The First Markets Have Successfully Resolved on Augur
Augur, the decentralized prediction market startup, has successfully resolved its first prediction markets.
$20,000 in Ethereum is allegedly being sent out to early users of the platform, who used it without 100% certainty that they would get their money back.
At this point, it’s important to step back and give our readers a quick recap of Augur and decentralized prediction markets in general.
Augur: An Overview
Augur at its core is a decentralized prediction market platform that utilizes the Ethereum blockchain.
A prediction market is defined by the ability for a user to bet on the outcome of future events in order to get monetary prizes. The less likely an event is to occur, the bigger the reward you can earn for predicting its success.
For instance, this analyst used a centralized prediction market called Predictit to win $6k in the 2016 election betting Donald Trump would win the election.
In this system, before the event outcome was determined, users could buy and sell “yes” or “no” bets between .01 cents or $1. If the outcome resolved yes, all yes shares were redeemed for $1. If the event resolved no, all yes shares were redeemed for $0.
Augur differs from centralized services such as Predictit by making use of “The Wisdom of the Crowd” from predictors on the platform.
They use these predictors to create real-time predictive data that’s oftentimes more accurate than the leading experts.
So how does this work in practice?
You need to spend a small amount of Ethereum tokens to create an Augur market. Markets can be anything from “Will the price of Bitcoin hit $20,000 before the end of 2017?” to “Will Jesus Christ return in 2018?”
When you create a market, the user sets the taker and maker fees (the cost to buy and sell shares on the books). Taker fees must be between 1.0% and 12.5%. Maker fees also can’t be more than half of the taker fee. As the market creator in this instance, these are the fees you would receive when the market closes.
Although this is the current fee structure, discussion on the official Stack Exchange page suggests that this will be changing.
At some point in the near future market, creators will instead set a creator fee, and there will no longer be maker/taker fees. The creator fee is taken from the rewards of the traders that hold winning positions and are given to the market creator.
As a market creator, the goal is to keep the settlement fees low enough to incentivize people to bid using your market while also being high enough to cover the initial Ethereum cost you spent to create the market.
Besides creating markets, Augur users can also buy and trade shares that represent the odds that the event in a given market will occur. For example, you see a market, “Will Stellar Lumens reach $1k by 2018?”
Because Coinbase recently stated they were considering adding STellar Lumens to their platform, this market intrigues you. You might be fairly sure that it’ll reach $1k before the end of the year, so you put in a bid to buy 50 shares at 0.6 ETH a share.
Shares are worth anywhere between 0 and 1 ETH. The higher the price you buy a share for, the more likely you believe that the event will happen.
There are two ways to make money as an Augur trader. With fluctuating share prices, it’s theoretically possible to buy positions at a low cost and sell them higher as sentiment changes. Real world catalysts may also cause an event to be more or less likely to happen over time.
You can also earn money if you predicted an event correctly and hold shares when the market closes. The amount of your payout equals:
Payout = Number of shares * Price / Number of ticks
The number of ticks is the number of possible price points between the minimum and maximum prices in a market.
You also need to pay settlement fees from each of your winnings. The settlement fees include the creator fee set by the market creator and the reporting fee used in the Decentralized Oracle System utilized by Augur. The larger your earnings, the higher the fees you’ll have to pay.
The REP token powers this Augur Decentralized Oracle System. You can stake REP to report on the outcome of events for the different markets.
When a market closes, you must report on the outcome of the event and put up a certain amount of REP to back your claim. If the event hasn’t occurred yet, you are asked to mark it “Invalid” seeing that you won’t be able to report on it.
You have 27 days after an event closes to submit a report. If you report the same outcome as the majority of reporters in your market, you’ll receive your REP back plus a portion of the reporting fee. The reporting fee uses the following formula:
Reporting Fee = Current Reporting Fee * ( Augur Open Interest * 5 / REP Market Cap )
The more REP that you stake when submitting a report, the greater proportion of the reporting fee you earn.
Making things slightly more complicated, markets can also be reported on by a designated reporter. The market creator delegates a designator reporter to report a proposed outcome for the market within 3 days after the market closes.
As a reporter, you are allotted an additional 3 days to challenge the proposed outcome of the designated reporter. If there’s no challenge put forth, then the market enters the next reporting round by skipping the usual 27-day reporting phase.
You also need to stake some REP in order to challenge a proposed outcome. The REP that you stake is called a dispute bond. If your challenge is successful and the proposed outcome is reversed, you’ll get the funds from your dispute bond back.
Augur started in 2014. Vitalik Buterin, known famously as the creator of Ethereum, is notably an advisor to Augur.
Augur did court some early controversy.
They originally held an ICO in August 2015 in which they distributed 8.8 million REP tokens. There are and only will ever be 11 million REP tokens in circulation.
REP traded between $1.50 and $2.00 (~0.0047 and ~0.0050) immediately after the ICO.
The price has had three significant spikes in its history since this point.
The first occurred in March 2016 as a result of their beta release.
The second occurred in October 2016 when investors received their REP tokens from the ICO. This caused the price to quickly increase before dumping as exchanges added support for the tokens.
The third and largest price increase occurred in 2017 on December 19th in which the price rose to over $100 before settling in on the $90 range. There was no significant news that seemed to cause this increase.
Some people have speculated as a result that this spike was a result of a classic “pump and dump” while others think that it may have been insiders trading on the rumor that the token will soon be added to Coinbase.
However, as more and more decentralized applications start providing real value an utility to users, the market prices of their tokens may start appearing closer to the true value of their worth.
Featured image courtesy of Shutterstock.