The Radical Potential Of Augur
Just-launched Augur is clumsy, slow, ugly. . . and potentially world-changing.
As Augur co-founder Joey Krug put it,
we’re trying to stream HD videos in 1995.
Due to scaling woes on Ethereum, Augur will likely remain sluggish and costly for a few years. Throw in the fact that on first glance, Augur looks like little more than a place to bet on the winner of the World Cup, and it’s tempting to shrug it off as a clunky, overhyped DApp.
Don’t make this mistake.
Augur could transform how we forecast the future, make decisions and manage risk in everyday life, fact-check and agree on the state of reality, and even hold politicians accountable. Someday, it may even be the world’s largest financial market.
ELI5: What Is This thing?
Augur has been called “Uber for Knowledge.” Like unused cars sitting idly around, we all have information or insights lying dormant in our brains. Like calling an Uber, creating markets on Augur recruits this idle information into action and transforms it into a shared resource.
Augur is the world’s first decentralized prediction market (DPM).²
If this sounds complicated and scary, you’re in the right place. I’m going to ELI5 (Explain Like I’m 5) exactly what a prediction market is and why you’d want to decentralize it and what that even means.
DPM involves 3 parts. Let’s start with “market.”
A market is place where people buy and sell things. That could be goods (think Amazon), services (think Uber), or financial assets (stock markets, prediction markets etc).
Its called a “prediction” market because its a place to buy and sell…predictions. You can sell your prediction at anytime, and how much buyers will pay for it depends on how likely the market thinks the prediction will come true. The more likely the market deems a prediction, the more it will pay for it. Don’t worry if this sounds abstract, I’ll give an example in a minute.
Now, the last part: decentralized. This is a fancy way of saying there is no central control. There is no single party that decides what can be predicted on, who can predict, and whether a prediction is right or wrong. No single party owns everyone’s data in the network. Augur runs on Ethereum which means all its data and code is distributed on thousands of computers around the world and is open to anyone.
Prediction markets are efficient at forecasting the future as they harness the “wisdom of the crowd.” Since they have skin in the game, market actors buy more or less shares depending on their confidence level. Prediction markets attract folks with the most uncommon, least accessible knowledge since they can most easily spot mispricings. This incents private, insider knowledge to flow into the public sphere.
Let’s take a look at PredictIt, a traditional, centralized prediction market. This will help break down how a prediction market works and the limits of centralized prediction markets as compared to Augur.
On PredictIt, you can buy and sell predictions on political outcomes. You make a prediction by buying one or more ‘shares’ in an outcome. A share is priced anywhere from 1 to 99 cents. If an outcome occurs, shares in it will be worth a dollar each. If an outcome does not happen, shares in it will be worth nothing.
In this example, you can bet on whether Mark Cuban will run for president. You can buy YES shares at 25 cents each which means the market thinks there’s a ~25% chance he will run. Prices go up and down as the market reacts to developments. For instance, if a major scandal surfaces about Cuban next month, YES shares may plummet to 10 cents since many YES holders will sell their shares and buyers won’t be willing to pay as much as before.
If Cuban ends up running, then all YES shares will be worth a dollar and NO shares will be worth nothing. If he doesn’t run, NO shares will be worth a dollar and YES shares will be worth nothing.
Put differently: whenever you buy a share you are entering a contract with someone betting the opposite outcome and whoever is right will collect the combined amount of cash put into the contract by both sides (which always adds up to a dollar) and whoever is wrong gets nothing.
In Augur, prices are denominated in Ether rather than USD, so if Mark Cuban has a 25% chance of running, shares in this outcome would cost .25 ether.
But where the real differences kick in is the decentralized part. On centralized markets like PredictIt, only the organization that runs the site can start markets and report on prediction outcomes, traders can only bet limited amounts, and the market is prone to regulation and may be shut down at any time. You end up with a market that is too inefficient to make strong predictions and be used for interesting things.
Augur changes all this.
On Augur, anyone can create a market on anything. Imagine a Chilean farmer whose livelihood depends on rainfall. He could protect his family from drought by creating a market forecasting rainfall, and betting on a low amount. If it ends up raining, great. But if it doesn’t, he still ‘makes it rain’ on Augur where he earns a payout from his hedge. Traditionally it would cost millions of dollars to start a market like this. With Augur it could be a few bucks.
In today’s world, only elite gatekeepers can open and close markets. With Augur, markets become like Wikipedia pages. Anyone can start or contribute to them. In other words, there will be markets for basically everything. I think of Augur as sort of Wikipedia meets the Stock Market. It democratizes speculation.
In addition to creating markets, participating in markets opens up to anyone anywhere. In today’s world, markets are segregated by borders and capital controls. If you’re in China, for instance, it’s hard to trade American stocks. With Augur, anyone anywhere can in theory get exposure to any asset by speculating on its future value.
In traditional betting and prediction markets, the house takes a steep cut. On Augur, there’s no rent-seeking middleman, so costs are minimal. There are still fees that serve to incent truth, but these are minimal.
Centralized speculation markets can be shut down or regulated at any time, which discourages participation. Due to regulation, Prediction markets like Predictit have low betting limits. This prevents high confidence actors from betting enough to really move the markets and thus limits the markets’ predictive powers. Augur cannot be regulated like this since it is distributed and peer-to-peer.
On a market like PredictIt, you have to trust a central source to resolve whether or not a prediction came true. This makes it prone to arbitrary decisions, and if you disagree with the verdict, you’re out of luck. On Augur, participants collectively report on outcomes.
Each of these perks are significant but when you fuse them together you get the magic: an open, frictionless, borderless pool of liquidity that becomes an efficient market for predicting the future and as we’ll soon see, determining present reality.
Obvious use cases like sports and political forecasting or using Augur to ‘short’ or get leverage on future cryptocurrency prices are just the tip of the iceberg.
If you’re unsure whether to rent or buy an apartment, you could use Augur to predict future housing prices in your area. If you’re having a wedding, you could ‘insure’ against getting rained out by predicting a rainy day. Farmers could use Augur to hedge against the risk of natural disaster.
Augur may replace polls and pundits as the go-to for political forecasting. Just like you might ask Siri what the whether will be tomorrow, in the future you might ask it who will win the presidential election, and it will say something like “according to Augur, Dwayne Johnson has a 77% chance.”
Augur could also be used for accountability. As one Reddit user wrote,
One of my favorite ideas is to have conditional prediction markets on whether politicians will actually implement their own policies. In this hypothetical crypto utopia, politicians would publicly demonstrate they had bought lots of shares of the market stating they would implement X policy if elected. If they don’t, they would lose their own money.
Economist Robin Hanson has floated the idea of Futarchy, a new style of governance in which citizens use prediction markets to bet on which policies will be most beneficial to national welfare. Politicians then enact the policies that win out in the markets. Whether this would devolve into plutarchy is yet to be seen, but it’s an intriguing idea.
DPMs also carry dystopian prospects such as “assassination markets” where users bet on the date a given individual will die. This could incent assassination since market actors will earn a payoff if they “predict” correctly while potentially skirting criminal liability since they get paid for choosing the date correctly rather than committing the act. While this example may be far-fetched, the reality is that censorship-resistant prediction markets could be used to incent negative, as well as positive, outcomes.
But while Augur is censorship-resistant, the community plays a powerful role in determining whether predictions end up true, false or ‘invalid.’ This is where Augur’s token, REP (short for reputation), comes into play.
REP is used to report on the outcomes of predictions and to incent honest reporting. Reporters stake their REP on the outcome of a market. If their stated outcome matches consensus, they earn settlement fees from the market. If their staked outcome differs from consensus, they lose their REP. But if they still think they’re right, they can appeal by staking a larger amount of REP.
If it gets to the point where the REP bonds hit an upper limit and the network cannot come to consensus, REP splits into multiple versions corresponding to each version of reality i.e., each prediction outcome. But since users presumably want to predict in markets that accurately reflect reality, this is an unlikely event.
So Augur can also be seen as a sort of truth engine that is not only efficient at predicting the future but also at determining the present state of reality. Market actors will be incented to report the news correctly, not in a way that grabs attention, satisfies viewers’ bias, or pleases advertisers — unlike traditional news outlets. This may be a powerful antidote to a world ridden by fake news, confirmation bias, and social media bubbles.
Today, Augur is hard to use, slow, and costly. Its success will ride not only on the hard work, tenacity and vision of its developers and community but on broader infrastructure improvements like sharding, stablecoins, and offchain exchange (0x).
Augur is an ambitious experiment in trustless economy and its success is far from guaranteed. But its potential is staggering. While it won’t happen anytime soon, I think Augur has a real shot at someday becoming the world’s largest (financial) market. And I wouldn’t be opposed to buying some shares in this prediction...
As always, comments and criticisms welcome and please tell me if I got anything wrong. For anyone interested in trading on Augur, if you want to toss around ideas about strategy feel free to contact me at bendvw at gmail.