Augur Is the New Algorithm for Truth
Blockchain and financial consensus could dictate our entire sense of reality.
--
The Decentralized Prediction Market
On July 28th, 2020, Augur v2 will launch as one of only a few mainstream, decentralized prediction markets. What does that mean? Augur users can bet currency on real world events, and anyone, anywhere is financially incentivized to report their accurate outcome. Here is how that works:
1. A user submits a “market” to be bet on. That could be nearly anything, like whether it will rain in Amsterdam on November 28th. In this case, there are 3 possible outcomes: yes, no, or invalid
- yes = it rained in Amsterdam on November 28
- no = it did not rain in Amsterdam on November 28
- invalid = it can’t be determined, e.g. maybe Amsterdam is split into North and South Amsterdam between now and November 28, and this leaves the market uncertain how to proceed
2. Users bet on what will happen. The counterparty to any bet is always another user, which makes Augur more like a financial market than a casino. For example, if I believe there is a 71% chance of rain on November 28th, I could offer a bet for 70 cents*. That bet will be taken if someone else is willing to bet 30 cents that it won’t rain (100–70=30). Later, I can sell my bets on the open market to anyone willing to buy them. There is no limit to how much a user can bet, and prices (=betting odds) are determined by forces of supply and demand.
3.(i) The event happens. Let’s say it does rain in Amsterdam, and all yes bets should be awarded their proportionate share of all no bets, as well as their initial stake returned. In other words, I should get $1 minus fees because my 70 cents is recouped and whoever bet no loses their 30 cents to me.
3.(ii) In order to determine the event outcome, the creator of the market has to have a plan in place from the beginning. For example, the creator of our Amsterdam rain market decides to use the Dutch national weather service as a reference. This could be manual (like the market creator checking a website and reporting back), or automatic (like configuring the market to automatically check an API). Either way, it must happen within 24 hours, or the creator loses a bond they staked to create the market. The creator could also lose a bond if the market is determined to be invalid.
4. After the initial determination, all Augur users can stake a special REP** token on either confirming the result by majority stake or disputing it. REP is its own reputation cryptocurrency. Those who confirm the winning outcome are awarded the REP that was staked on the non-winning outcome(s). There are potentially several rounds of confirmation, depending on how heavily disputed the market is. If a market is heavily disputed, the process is given more time so that an open market can intervene for longer and give the truth more time to be resolved. The complete process is shown below:
This entire process is carried out on the Ethereum blockchain via smart contracts. That means that the process is:
- public: the code is visible to anyone
- verifiable: anyone can audit results to ensure there was no foul play
- immutable: results can’t be changed after they are agreed upon
- decentralized: everything runs on a network of computers collaborating to ensure correctness
This is all detailed thoroughly in the Augur whitepaper. Although it seems complicated compared to existing prediction markets and gambling sites, it’s actually much simpler. Existing sites don’t expose their inner workings, but rather a simple interface for users who pay fees in exchange for trusting the site to work properly and resolve bets correctly. A comparable user does not need to understand Augur’s architecture, but rather has the option to inspect any part of the process. Hence, this model is embedded with trust.
Implications
If Augur succeeds in its initiative to perform as a global, no-limit prediction market, it could change the world almost immediately in several meaningful ways. Here are just a few:
- Augur could become a de facto oracle for news events. If there is a financial incentive to reach a consensus on truth, Augur should become a reliable source of information.
- Any event could have a financial incentive attached, revealing a new range of useful financial instruments. For example, someone with severe asthma might bet on the pollen count for Spring 2021, using the outcome as insurance to purchase a new air filter in their home if need be.
- Cryptoassets and blockchains could move into the mainstream. Augur has the potential for global mainstream use. That might get people everywhere more interested in the many use cases for blockchain technology.
However, Augur’s strengths (transparency, democracy, freedom) may double as weaknesses. The open nature of Augur allows for insider trading and market manipulation. To use the Amsterdam rain example, someone at the Dutch national weather service has a clear information and influence advantage over other users. Also, some events simply don’t merit a financial component, but that may not stop users from making inappropriate betting markets. There is no limit to how someone might create a market with immoral incentives. And of course, your laws, personal ethics, and financial responsibility should always preside over your decision to use Augur if you ever choose to.
It remains an open question whether Augur is the next step forward in democracy or a failed experiment with a clever premise. The technology is certainly unprecedented, which at least tracks well with its era in human history.
You can track Augur’s new developments at https://www.augur.net/
v2 launches 7/28/2020
*70 cents = 0.7 DAI. DAI is a stablecoin whose value is engineered to remain at $1. Augur uses DAI because it can be transferred on the Ethereum blockchain. DAI can be exchanged for USD.
**REP is only useful for backing the outcome of an event that has already happened. It can’t be used for betting directly, although you can exchange REP for other currencies like dollars.
