Prediction Markets and the Future of Crypto Self-Regulation
Augur is on its way. As a decentralized oracle and prediction market, Augur not only allows for the winnowing of truth, but could also provide a way to trustlessly short over-hyped and over-valued projects. Prediction markets can allow for targeted shorting based on specific technical metrics, providing transparency for all actors in this space.
Currently there are few ways to short crypto projects (protocols and ICO tokens alike). Typical shorting requires borrowing on margin, usually through a centralized exchange. There are a few dangerous attributes with preclude widespread adoption of this method, namely lack of liquidity and high volatility. Borrowing to short a crypto project is asking to get liquidated, likely during mass liquidation events, harming both borrower and lender. With limited shorting ability, a trader with a negative or bearish view can only sell his or her stake, hampering price discovery on a crypto asset.
Enter the prediction markets of Augur. The prediction markets, or event derivatives, are bets on the occurrence or non-occurrence of an event. If you are familiar with PredictIt, the CFTC sanctioned (No-Action Relief) prediction market, Augur works the same way, but with decentralized market resolvers. The prediction markets are priced off of the underlying market, but are not reliant on borrowing and lending of assets on the underlying market. The prediction markets will likely not be settled in the underlying asset, but instead utilize a stablecoin. While there are many stablecoins on the way, Eth likely could become one with the implementation of Proof of Stake.
When Augur launches in the near future, the prediction market will allow anyone to create a market not only on the future price of a crypto, but also on other metrics or characteristics, such as the tx/s of a blockchain/DAG at a given time, any other proxy for technical merit of a project. It is then that a motive for stressing and stress testing projects will arise. Think of it like a decentralized, permission-less bug bounty, where the competent will separate the incompetent from their holdings, and provide true price discovery and transparency for a project.
If a prospective buyer wants to buy a cryptocurrency that advertises 7000 tx/s, the buyer can check the relevant prediction market for the likelihood of the truth of the assertion. Will a privacy-centric crypto’s protocol upgrade break anonymity (will it leak the IP addresses of its users)? Check the prediction market. Will the tangle’s coordinator be lifted by a specific date? Check the prediction market. Will a $100B+ market cap cryptocurrency be globally frozen by a decision of a half dozen individuals? Check the prediction market.
Think of it as a forward indicator narrowly tailored to specific metrics. Unlike a derivative market that focuses only on price, these prediction markets can be focused on the exact technical assertion. This reduces noise from other factors that cloud up price discovery. The participants on the prediction markets can put any claim to the test, with the best motivator of all: greed.
By utilizing prediction markets, the crypto ecosystem can vet assertions and provide useful data to potential investors. The incentives and motives for prediction market users will be put to the test against the interests of project pump and dumpers, and dishonest devs. This will be the start of a more disciplined crypto investing space.
The future of crypto self-regulation is here.
Note: There are a few other crypto prediction markets in development, including Gnosis, Spectre, and something called STX? Augur is selected as the focus of this article as it appears to be the closest to launch. If only there was a prediction market for this.