a creeping centralization effect, as the less engaged users slowly sell their REP to those who are more into the whole process.
Mr.Sakich was less concerned about such a centralizing effect. "There are plenty of safeguards to protect this from happening. If a REP holder finds the responsibility of event reporting to be too time consuming, they have the option of simply selling REP on an exchange and allowing someone else the change to report." And indeed, there is a well-developed exchange market for REP, which should grow considerably as Augur expands its user base.
Will it Work?
Augur is an exceptionally creative product that has a chance of fundamentally altering not only the niche prediction market...market, but also might serve as a template for application in other industries. That being said, Augur has a number of challenges to overcome should it ultimately prove successful.
First, just as Ethereum is eyeing Augur with extreme interest as their own Dapp proof of concept, Augur depends greatly on the success and popularity of Ethereum. While there are plans to allow bitcoin betting on the Augur prediction markets, this is wholly dependent on the speed with which Ethereum is able to open up a bitcoin sidechain. Until then, bets may only be placed with Ether, a much less popular, less exposed, less liquid, and more volatile currency. (Though some might argue it possesses a brighter future). This limits greatly the size of the audience whom can easily bet with Augur, and will make reaching the critical mass required for an active and engaging prediction market difficult. Additionally, the volatility characteristic of crypto-markets is another great challenge for Augur. Settling the outcomes of a prediction market takes a surprisingly long time - up to a month after the event has taken place, not to mention the time between the bet being placed and the event occurring. Volatility in the interim could lead to an entirely different value associated with the original bet. Without some sort of hedging mechanism, this might be a deterrent for greater adoption.
Not to worry, says Mr. Sakich. "The Augur platform was designed to be currency agnostic, so in the future it will be able to use bitcoin and more importantly stablecoins that are currently under development. Stablecoins mitigate currency risk and act as proxies for fiat currencies. Vitalik also told other members of the Augur team about the possibility of using a crosschain into a decentralized exchange within Augur, to convert all incoming cryptocurrencies into the stablecoin. Additionally, the platform also allows for the creation of markets that could function as hedging tools, including contracts for difference."
Augur is an exceptionally ambitious project, and we are greatly encouraged by the professionalism and drive of the team. With the support of Ethereum - and with the wider crypto-community interested in seeing the project succeed - Augur seems the best bet for pulling off an entirely decentralized prediction market, which could light the path for application in the wider smart-contract marketplace.
- Augur White Paper
- Founded By:Jack Peterson and Joey Krug
- Base of Operations: San Francisco, CA
- Venture Vapital Raised:$5.2 million (18,000 BTC and 1.1 million Ether)
- Accepts US Traffic: Yes
- Twitter: @augurproject, @tonyswish