Augur is an Ethereum-based platform for prediction markets. Users can create a market for a real life event, bet on an outcome, report on results, and win (or lose) money based on the actual outcome of the event. Augur was founded in 2014 by Jack Peterson, Jeremy Gardner, and Joey Krug. The team launched the platform in July 2018 after more than three years of development.
How does Augur work?
Structurally, Augur is a decentralized application on Ethereum. It operates as follows: a user elects to create a prediction market around any future event, and participants bet on the outcome of that event. Participants then either win or lose money based on the actual result. The platform itself has no way of validating what the true outcome is, so Augur must rely on users and a sophisticated results reporting system to encourage honesty in results reporting.
Prediction markets are different than traditional betting systems in several ways. In a prediction market, a user bets on an outcome through buying shares of that outcome. Each outcome has a respective share type. When the hedged event occurs, only the shares of the winning outcome are redeemable for money, and the rest of the share types become worthless. This means that a user is not locked in to an outcome when they make a bet in a prediction market - they can sell their shares if they want to exit. In a traditional betting system, users are typically locked into an outcome until the event has occurred.
Consequently, the price of shares for an outcome can fluctuate based on the market's current beliefs on outcomes’ likelihood. For example, if the market is a yes/no market on whether the price of Ether will surpass $500 by the end of the year - and the price of Ether spiked over $500 - "no" shares will drop in price and "yes" shares will increase in price. If you bought "yes" shares at a lower price, you can decide between selling now and taking the profit, or waiting until the end of the year and possibly make more.
Complete sets and redeeming shares
A complete set is a set of shares that covers all possible outcomes for a market. The market creator sets the price of a complete set. Typically, it's 1 ETH. Complete sets are created when the market is able to match users who want shares of all possible outcomes. For example, in a yes/no market with a 1 ETH complete set price, if a user wants to buy a "yes" share for 0.6 ETH and another wants to buy a "no" share for 0.4 ETH, Augur takes the ETH (1 ETH in total) and creates a "yes" and a "no" share and gives each to the right user.
When the event for the market transpires, the shares for the true outcome can be redeemed for the full price of a complete set (excluding fees).
Reporting and disputing events
When a user creates a prediction market, they choose a designated reporter to report on the event's outcome. The market creator also pays a no-show bond in REP tokens. When the market's end date is reached, there's a three-day grace period when the designated reporter can pick an outcome. If the designated reporter doesn't show up, the no-show bond is given to the first voluntary reporter.
The designated reporter is thus usually the market creator.
When the designated reporter reports on the event's true outcome, there's a one-week period where anyone can dispute the result. A user disputes the result by staking two times the no-show bond on another outcome. When this happens, another one-week period starts wherein another user can dispute the new tentative outcome by staking much more than the currently staked REP. This staked amount follows a formula described in Augur's whitepaper that ensures that the winning team always receives a fixed 50% ROI with respect to their staked REP.
If a one-week period passes without a successful dispute (enough REP is staked to meet the dispute bond amount), then the market is finalized and the last tentative outcome is chosen as the true outcome. Users with shares of the winning outcome can then redeem the shares for the price of a complete set.
If disputes keep happening, and the size of the dispute bond surpasses 2.5% of all REP, then Augur goes into the forked state. The forked state lasts for 60 days and it disrupts the whole platform. All non-finalized markets are put on hold and no new markets can be created. All Augur users will then have an option to migrate their REP to a new "universe". Each universe corresponds to an outcome in the market that created the fork. The outcome where the most REP is migrated to becomes the winning universe.
How does this dispute system encourage honesty in Augur? There are complex game theory reasons behind why this works that root around the fixed 50% ROI for winning disputers and the eventual forked state. For example, if a user willingly disputes an obvious outcome, then there's a strong impetus for other users to dispute this user because there's a high likelihood of winning and earning a 50% ROI. The forked state mobilizes Augur's entire user base to be the arbiters of truth and largely neutralizes the risk of verifiably false reporting.
Augur works best when its users are highly engaged. Users are ideally disputing bad reporting, ensuring designated reporters report on an outcome, and participating in forks. As such, Augur's developers created a participation token mechanic that encourages users to check on the platform in a weekly basis.
Essentially, participation tokens give holders the right to 50% of the fees a prediction market generates. Each prediction market can sell participation tokens equal to the number of REP in its no-show bond. The cost of a participation token is 1 REP, and the token can be redeemed at the end of each week for the REP and a portion of 50% of the fees generated for the week.
The team behind Augur
Augur was co-founded by Jack Peterson, Jeremy Gardner, and Joey Krug. In 2017, Joey left to join Pantera Capital and Jeremy left to start Ausum Ventures. Jack continues to work on Augur to this day, leading the Forecast Foundation which manages Augur's ICO funds. The foundation employs operational staff, developers, and designers.
Vitalik Buterin, the founder of Ethereum, is an advisor to the project.
With the launch of Augur in July 2018, the Forecast Foundation proved it could execute and achieve substantial results. The remaining question is whether the foundation intends to continue supporting and growing Augur post-launch.
Growing Augur's user base
Many cryptocurrency investors conveniently forget that releasing a "working product" is only a small step towards success. The team still needs to work on growing the product's user base after launch. A "working product" is meaningless if no one uses it. Most cryptocurrency projects struggle to reach the "working product" phase, but now that Augur’s passed this phase, the team now faces the age-old challenge of user growth.
This is not a trivial task. Most startups with working products fail, and projects in the cryptocurrency space are no exception. Currently, Augur only has a few active markets, and its global trading volume is relatively low. The team has a long way to go to create a compelling product.
To grow Augur's user base, the platform needs to be easy to use. As it stands today, Augur’s UX is complex, including various baked-in mechanics to help keep it decentralized. Mechanics like order books, participation tokens, outcome disputes, and forks greatly increase the learning curve for new users. Additionally, to access the application today, a user needs to first download the entire Ethereum blockchain. This is relatively time-consuming and requires significant disk space.
Augur can hide its complex mechanics by creating a user interface that's highly optimized for new users and only exposes the most important actions (e.g. betting on an outcome) - unless a user requests to do more. To solve the problem of having to download the entire Ethereum blockchain before accessing the application, Augur can develop light clients. A mobile light client is critical to increasing accessibility.
Another name for a "platform for prediction markets" is a "platform for gambling". As much as the Forecast Foundation likes to brand Augur as the former, it's difficult to meaningfully deviate from the latter. There are regulatory complications with being a gambling platform. Many jurisdictions in the world have stringent gambling laws and Augur possibly infringes on them. This has negative ramifications for Augur and the Forecast Foundation. Gambling regulations limit the size of Augur's user base and governments that decide Augur is illegal could hold the Forecast Foundation responsible.
Augur is a platform for prediction markets on Ethereum. Prediction markets are a compelling application of blockchain and Augur is one of the first of such projects in this space. Although it took over 3 years to develop, the platform officially went live in July 2018. Augur currently sees limited adoption with few active markets and low trading volume. The challenges for the team moving forward include growing platform adoption, improving its first time user experience, and navigating potential regulatory problems if the user base grows.