Estimated reading time: 5 minutes, 39 seconds
Today we’re going to be covering One of the most anticipated dApps that already has millions of dollars being staked on the outcome of various events, Augur.
Augur had a recent mainnet launch of its completely decentralized prediction market.
The idea behind prediction markets is fascinating. Normally when we’re looking for a prediction, we turn to experts in their respective fields. The problem is these so-called “experts” tend to be not very good at forecasting these events.
Interestingly enough there is a source that has proved more accurate than even these experts, and that is the collective prediction of the masses.
The more people you ask, the more accurate the collective prediction turns out to be. So it’s actually you, or rather the group that you are a part of, it’s your and their opinions that prove to be better than those “experts”. So prediction markets are a great way of predicting future events by accessing the collective brain of all users, to figure out a probability of an event occurring.
Augur may seem abstract, so let’s go over a couple markets where people are trying to predict certain events. We’ll also go over how to use the software to make predictions and even create your own prediction markets.
One thing you may need if you’re going to be using Augur is Metamask. Metamask is a browser extension that allows your browser to interact with decentralized applications. It can also function as a wallet for ether. Metamask is like the bridge you need in order to interact with Augur or any other dApp on the Ethereum blockchain. For Augur, you’ll be using metamask to buy shares of an outcome.
Head over to Augur and download the application. Be sure you select the download that corresponds to your operating system. Once it’s downloaded, launch Augur and select Mainnet from the drop-down.
Other options are simply different types of testnets, where you can experiment. These networks were used to test out Augur before the mainnet launch. But you can play with fake Ether from a “faucet”, and you can do that from metamask. Just make sure the network you’re on for metamask matches the network you are using with Augur.
Feel free to use the testnets which allow you to get comfortable with both the interface and prediction markets before you dive in and actually take on real risk.
When you’re ready to go for the real thing select the mainnet. The mainnet may take a bit to sync as it is downloading the history of the blockchain. It shouldn’t take too long, it took us about half an hour to catch up for the first time.
You’ll be connected to a node, you can input a node address but I’ll use the default.
So now that we’re into Augur’s home page, we can see all of the different categories for which Augur has prediction markets. Just by taking a quick look, you can see there are quite a few categories covered. Everything from sports to weather, politics to celebrities. If you can think of it, there is probably an Augur prediction market for it. And if there isn’t, you can actually create your own market.
So let’s head over to the cryptocurrency section. The market that will be focusing on asks the question “Will 1 ether be valued at $500?” A simple yes or no question. For the sake of this example, let’s say we believe that this will happen. We want to buy shares in “yes”.
While the order book looks pretty intimidating, it really isn’t all that hard to get familiar with the interface. It is very helpful to remember that share price is actually the probability of an event happening. For example, A share’s value on each side of the market will equal 1. If the value of a share is .7, all this means is that event has a 70% chance of that event occurring, then there is a 30% of it not happening.
If you buy shares at a certain price and that event occurs, you’ll receive the difference between that price and 1. So if you bet on an event that has a 30% chance of happening, and it does, you get the remaining 70% that’s bet on the other side of the market. Just like gambling, the more risky bets will pay out more. For this specific market, based on available shares, the market shows that about 60% agree that ether will trade over $500 when the clock strikes midnight to end the year.
ETH vs. REP
When buying shares it is important to understand the difference between ETH and REP, Augur’s cryptocurrency. Users buy shares in ETH and markets are settled in ETH. However, if you’re interested in creating your own market, you’re going to have to stake using REP. Users can also stake REP on reporting results of disputed events, which we’ll cover shortly.
Creating a market
As indicated above, users must stake REP to create a market. Your staked REP is returned once the market is settled. Think of it as collateral or a deposit, you’ll get it back once a result is reported and the market is settled.
- When creating a market you can create your own fee that you will receive of the volume transacted. Obviously, you don’t want to take too much of a cut, as people won’t participate in the market. Just browsing around shows that most markets are taking a little over 1%. That’s not a scientific measure.
- This incentivizes a cycle where users can potentially passively stake REP by creating markets, collect the fee, report an accurate result, then profit and repeat…
Results have to be clear and empirical, so a source has to be selected as the official information that will determine the result of an outcome, so a market can be settled in the case of a dispute.
If the market creator who was supposed to act as a reporter goes MIA, a REP fee is paid to a surrogate who will settle the market in the creator’s place. The creator can also select not to be the reporter, and some staked REP will go to an accurate reporter.
If a market’s event occurs and there is a dispute in the result, the market will be frozen for a period of seven days.
- At this point users can stake REP on their interpretation of the outcome. the staking is considered a form of voting
- The market is settled and the stakers or REP on the correct side of the outcome get the amount of REP staked on the inaccurate outcome. So there isn’t any incentive to lie about the outcome, as you would lose your staked REP by reporting a false result.