In the past, the prediction markets have either been centralized, like most gambling websites, or far from reach from a law abiding citizen, like the assassination markets that floated the dark web. The people who gambled on future events had to trust third party middle men with their finances and betting money. Other issues with centralization were that the platforms could be controlled, hacked or shutdown by government. This issue called for a decentralized solution for such an interactive user-based platform. This is where Augur dashed into the scene.
What is Augur?
Augur is a decentralized solution for prediction markets. It is based on Ethereum blockchain, and uses the distributed ledger technology to give an interactive user based platform for prediction of future events, such as weather, elections etc.
Augur envisions a time where everybody would be able to take a glimpse into the future events by simply googling the event and the most probable and accurate outcomes would pop up. Their vision is to create one of the most reliable prediction markets and instead of relying on experts, the market would rely on a principle called wisdom of the crowd. According to the principle, the average of the opinions of a crowd relating to a certain event is far more accurate than the opinion of an expert on the matter. The usage of this principle for a prediction market makes the prediction of events more powerful and accurate.
The result of the events were previously announced by a single individual, upon which all the investments of the people depended upon. Due to simple human errors, or due to the results being tampered with, investments of millions could go down the drain. Augur provided the solution to this problem again with its decentralization policy, where every one had their input and authority over the network.
Investors can invest in the shares of the occurrence of an event. The price of a share is determined by the estimate of the probability that an event will occur. The investments work 50 50, with the input of the people who vote for the occurrence and of those who vote against. The winner gets the price of the share of the opposing side as well as their initial investment. For those who predict the event wrongly or give corrupted reports about the outcomes of the event, they are penalized in the Augur’s personalized token, and their credibility is automatically lost.
People usually confuse prediction markets with gambling sites. Although the platform provides investments in shares and penalizes for wrong predictions and false reporting, but it is solely meant to promote truthful reporting and finding out the right outcome based on the scientific principle ‘Wisdom of the crowd’.
The use cases of this prediction market are far more vast than simple entertainment. The platform can be used to predict the future events i.e. to analyze the risk involved in an investment, the loss or profit, and many other events. The simplest use case that defines the platform’s potential best is that farmers can use this platform to hedge against the weather cycles. Doctors can use this application for the proper analysis of patients. Similarly, laymen can leverage the potential of the prediction market into finding out the risks involved in the stock market, whether or not should they invest in a stock.
The REP Token
The platform is powered by Reputation(REP) tokens. These tokens are required to be owned by market creators and reporters of the platform. The reporters stake their REP on the occurrence on an event. Their stake simply means that the occurrence of the certain event is matched by real-world outcomes. After this, a period of consensus takes place. Once the consensus is achieved, the truthfulness of the reporters is analyzed. If the report of an individual matches the consensus, he is deemed truthful and is rewarded in REP. On the other hand, false reporting results in loss of REP tokens.
The more REP tokens a reporter has, the more his opinion is valued regarding the outcomes of events.
Having established that REP is the backbone of the platform, it is not necessary for the predictors and investors to own REP as the shares can be bought using Ethereum and Bitcoin.
How Augur works
Augur works in a 4 steps progression, two of which occur before the actual event happens, and 2 after. The steps are stated as follows;
- Market Creation
The white paper presented a simple model of the life cycle of the event prediction that walks us through the process,
A market can be created related to any real world event. The end time of the market is set and a reporter is designated for the end result. The reporter doesn’t have full authority over the results, as the results can be altered based on consensus. The market creator also chooses a resolution source for the market that can be either common knowledge, or a news source. If the market resolves in an outcome other than invalid, the market creator is incentivized with tokens to create more real world based markets.
Once the market is created, the trading starts immediately, people bet on whether the event would occur or not, and buy shares of the particular outcome they bet upon.
The white paper explains the reporting period as, “Once a market’s underlying event occurs, the outcome must be determined in order for the market to finalize and begin settlement. Outcomes are determined by Augur’s oracle, which consists of profit-motivated reporters, who simply report the actual, real-world outcome of the event. Anyone who owns REP may participate in the reporting and disputing of outcomes. Reporters whose reports are consistent with consensus are financially rewarded, while those whose reports are not consistent with consensus are financially penalized.”
Once the event is reported and the consensus is achieved, people who predicted the event successfully can claim their shares and winnings.
Benefits of Augur
The benefits of Augur and the the answer to why there is a need for a decentralized prediction market are as follows,
- ‘Wisdom of crowd’ predicts the events far more accurately than experts’ assumptions.
- The decentralized platform allows anyone to make markets; it is open to all.
- The trading fee is very minimal as there is no third party involved. The fee goes directly to reporters and market creators.
- The markets can be based on any real-world based events and the markets cannot be tampered with, or shut down by any third party, including the government.
- The payments are made transparently once the outcome is decided.
- Truthful reporting is promoted.
ICO and Token sales
The platform opened their ICO on 17th of August, 2015 to October 1st of the same year. The ICO was open for people of USA at a price of $0.58. The platform was able to raise $5,100,000 and made a name for its dramatic success in fundraising. The Token has been performing well in the charts ever since, it is being traded at $18.77 as of press time and is ranked at 39 in the top 100 cryptocurrencies.
Although there were a few setbacks in the way of Augur following their launch, including the event where they lost quite a repute when the assassination market floated the platform, but once it is used ethically and to predict events that actually bear value, it is evident that the innovation they envision to bring would take the world by storm.