No. Augur is not a prediction market. Augur is a decentralized application (DApp) on the Ethereum blockchain that provides anyone who wants to create a prediction market the tools they Augur gets out of the way the technical and cost obstacles that have always made it difficult to set up prediction markets. It makes the entire process efficient, secure and fast.In particular, it delivers a secure and reliable oracle on a peer-to-peer network—an automated way to determine the outcome of a predicted event on the blockchain. In a moment, we will see how that is achieved.
First, what exactly is a prediction market?
A prediction market is a market in which people can bet on the outcome of future events. The bets can also be sold as shares between the time they are made and when the event outcome is determined.
That means if you bet that the Democratic Party is going to take the senate in the upcoming elections, before now and the day of the election, you can sell your bet to another person for the amount you wagered or more.
The new owner of the share then can cash it when the market settles if the outcome is what you predicted. However, they also stand to lose the bet.
When the event happens, those who predicted right get back their money and what those who lost had wagered.
The concept of prediction markets is not new. Perhaps it has been around since the beginning of human civilizations. In the recent recorded history, however, prediction markets have been used to tell the outcome of elections and commodity market movements.
Before opinion polls in the 20th century, many in the US relied on prediction markets run from homes, cafes and exchanges to get an idea of how presidential and state elections would turn out.
Interestingly, almost always the prediction markets were right. According to a research paper titled Historical Presidential Betting Markets, by economist Koleman Strumpf and Paul W Rhode, in the 15 elections between 1884 and 1940, only that of 1916 went the opposite of what prediction markets had shown.
Prediction markets offer two types of opportunities:
- It is a way for the members of the public to bet and stand to win more than double what they invested (wagered). Augur opens up many more ways one can make money from prediction markets beyond betting on the outcome of future events. We explore those options in a moment.
- It is a way for institutions, companies, and even individuals to figure out how events in future are likely to turn out. When people vote about future events with their money, it turns out they are a lot more accurate. Prediction markets operate on the principle of the wisdom of the crowd. It has been determined that what a crowd finds consensus on is more accurate than what an expert or a group of experts can determine.
With that being the case, Augur is turning out to be an efficient betting platform but also a machine (some sort of a crystal ball) for telling us what is likely to happen in the future using the wisdom of the crowd.
The promise of winning money is indeed an incentive for people to contribute or crowdsource their wisdom, which is more potent than what an expert can say or predict.
Major organizations, including tech companies like Google, have always used prediction markets to determine how their actions, policies and even products are going to be accepted. Prediction markets is often a critical component to their decision-making process.
Augur is among the first Decentralized applications (DApps) to be set up on the Ethereum blockchain. Like all the other DApps, a smart contract on the blockchain executes its operations.
That means that there is no team or an admin that manages its operations on a day-to-day basis. Indeed, Augur is now almost completely a Decentralized anonymous organization (DAO). It exists and runs on its own.
The project is a brainchild of Forecast Foundation OÜ, a company founded by Jack Peterson and Joey Krug in 2015. Ethereum’s founder, Vitalik Buterin, is one of its advisors.
Besides it being among Ethereum’s first applications, Augur was also among the first project’s raising funds on the blockchain through an Initial Coin Offering (ICO). In the token crowdsale that began in late August 2015 and ended in early October, the project raised slightly over US$5 million.
The amount was needed for the development of the platform. However, the ICO was also a way to distribute Reputations (REPs), the new platform’s native coins. In a moment, we will see how the REP coins help the platform function.
Performance of REP tokens since the Augur ICO.
It is important to point out that Augur is no longer the only platform on the blockchain that offers the environment and tools for creating and running prediction markets. Gnosis is another DApp on the Ethereum blockchain with similar capacity.
What is special about prediction markets on Augur?
With the internet, prediction markets quickly moved online. In 1988, the University of Iowa became the first to launch an electronic prediction market on the Iowa Electronic Markets for that year’s US presidential election.
Indeed, today there are several online platforms that facilitate users to create and manage prediction markets. An example of such a platform is PredictIt.
However, most of the centralized platforms for creating prediction markets have several weaknesses that Augur is attempting to fix.
It is not anyone who can create a market on the platforms. Also, it is not everyone who can access and trade on them. Often there is geographical exclusion. For example, if you are outside the United States, you most likely cannot even access the PredictIt platform.
You can’t create any kind of market. Often there are stringent requirements before you are allowed to create and maintain a prediction market. Also, some topics might not be allowed.
High cost of entry
The centralized prediction market platforms charge up to ten times what it costs to create a market on Augur and also trade the shares. For example, while Augur charges bettors about 1% of the value they stake, PredictIt takes close to 10%.
It is easy for someone to tamper with the results on a centralized platform. Often they have a single server or database to target. Also, users have to trust those in charge of the system that they are not motivated enough to compromise it.
It is possible for the admins to make changes behind the scenes to create a certain narrative about a future event. For example, they may want to make the public believe that a certain candidate in an upcoming election is the most popular, while that is not the case.
How to use Augur
On the Augur platform you can be a market creator, reporter, a bettor or a share trader. You can also be a REP stakeholder who helps with consensus making processes.
You also stand to generate revenue through any of those roles. Indeed, you can hold more than one role on the platform. For example, you can be a market creator and also a reporter.
However, to take part in the Augur activities, you need to hold the Reputation (REP) tokens. It is having this token that gives you the right to create a market, report or trade.
More importantly, the REP tokens are critical because those who hold them can vote in decision-making processes that preserve the integrity of markets and indeed the entire ecosystem.
In total, there are eleven million REP tokens in the circulation. All these tokens were issued during the ICO in 2015. You can buy these tokens on major crypto exchanges online.
Acting as a market creator
Anyone with REP tokens can create a prediction market on the Augur platform. As a market creator, you determine and formulate a question about the outcome of a future event. Your question should have a definite answer that others in the market can bet on and trust that the resolution is straightforward.
It can be a question like ‘Which party will win Texas in the 2020 presidential election?’
The outcome for this question is a simple Democrat or Republican. That means the resolution is straightforward.
You can create questions with more complex, likely outcomes. You just need to ensure that the outcomes are definite.
You also need to identify the source that will provide the information about the outcome of the event. For example, on the question about whether the democratic party wins Texas, you could designate CNN, for example, as the source to be referenced.
You also need to pick a reporter, someone to take the information about the outcome of the event and enter it into the Augur system. This triggers the move to the next stage.
As a market creator, you need to stake some REP tokens. These you get back at the settlement of the market, along with the fees that the bettors paid to wager on the outcome of your question.
You also need to provide a validity bond in REP tokens as a guarantee that the question you provided is in the state you say it is and it is going to resolve in the way outlined. If any of these details turn out to be erroneous or misleading, you will lose the money.
If you are honest and everything works out as you planned it, you get your validity bond back when the market settles.
Then there is the ‘no show bond.’ You also provide this amount in REP token as a guarantee that the reporter you picked will provide the information needed to settle the market.
If the designated reporter cannot perform the function, you lose this amount to the individual who takes their place.
Indeed, this is an incentive to make sure that no market remains unsettled because the creator didn’t pick a reliable reporter.
In addition to collecting fees, the incentive for the market creator is to collect data that is going to help them decide or plan for the future.
Taking part as a reporter
To become a reporter means you are the person to feed the system with information confirming the outcome of an event predicted. Your source has to be the one the market creator designated.
A market creator can elect you to be the reporter. They need to trust that you are going to show up when the predicted event happens and play your role accordingly. That is because if you don’t show up, then they lose the REP they staked as ‘no show fund.’
It is also possible for the market creator to also be the reporter. However, where there is a likelihood of a conflict of interest, it is always better for the market creator to pick a different person.
Like with the market creator, a reporter has to have REP tokens. This is important because they need to stake the tokens when they make a report. This is so that if they are dishonest, and others dispute their input, they have a price to pay for it. The risk of losing one’s REP incentivizes reporters, to be honest.
Anyone with REP tokens can stand in as a reporter in any prediction market if the designated reporter cannot perform for whatever reason. When this happens, the new reporter takes the ‘no show bond’ that the market creator had staked.
The designated reporter earns part of the fees the betters and traders pay.
Being a bettor
You become a bettor by going onto the platform and looking at markets that have been created and putting money in those odds you think you can predict accurately and thus stand a good chance to make money.
If your prediction is correct, you can win up to double your stake. Of course, buying shares that most others have bought almost assures you of winning.
However, if you wager on the side with the smaller odd, you are going long, and that means if that side turns out to win you stand to win a lot more.
The odds range between 0 and 1, complimentarily. That means if, for example, the YES odd is 0.7, the NO odd is 0.3. That means if you bet on YES, you will pay 0.7 ETH for a share, and if you win, you get your 0.7 ETH back plus an extra 0.3 ETH.
If you bought the 0.3 share, and you win, you get it back, plus 0.7 ETH.
Trading bet shares
You can trade the Rep token on exchanges like you would other assets.
More importantly, though, you can buy and sell prediction shares (basically, futures contracts). Indeed, outcomes might be affected by things happening before the actual date.
For example, it might look like the democratic party is going to take the Senate during the midterm elections, but then it turns a few months before the election, the party is hit by a major scandal.
Such changing dynamics can make the value of shares in prediction markets to fluctuate. Just as you would take advantage of the volatility of stocks due to market trends, one can take advantage of the changing fortunes for various prediction market shares to generate a revenue.
How to set up Augur
To use Augur as either a market creator, reporter, better, or just REP holder , you need to download and install the DApp on your computer.
You can also use third-party websites to access the platform.
To download the Augur interface, you need to visit the project’s official website. The project is largely still work in progress, and therefore it is not uncommon to find the installing files unavailable as they are being worked on.
Once you have the install file downloaded, launch it and follow the wizard through the process.
Once it is ready, you can select to connect to the mainnet or a testnet where you can experiment with the platform spending no real ETH. On the testnet you are assigned a free demo ETH to use. A testnet can be your learning space that comes with little risk before you go to the mainnet and spend your money.
When launching the mainnet for the first time, it is going to take a few minutes to an hour for your computer to sync with the rest of the network. That includes downloading files that are critical to the transactions you will carry out.
Once it completes this process, you are connected to a node that will be the bridge between you and the rest of the Augur network. The interface will open on your browser.
On the homepage you will see categories of prediction markets you can join as a wager. If you click on any of the markets, you access an order book from which you can buy a share.
However, before you can do anything, you need to connect a wallet. The Augur app supports Metamask, Edge, Trezor and Ledger wallets. You can also fund your Augur wallet using credit cards and make transfers from exchanges like Coinbase.
It is through the connected wallet you can buy and sell shares using ETH as the payment method. You also need ETH from your wallet to pay for transaction fees. Remember, Augur runs on top of the Ethereum blockchain, and therefore every of its transactions needs gas.
The Augur cycle
The four stages in Augur function:
The prediction market creation
Anyone with the REP tokens creates a market by drafting a question regarding a future event. Their motivation can either be the need to generate a revenue or collect data to give them insight about the future.
To create a prediction market on the Augur takes about 5 minutes. The dashboard for doing this is accessible through the Augur app or a web portal by a third party. The market creator can stake the REP needed, provide gas for gas, and also set the number of shares to be in distribution.
In this stage people are expected to buy shares supporting either the NO or YES outcome of the future event that is the focus of the market. They can buy the share by spending ETH, DAI or USD.
The Augur dashboard accessible through its app also provides access to an order book where one can buy prediction market shares.
Here the reporter looks at the resolution source provided by the market creator and informs the market about the actual outcome. This is meant to make the next stage possible.
However, if the reporter gives inaccurate feedback, anyone with REP can challenge or dispute their call. Others can choose either to support the reporter or the challenger by staking their own REPs.
The winning side takes all the REP staked. The reporter too loses their own stake because for one to become a reporter they must stake some REP. This is an incentive for players to be honest about the outcome.
In this stage, people can exit positions by selling their shares to others.
If the challenger is also challenged, then the market could lead to a fork and the freezing of the assets in the market for close to 60 days. The fork leads to a split that then forces players to choose a side to join.
In this stage positions are closed. Those whose predictions turned out to be true then you sell your share back to the system and collect your money, which includes the amount bet on the opposite side. If your prediction was wrong, you lose your side of the bet.
Augur is a powerful application of the blockchain. It is likely to revolutionize and overhaul how prediction markets operate going forward. It stands to give institutions and individuals the power to understand the future with little technical and cost hindrance. It is, however, still early days for the project.