The Three Powers of Augur

BΞN
BΞN
Feb 28, 2019 · 4 min read

Augur is often called a decentralized prediction market (DPM). This is a good starting point and I use this phrase myself, but I think it’s incomplete and imprecise. The main reason is that predicting is just one of the things that Augur can do.

I think a helpful mental model for understanding Augur is to look at it as having three core powers. Augur can help us predict the future, prepare for the future, and persuade the future.

Predict

This is the first thing that comes to mind when most people think of Augur. By efficiently capturing both public and private knowledge via financial incentives and borderless participation, DPMs can help us better forecast elections, sports, the weather, housing prices, the spread of memes…you name it.

Prediction markets not only absorb existing knowledge but create incentives to produce new knowledge. For example, sufficient money at stake on future weather outcomes could motivate meteorologists to develop better forecasting models. Through rewarding accurate predictions and imposing costs for inaccurate ones, DPMs reward “superforecasters” greater leverage over time while discouraging inaccurate or dishonest ones.

Research has indicated that prediction markets make more accurate forecasts than existing alternatives. But this research is based on centralized markets that have limitations like low betting caps, borders on liquidity, regulatory risk, and fees. When you strip away these constraints with DPMs, predictive powers could greatly expand.

More broadly, DPMs not only allow for more accurate predictions but more accurate prices for any (financial) asset, since they facilitate frictionless speculation on anything. For instance, traders can, in theory, get exposure to any asset from Amazon stock to Chinese real estate by speculating on their future prices.

Prepare

Augur can be used to hedge risk or insure against undesired outcomes and thus prepare for the future. From my post, The Radical Potential of Augur,

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.

The potential advantages of a platform like Augur over existing insurance alternatives are more customizable and granular conditions to insure against, lower prices due to a global liquidity pool and the absence of intermediaries, more flexible “claims” and the the ability to sell them at any point, and perhaps someday, faster payouts. Augur markets are particularly well-suited for parametric insurance, which triggers payouts based on specified, measurable events like X amount of rainfall, rather than indemnifying losses or damages.

Persuade

Augur can be used to actually “persuade” the future i.e., motivate certain outcomes. “Incentivize” might be the better word here, but I wanted to keep with the Ps to make this easier to remember…

Augur can incentivize traders to produce favored market outcomes in the “real world” in order to win payouts. For example, a YouTuber created a market for whether his tutorial video on Augur would reach 5,000 views. At least one market participant bought YouTube views leading the market to resolve YES.

Or, by betting that a security vulnerability will not be found in a given codebase i.e., taking a NO position, one can create a bounty for hackers to discover and reveal bugs and collect a payout by taking a YES position.

Other Use Cases

Even these three powers are not all-encompassing. Augur could be used, at least in theory, for other things like Futarchy, determining present reality and filtering out fake news, and creating accountability for public figures. But so far, this is the simplest mental model I’ve found to classify the most likely use cases.

Nor are these three categories distinct. In theory, a single market could be used for forecasting the future, hedging risk, and creating incentives. Particularly, as capital amasses in a market, the lines can blur. Any outcome with enough at stake can effectively become a bounty, even if it was intended as speculation.

The relationship between “prediction markets” and reality is a two way street: external events influence the markets but the markets can influence external events as well.

The Meta “P”

Aside from these three “Ps” is what could be called the Meta P of Augur: Participation. Augur lets anyone, anywhere, anytime create and trade in markets on anything. So one can think of Augur as a sort of “Wikipedia for markets.” Before Wikipedia, encyclopedias were elitist entities curated by a few. Augur markets are like Wikipedia pages: anyone can create them, participate in them, and add their knowledge to them, and anyone can access the resulting collective insight for free.

Both are instances of knowledge becoming easier to create, share, and access.

Thanks for reading. To stay ahead with fresh insights on the future of prediction markets, join my newsletter The Augur Edge.

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