Fees, Fees, and… Fees?
If you look at Augur right now there’s really essentially one core problem to be solved going forward: user experience. I’d always said something like “When Augur launches it’ll be slow, expensive, and hard to use.” The goal behind launch was to get something out there that fundamentally works, even though it has those three big limitations. Post launch, those are the three problems to be solved.
Given that Augur really is a market based platform/protocol, I think it’s always good to look, well, at the economics! General difficulties of using Augur will improve over time as the developers improve the platform, and speed will be solved by things like 0x trading, state channels, Plasma, and layer one scaling. But what about fees?
Right now if you want to use augur you have a few fees:
- Fees to get ETH (debit on coinbase of 4%, ach is 1.5%)
- Volatility issues associated with ether itself (daily volatility of ~5%) which won’t be fixed until something like dai is supported
- Reporter fees (very low atm, like 0.01%, likely closer to 1% in the long run)
- Market creator fees (~1–2%) which I think will trend towards 0 over time
- Ethereum gas fees (~3% on a $100 order) which’ll be solved as the Ethereum network scales
The absolute cheapest you can get is hedging out the volatility (say around 1.5% cost of capital + fees to do so), buy with ACH on GDAX (0 fees that few people know about), use a market with a fee of 1%, and do a large order (say $500) so the gas fee is more like 1%.
That’s about 3.5% in fees [fees aren’t charged on every trade though, but rather open interest, but we’ll get to a metric we can use to compare fees to the regular world quite easily in a moment]. Maybe add 2% for spreads because given all the above and the speed of Ethereum and you’re at 5.5% best case scenario.
Worst case scenario [or sometimes even average case scenario, because the average user won’t know all the tricks above] is you’re coming in through debit on Coinbase (4%), not hedging out ETH volatility (say that’s a 3% cost for a day, since it can go either way), not being careful about picking a cheap market (2% fee), and doing a smaller order size (3%). That puts you at 12%, add in 2% for spreads and you’re at 14%.
Ok so to compare this to the outside world, in the UK between markets like Betfair and bookies the payout ratio is about 92–93%. That roughly means for every dollar matched that’s how much a user expects to get back on average. Since fees are charged on open interest in Augur, we can almost directly compare those fees above to external world payout ratios. So, best case scenario on Augur your payout ratio is around 94.5%, average/worst case scenario your payout ratio is more like 86–88%. Which perfectly explains why it doesn’t make a ton of sense to use Augur for much today.
There are two additional avenues to explore here. One is, how do those fees drop so that it does make sense to use Augur and it’s the #1 venue for almost anything? And two, is there anything where it makes sense to use Augur today?
Of the five types of fees, reporter fees are pretty low at the moment, so we won’t examine them. Let’s look at the rest though.
For fiat on ramps the most popular option is Coinbase. If you want to buy Ether there you first have to deposit dollars [or other crypto]. The cost to deposit dollars with an ACH transfer is 1.5%, which is pretty high given that most forex sites allow ACH deposits for free. If you want to use a debit card, it’ll cost you 4%. Again forex sites are free to 0.05%. Crypto though does have higher fraud risk, which probably explains some of the fees for debit as well as the fact that Coinbase has to make money somewhere! If you use Coinbase Pro / GDAX, your ACH fees are 0.
Hopefully as more competitors pop up, Coinbase shifts the ACH fee for regular retail users down to 0 as well [and begins to make money primarily on the exchange itself instead]. Additionally, there are new competitors to Coinbase popping up like the ICE spinout Bakkt, which should hopefully drive fees down and ideally force a competitive move to make ACH fees 0 for retail and not just pro traders using GDAX / Coinbase Pro.
For volatility issues, the simplest way to nip them in the bud is for markets to be able to be created in a currency like Dai, which knocks out the volatility risk of using ETH and thus effectively makes markets cheaper to use. Newer releases of Augur will likely have this.
On market creator fees, I believe those will drop down to near marginal cost [so essentially 0] over time. As a market creator, you want to attract as many users and trading activity to one’s market as possible [especially more than other market creator’s markets]. No fees will encourage people to trade. This begs the question: where will market creators make money from in the future? I think the answer is market making, e.g. offering to buy and sell on both sides and providing liquidity for the market whilst charging a spread. It’s the most similar to how regular markets work and what people are used to.
The last category of fee is transaction fees / gas fees in Ethereum. Fees are relatively high at the moment because Ethereum is being used a lot and the network’s throughput is not very high [a few transactions per second]. As Ethereum scales, these fees will drop to mere pennies.
Add all these fees up at the end state and you get fees sub 1% for a payout ratio above 99%, which is pretty damn cool.
So where does it make economic sense to in theory use Augur today given all that?
There are some use cases where it probably is still the best option even today. For example, derivatives on the ETH price.
There buyers are sophisticated crypto users, probably coming through GDAX with no fees and they won’t care about ETH volatility in this scenario.
And sure enough, the most popular market on Augur right now is
“Will price of Ethereum exceed $500 at the end of 2018?”