Augur: Prediction Markets for Everything
N.B. This is an article I wrote one year ago. A lot has happened in the past year, but this is a pretty good summary of why Augur is so exciting. I've also made a video that walks through the process of creating a prediction market.
Augur-Why an Unstoppable Betting Platform is More than Fun and Games
Perhaps the most important aspect of the Ethereum Virtual Machine is that it is unstoppable: it takes an incredible amount of energy to be taken down[1]. This is a feature that makes it the perfect platform for Augur, a betting platform that allows for betting on anything users choose to bet on. Augur harnesses the innate desire humans have to predict what is going to happen into crowdsourced data. The betting action is also fun: people have gambled for thousands of years.
It’s a little bizarre, then, that betting and gambling are so heavily regulated in many countries, including the US. Some states have very open gambling laws: Nevada is an obvious example. Some states only allow sovereign tribes to set up casinos on their land. Sports betting happens in bars, garages and basements around the nation as people juice up their interest in a big game trying to guess the outcome. Fantasy Football is good business, with the two biggest fan betting platforms, Draft Kings and FanDuel, each pulling in a couple million in revenue per week, while NFL betting alone is estimated at $95 billion per year.
It’s no surprise that people are interested in betting on topics beyond sports and cards. Intrade, a now defunct company formed in 1999, first monetized this. Intrade allowed people to bet on any binary event; that is, an event with two outcomes. For example, will George Bush be elected president? One could bet “Yes” or “No” depending on what one expected. As the bets increased on one side, the cost of a “Yes” or “No” bet changed, just as the odds change in horse racing until just before the race begins. Those bets that become more certain pay out less, while those bets that are less certain, the longshots, pay out more.
The end result is we can get a futures market that is more accurate than polls. As people put their own money towards expected outcomes, it shows a greater amount of certitude than what they may answer in poll, which are often easily manipulated. Just as a poll requires randomized sampling, a futures market requires a lot of liquidity and participants: holding a futures market at a political rally would be far less effective than one widely available on the internet.
Unfortunately, Intrade was forced to bar US customers from using its platform in 2012, and by 2014 it closed permanently.
The concept of a futures market works because it is believed that those with the highest certainty of knowledge about future events (in some cases, insiders) will bet more money. In individual examples, there will be times when the “less likely” outcome happens. Those who bet on the underdog in that case will reap a reward commensurate to the odds of it happening. Presidential elections are a great example: while a futures market could be looked at as a quasi random poll of voters who know who they are going to vote for, there are still random events that can change people’s decisions (in last fall’s example, we had Clinton’s emails and Trump’s comments on women that likely swayed some voters near the last minute)
This is useful beyond something as mundane as a presidential election. Just as speculators in commodities markets allow farmers to ensure a more steady income, speculators in futures markets allow for third parties to plan and hedge[2]. A decentralized futures market offers anyone to bet on anything, from terrorist attacks to influenza outbreaks. This, unfortunately, makes them subject to political scrutiny, as many are uncomfortable with this sort of bet being legal, even if there is good evidence supporting the use of prediction markets in anything.
Removing Political Influence
With the introduction of an unstoppable world computer, the Ethereum Virtual Machine, a massive prediction market became a reality again. Augur, founded by Joey Krug (and advised by Ron Bernstein, cofounder of Intrade), is a futures trading platform just like Intrade, but uses the power of the ethereum blockchain, which cannot be shut down. Here’s how it works:
The token associated with Augur is called REP. REP, short for reputation, is a token that is held by validators, who ensure the outcome of an event is honestly reported. REP holders are incentivized to be honest reporters as the system punishes dishonest reporters. For example: “Will NYC get 10 inches of snow before December 25th?” REP holders will report after December 25th if this happened or if it didn’t. If there was 12 inches of snow, REP holders will report that it did happen, and those Augur customers who voted “Yes” will receive their payout. If there was 9 inches of snow, REP holders will report that it didn’t happen, and the “No” voters will be paid out. Because the REP holders are anonymous and spread out, it is incredibly difficult to get 51% of them to coordinate and report dishonestly, so those who report against the majority will lose REP, while those who report with the majority will gain REP.
REP is freely transferrable, and allows participants an opportunity to make some income by reporting on events. REP holders who do not report on events are also penalized, so this is not a purely passive product.
Users of the Augur platform will likely bet using a stable coin such as DGX (Ryan-link back to DGX article here), Maker DAI, or even the USD, as a widespread adoption of cryptocurrency should not be required for using this platform.
Unstoppable
As mentioned above, Augur is designed to be incredibly difficult to shut down. One, as mentioned above, is the use of a worldwide computer, the EVM. Augur does not have a central server database that can be shut down. Instead, it is run on every GPU that supports the ethereum network. A government could try to order Augur shut down, but actually doing so would be incredibly difficult. Likely only a few organizations in the world can do so, and they have much bigger threats to deal with.
The other thing that makes Augur difficult to shut down is the distributed network of reporters who hold REP tokens. Anyone who wants can buy REP at a crypto exchange (or using ShapeShift) and report on outcomes. Forbidding citizens to vote on REP would be an exercise in futility, as VPNs and the pseudonymity of ethereum wallets makes it incredibly difficult to find individuals who are doing so. Furthermore, REP holders are distributed worldwide.
As one can see, Augur is making itself into an unstoppable application for betting on future outcomes. Augur allows speculators and gamblers the opportunity to work together and as a side effect, create a product that will help preserve capital and allow for clearer economic based decision making by third parties.
-Jeff
Notes:
[1] Currently, ICOs in high demand have spammed and severely slowed the network. This will be fixed in the future through Plasma or Casper.
[2] A farmer may buy options in the commodities markets that will only pay out if the price of corn rises-that position will cost him a small amount of money, but if his corn crop is ruined due to bad weather that affects many farmers, and the price of corn rises, he can still earn money by closing that option. His net income is lower because of this hedging, but the volatility of weather is smoothed over time and he is protected from one bad year wiping him out forever.
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