A short while ago, after months of anticipation, the Augur prediction market project deployed their smart contracts on Ethereum’s main network. Amongst all the decentralized applications launched daily, the Augur launch stands out for a number of reasons.
First of all, we can finally test the high expectations regarding prediction markets in practice. Secondly, the Augur smart contracts are very complex and the impact they may have on the Ethereum network is an open question. Thirdly, Augur is an example of one of the earlier Initial Coin Offerings resulting in a real product.
What is Augur?
Augur is a protocol for decentralized prediction markets. Prediction markets are markets that allow users to trade the outcome of upcoming events. Possible outcomes are treated as shares traders can buy. Winning or losing is determined by the outcome of the event. This type of markets can be used to make predictions based on the opinion or wisdom of the participants. The concept could be described as “crowd-sourced wisdom”.
The idea behind prediction markets may sound trivial, but they work surprisingly well. The Efficient Market Hypothesis states, that market prices always reflect all available information. By making a large number of people have a financial stake in the outcome of the information they provide, they are incentivized to provide the most accurate prediction they have.
Augur provides the protocol to create decentralized prediction markets on the Ethereum blockchain. Users can create markets and earn a creator fee of between 0 and 50 %. They can also earn from spread by providing liquidity to the markets they create. A so-called Reputation Token (REP) is used to power the platform. REP tokens are also used to incentivize users to report the outcome of the events correctly. Incorrect reporting is penalized.
Network Stress Test
Augur is not just an interesting example of decentralized prediction markets being used in practice. Its launch is also notable for the complexity of the smart contracts involved and the effect these may have on the already stressed Ethereum network. Augur transactions are very gas intensive, meaning that not that many Augur transactions are needed to fill up an Ethereum block with the current block gas limit. Fears have been expressed that Augur might bring the network to a standstill, far exceeding last year’s Cryptokitties crisis. So far, such a collapse has not occurred, but it remains an open question how the network will react if Augur becomes truly popular.
Initial Success and Future Possibilities
On 18 July the Augur team reported more than 460 markets created, with approximately $1.3 million being moved within the project’s smart contracts. They also announced the first successful resolution of markets, demonstrating the whole market life cycle in operation. Some bugs have also been discovered and fixed.
Augur is actively demonstrating the power of decentralized prediction markets as a cryptoeconomic primitive. This opens up applications we are only beginning to understand. Imagine combining the collective investor wisdom with the power of artificial intelligence?