Token Technology: Understanding Augur

Imagine making a living just from your predictions. Got a hunch your favourite sports team will win on the weekend? What about Leonardo DiCaprio winning an oscar? Research it, think it through — if you’re correct, you’re rewarded. If you’re wrong? You just lose your initial investment.

Now, imagine using these kinds of predictions for real world analysis — earthquake predictions; political outcomes; medicine prices; stock market analysis. Given a monetary incentive, people will be motivated to predict their outcomes as accurately as possible — so they’ll research, learn, and improve.

That’s what Augur aims to be: an early warning system — for everything. Riding off the backs of concepts proposed by James Surowiecki, Charles Mackay and Francis Galton, Augur gains accurate predictions about future events by letting people bet on their ideas.

Before we get into what makes Augur unique, let’s take a step back and talk about tokens — what they are, how they work, and how mining it all ties in with Ethereum.

Tokens — A Standin for Assets

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If you mine Ethereum, you’re already familiar with the concept of tokens — Ether is a kind of token. Tokens are fairly easy to understand — they’re a representation of something we attribute value to. We’ve used them for trade since 1400 AD — where we took stones and carved them into disks — to represent other goods, and now in 2017, we’re using them to represent property in the digital world.

Tokens can represent any asset. Imagine a world where you could grab a token that gives you a week’s worth of produce from the farmer’s market, or a little digital token that is redeemable for a download from your favourite artist. And even better, you don’t need to physically store tokens — they live on the cloud, or in your machine, or even on your phone — or more accurately, in your Ethereum wallet.

Augur has three kinds of tokens: the first two are called value tokens, and allow you to exchange them for real money (fiat, or cryptocurrency). The third kind is called REP — short for reputation.

REPutation tokens were created to solve two big problems: first, they were sold in a limited time auction, to provide funding for the development of Augur. But further, it ensured that the initial group of reputation holders are genuinely interested, and invested, in the network’s success.

It’s a rather ingenious incentive system, and part of Augur’s appeal: REP holders are required to honestly REPort the outcome of events. By doing so, they earn more REP — we can think of this as a dividend (a sum of money paid out regularly) of sorts. Dishonest reporters, however, have their REP confiscated and redistributed to honest reporters. It keeps the entire system clean and transparent.

Augur made a fantastic, two-minute video on the entire topic of reputation — check it out.

Prediction Markets

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Prediction markets sound a little like snake oil at first glance. After all, it’s an investment in future facts. You invest information that will, to your mind, become a fact before it becomes a fact; if it never becomes a fact, you lose your money. If it does? You earn money in proportion to the number of people who thought you were wrong.

The more Augur is used, the more it will be able to deliver accurate probabilities on the future existence of facts. If enough people use it, humanity, in theory, could know the future before it happens.

Prediction markets have existed for quite a while and still do exist. Intrade is perhaps the most popular example, but it had to exclude the US from it’s list of allowed traders. In some jurisdictions, it’s seen as gambling; in others, options trading. And there’s further worry that incentives might be created for controversial topics — like predicting the death of a celebrity.

These small things have held prediction markets back — and even if all of this was sorted out, building on top of the platform is not an easy job, and there’s no guarantee that the system will not be corrupted at a later date.

And this, ladies and gentlemen, is where Augur comes in.

Decentralization

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Decentralized systems are fantastic, and allow ideas — new, and old — to blossom into wonderful new ways. We’d not have some of our most favourite social media sites if it wasn’t thanks to innovation without permission.

Prediction markets need that same kind of decentralization — the ability for anyone, anywhere, to create a market, bet on the outcome, and report the outcome. But with Augur, there’s a little more to it than just that.

At the end of a prediction, the results must be reported. In previous markets, this would be reported by the people who ran prediction markets themselves — and you had to trust they’d report correctly. With a decentralized system, however, you don’t need to trust just one party — you trust multiple.

Once again, Augur made a terrific two-minute video on this topic — which you can watch now.

Where does Ethereum fit in?

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Augur needs a blockchain to record all the information, and store it in an easily accessible manner. There also needs to be a way to prove that this information was not tampered with; a way to keep track of current REP holders, how much they own, and how much they’ve lost; and a way to keep track of all the market fees.

Ethereum powers Augur — it allows it to exist on the blockchain, and ensures that it cannot be shut down. After all, it doesn’t operate off just one machine or network; it isn’t controlled by just one person or entity. All money in the system is in cryptocurrency — so no banks are involved. And if for some reason legal complications arise, there’s no company to sue, no hardware to seize, and no CEO to throw into jail. The software and the processing power required to make Augur function is distributed across thousands of computers, all mining on the Ethereum blockchain.

So grab your Ethereum contract, grab your Augur, and let’s get predicting — starting with the Bitcoin price in 2018!

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