Community-driven markets can be Augur’s first success story

Co-authored with Henri Hyvärinen.

This post is focused on why the ability to create markets is such an interesting feature of the Augur protocol. For a deep-dive into how Augur works, I recommend reading the project’s whitepaper.

Augur web application UI

What Augur enables

The Augur protocol defines how users can create, participate in, and verify the results of markets. As users place bets, and sufficient liquidity builds, those markets can be considered odds of future events (prediction markets). Currently, there is $2.1 million of open interest on Augur — and while that is a small number compared to any traditional financial market, it shows the Augur system has worked without faults so far. However, it’s still early days for Augur and it’s obvious that the technology still needs to improve significantly before adoption by the mainstream is possible.

New technologies seldom develop in isolation but rather in a series of infrastructure-application-infrastructure cycles. New infrastructure enables new applications and those applications, in turn, demand more infrastructure in order for their full potential to be realised. Augur’s cycle started off with the introduction of Ethereum (and smart contracts) which enabled the protocol to be built. As traders are limited to betting in ETH, user experience is hampered as traders are forced to take on the volatility of the asset they are betting with. This is why new infrastructure like MakerDAO’s stable cryptocurrency DAI being implemented into the protocol drive better usability.

Once the Augur protocol matures — as features and liquidity improve — it can outcompete existing centralised prediction markets by providing:

  1. Global access. Anyone in the world with an Internet connection can participate in global financial markets. Access to the markets is difficult to stop.
  2. Lower fees. The Augur system is not rent-seeking, which means results of markets are verified at the lowest cost someone is willing to provide the work (contrasted to traditional betting firms that charge a 3–7% fee).
  3. New markets. Users can create new markets that did not exist before. This is mainly due to the high cost of creating markets in traditional finance.

Global access and lower fees (through the removal of rent-seeking middlemen) are built-in features of crypto protocols, but the unique feature of Augur is the capability to create new markets. Augur defines a protocol for how markets are created, traded, and resolved — and what the format of those markets are. The protocol can be interacted with from anywhere in the world, and the format can encourage the emergence of novel behaviours — think Twitter’s character limit or Snapchat’s short videos. Formats both restrict what users can do while simultaneously promoting creativity, as users find unexpected ways to express themselves through the use of new tools.

Community-driven markets

Veil.co and Guesser.io are examples of companies that are bridging Augur with a mainstream audience by providing simple-to-use interfaces. Improving the user experience is the first step, but for a new service to be adopted it typically has to be 10x better than what exists on the market before it. Due to scalability issues and the relative difficulty of using Web3 wallets (at least for an average person), companies building on crypto protocols are unlikely to compete on UX alone if their service offering is similar to traditional counterparts — i.e. offering odds on a web page to popular sports, entertainment, and political markets.

This is where the Internet-native aspect of Augur comes into play. Augur can be integrated anywhere on the Web with plugins/browser extension tools. These tools enable people to interact with markets that simply live on the Internet without management from a trusted third-party. Veil’s latest announcement showcased a new feature, Wagers, that lets users share bets with a link that can be sent to friends, posted on social media, or embedded on a website. Wagers is a great addition to the quickly growing toolbox of different ways people are able to interact with Augur markets.

Veil.co, Wagers feature

The next step, which Veil has alluded to, is a future where people not only share markets but are able to create them. For online communities that are passionate about some subject (a sports league, online game etc.), it’s easy to imagine how arguments will be turned into interesting markets. Being able to put skin in the game forces people to put their money where their mouth is, and thus adds weight to online arguments.

For example, Reddit communities for sports fans (for a league like the NHL, NBA or NFL) could well be early adopters of the ability to create markets because:

  1. They are global and large communities.
  2. There are active storylines 24/7 that evolve continuously 365 days a year.
  3. Arguments and discussions revolve around subjective (and fanatic) thoughts but objectively verifiable results.

The tool for creating a market could simply be an embeddable link to a form, where users type in what they think are the odds for some future event. Once a pre-determined number of users have decided to make the bet, their market is created and orders start to fill. Another implementation could be a browser extension that interacts with Twitter or Reddit — with a user experience similar to tippin.me for Bitcoin Lightning Network payments — where a market is created if a sufficient number of bettors signal their interest in a market through upvotes or replies to a tweet.

tippin.me for Bitcoin Lightning Network tipping on Twitter

Through the development of new tools that are put into the hands of online communities, Augur can find success in encouraging viral topics to be turned into tradable markets. In this sense, the Augur protocol is a mechanism by which online virality is turned into market liquidity.

Feel free to share the post if you enjoyed it. You can find us on Twitter @mhonkasalo and @henrihyvarinen.