Augur's Prediction Markets Platform: A Historical Experiment With a Long Lineage of Intellectual Legacy

From Cryptoslate:

Augur is a decentralized oracle and prediction markets platform, built to conform to the logic of the Ethereum network protocol. Prediction markets as such are event derivative markets created for the purpose of trading the outcomes of concrete events, with aggregated price wagers of crowd-sourced opinions thought of as well-calibrated indicators of how likely an event is to occur (“Traders put their money where their mouths are”).

The concept had first been articulated by Friedrich Hayek in his famous 1945 essay “The Use of Knowledge in Society” and further contextualized in James Surowiecki’s “The Wisdom of Crowds”, where he makes a point of how the weighted aggregate of the opinions and beliefs of diverse range of independent groups and individuals that integrate a plethora of different views produce better and much more accurate predictions than specialized panels of experts or individuals alone.

Augur aims to flesh out an engine that propels market efficiency by introducing mechanisms which cut through the semantic noise and misinformation. It plans to do so by forcing participants to clearly articulate their statements and binds them to their individually held beliefs.

The efficient market hypothesis assumes three forms — “soft”/weak, semi-strong and strong. The first claims that market prices already reflect all publically available information, the second that they also rapidly change to additionally accommodate new public information and the last, “strong” form, that prices instantly reflect also the hidden “insider” information.

As a meta-tool meant to absorb the advantageous qualities of all already existing tools while leaving out their disadvantageous ones, Augur assumes the “strong” form as “insider” information would inevitably be extracted in the aggregate sum of the whole. Another obvious initial use case which presents itself is an indirect mechanism for shorting of other assets. In fact, prediction markets as such can be seen as a generalization of all derivatives.

However, Surowiecki himself highlights three key criteria which separate ‘wise’ crowds plain ‘crowd psychology’:

• a diversity of information,
• independence of decision,
• decentralization of organization.

Conditions that current blockchain technologies seem capable of satisfying and Augur stands out among prediction market platforms not only in that it is the longest standing and most matured among them, but also emerging from the background of solid fundamental-theoretical research (drawing much upon the work of Kenneth Arrow and Gerard Debreu in their developing the complete market model – a market which assumes frictionless transactions, which in turn condition perfect competitiveness of which perfect information is an emergent property).

Another distinctive feature of Augur that makes it different from other prediction markets is its concurrent evolution with the Ethereum platform below it and its emphasis on strong decentralization is prerequisite for actualizing the potential of prediction markets as envisioned by Friedrich Hayek.