Augur - Repairing Prediction Markets

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What is Augur? In one sentence it is an open-source, decentralised, peer-to-peer prediction market platform that is built using the Ethereum protocol. REP, the token issued for the Augur platform, is trading on Poloniex, Kraken, and Gatecoin after a successful crowdsale last year of 11 million REP.

Prior to its secondary listing, Gatecoin listed a REP IOU. They were trading against Bitcoin at a high of $18.29. After the start of secondary market trading, REP trades around US$7.60. That equates to a market capitalisation of $84.4 million, placing it as the 7th largest Coin by market cap.

Impressive. But why is it currently valued so high? Why are exchanges listing it? Why do people want to trade it? What are people actually trading?

Augur is a platform that is built off Ethereum, similar to DAO, in that it is using the smart-contract technology as a way of governing and decentralizing a prediction market. With a few failed exceptions (Intrade for example, which attempted what Augur is doing but got shut down by CFTC regulations), most prediction markets have been centralised. Why is this an issue? Well betting on certain events in the US is illegal, such as election outcomes. Hence, a dencentralised platform which a 3 or 4 letter organization cannot close is preferential for those wanting to bet on Drumpf or Crooked Hillary as the next leader of the US.

Centralised platforms are prone to manipulation. Often the results are reported by 1 person only, who may lie or skew the results for their personal gain. Under Augur’s rules, a random selection of multiple REP holders are chosen to vote. So the tagline is that the "Wisdom of the Crowd" is better than an expert. But if you are holding REP, why would you bother to possibly research the event and then report on the outcome?

Here is the interesting part, you get rewarded for accurate reporting. How? It first works with someone creating a binary event (although Augur is not limited to such), for example you bet Drumpf is going to win. So you buy one share in this particular market that pays off 1 if he wins and 0 if he loses. Hence the current traded price of this particular market actually reflects the probability of a win. Volatile swings between 0 and 1 are earn trading fees as traders buy and sell contracts. At the end of the event, half of the trading fees go to the market creators / market makers and the other half go to the reporters (as an incentive to report correctly). Those who report incorrectly or do not report at all, get penalized and lose some of their REP tokens.

Oh and by the way, coming up with “unethical”, assassination-market based questions such as “Will Clinton die from a gunshot wound to the head before she dies from pneumonia” can lose REP for the market creator.

So why will people buy and sell REP? With the “illegal” sports betting market valued anywhere north of $3 trillion, Augur aims to take a cut, and allow degenerates to bet on their favourite teams without fear of the site being shut down. REP is similar to a trading seat at an exchange, such as the NYSE, whereby holders earn the trading fees via active participation.

Augur's success depends on active participation, else events will fail to reach the 65% consensus limit, delaying contract payments. Using DAO as a use-case (discussed in depth in a previous post, DAPPathy), voter apathy killed the token long before the hacker drained it. If that laziness wasn't bad enough, even now, months after the exploit, there are more than 1.5m Ether to be claimed in the DAO withdrawal account.

If you hold REP you must vote. If you don’t, then you lose your REP. At launch, there could be 10s of thousands of markets being created. This could initially create some friction in the market.

However, over time I believe those type of people who enjoy spending a minute out of their day answering surveys they get in emails will be attracted to the token and enjoy the rewards it brings.

As a trader, I choose not to value REP based on technical analysis, but rather using a discounted stream of cash flows. As a holder, you earn a dividend stream into perpetuity. That stream is dependent on the breadth of markets, number of traders, and ultimately turnover.

Is $7.60 a good price for this perpetual stream of income? At the moment it is anyone's guess. Augur is starting to heat up, and events are starting to be created. I expect REP price volatility as traders' come to their own conclusions about Augur's viability as an alternative gambling arena. I do expect it to "moon" if it gains traction in the mainstream media, and I am sure the Augur team will focus heavily on public relations.