Augur (REP): A Decentralized Prediction Market for the People

How Does the Augur Prediction Market Work?

Augur is a decentralized prediction market built on the Ethereum blockchain that enables users to stake digital assets on the outcomes of real world events. Unlike traditional betting platforms, the Augur prediction market can facilitate staking on outcomes without the need for a central authority. Instead, Augur uses smart contracts that execute under set conditions — in this case, when the outcome of an event is confirmed. The Augur betting platform is notable in that its markets are global, pseudonymous, and practically unrestricted in terms of limits and participation.

Similar to traditional prediction markets, Augur users place bets on the outcome of future events with the intent of forecasting the correct outcome and earning rewards. The less likely an event, the higher the reward; the more likely an event, the lower the reward. The platform was one of the first to raise funds through an Initial Coin Offering (ICO) in 2015. When the project went live in 2018, $1.53 million USD of value was staked across more than 800 outcome bets within the first month, and the platform has grown significantly since then.

In addition to the recreational and speculative elements of betting, Augur’s prediction market incentivizes crowdsourced truth-seeking by leveraging decentralization. While cryptocurrencies like ETH and DAI are widely used as currencies of transaction on the platform, Augur’s native REP token has multiple functions. REP is used to create prediction markets, to participate in the Augur betting outcome reporting process, to dispute the outcomes of results, and as a currency of reward.

Three Types of Augur Prediction Markets

Augur betting markets adhere to a four-step process that dictates the platform's flow of value: creating, trading, reporting, and settlement. Users can create a prediction market on the Augur crypto platform, so long as the market represents a real-world event that can be confirmed with a definitive outcome at the conclusion of a set period of time. There are three different market types that a creator can establish: YES/NO (binary), multiple choice, and scalar:

1. YES/NO (Binary): These markets are the most straightforward as only a “yes” or “no” outcome is possible. Example: Will the price of Bitcoin be above $50,000 on August 31, 2021?

1. Multiple Choice: A multiple choice market has more than one potential outcome. Example: Who do you think will win the 2022 Super Bowl Championship?

1. Scalar: These markets utilize a lower and upper bound to structure bets. As such, traders need to select their own strike price within that range — that is, the price at which they intend to go long or short. Example: What will the price of ether (ETH) be in 30 days between $1,000 and $2,000?

Augur Betting Markets in Focus 

Once a prediction market is created, trading can begin immediately. Traders who wish to participate in a particular market can buy shares in a potential outcome. The payout of rewards differs depending on the type of market: yes/no, multiple choice, or scalar. We can break down this structure further for each market type.

YES/NO Prediction Markets: If the market outcome is YES, the buyers of YES and sellers of NO receive one DAI per share in the market. If the market outcome is NO or Invalid, they receive nothing. If the market outcome is NO, the buyers of NO and the sellers of YES receive one DAI per share, but receive nothing if the outcome is YES or invalid.

Multiple Choice Prediction Markets: Buying a long share in a multiple choice market reflects a belief that the chosen outcome is likely. Conversely, buying a short share reflects a belief that the chosen outcome is unlikely. As such, long-share traders receive one DAI if the chosen outcome occurs and nothing if it doesn’t. Short-share traders receive one DAI if the outcome doesn’t occur and zero if it does.

Scalar Prediction Markets: These markets utilize pre-determined bounds to anticipate where the outcome will fall. As such, there are three possible scenarios when the market resolves:

1. If the market outcome settles below the lower bound, sellers receive one DAI per share and buyers receive zero.

2. However, if the outcome settles above the upper bound, buyers receive one DAI, while sellers receive zero.

3. If the outcome lands within the range, the buyers of an outcome under the settlement price and sellers above the settlement price are paid the difference between the price to open their position. Similarly, if the outcome settles within the range, buyers of outcomes above the upper bound and sellers below the lower bound pay the difference between the price to open the position.

Augur Crypto Platform Reporting and Settlement

Augur users must select a resolution source when creating a market. These sources validate event outcomes and trigger the issuance of reward payments. The Augur Decentralized Oracle System brings this real-world information onto the blockchain and requires that market reporters reach a consensus regarding the outcome. Reporters stake REP tokens so they can report on the outcome of events across different markets. However, reporters can lose their stake if not part of the consensus.

When users create a market, they must also select a Designated Reporter and post a bond in the form of REP tokens. Once the market event occurs, the Designated Reporter is given three days to report on the outcome. If the Designated Reporter fails to report an outcome, the Market Creator loses their bond, and the event enters the Open Reporting Phase.

During the Open Reporting Phase, anyone can report an event outcome, not just the Designated Reporter. The bond is given to the first user who reports the outcome. Once the Decentralized Augur Oracle determines the event's outcome and the reporting process is complete, traders can close out their positions. Recall that winning shares pay $1 (DAI) while losing shares pay $0.

Augur v2 Improvements

Although Augur v1 was the first integration of predictive markets and blockchain, the Ethereum ecosystem is in a perpetual state of rapid development, and Augur has grown as well. The 2020 release of Augur v2 was a response to the evolution of decentralized protocols since v1 went live in 2018. The Augur v2 update adds improvements to dispute management and settlements, introduces more secure oracles, and replaces the REP (REPv1) token with REPv2. The following integrations highlight the most significant changes to the Augur crypto network:

• Augur v2 and 0x: The utilization of 0x Mesh supports off-chain order books, supporting no-fee "maker" or buying orders. As such, Ethereum transaction fees are paid by order "takers" or sellers. The 0x protocol supports greater liquidity on the Augur crypto platform by encouraging participation in predictive markets.

• Augur v2 and Uniswap v2: The Uniswap v2 upgrade now broadcasts exchange pricing signals to the Augur v2 network. Before this, REP token market capitalization was fed from a semi-centralized oracle.

• Augur v2 and Portis, Fortmatic, or Torus: Augur v2 was built to provide a more user-friendly experience capable of broadening platform appeal. This Web2 approach streamlines the authentication flow and natively supports wallets from Portis, Formatic, or Torus.

• Augur v2 and DAI: On the Augur v1 network, users made bets in ETH, which was subject to crypto market volatility. In response, Augur v2 uses the DAI stablecoin via MakerDAO to place bets, resulting in a more stable user experience.

Augur Prediction Markets and Crowdsourcing Truth

While most users of prediction markers like Augur are primarily concerned with earning rewards for correctly forecasting real world events, inherent in the platform is a mechanism for crowdsourcing truth. While the information age and the internet have democratized access to information, the veracity of that information can often be in question. By incentivizing users to participate in crowdsourced opinion, and then creating mechanisms for information to be verified, prediction markets can play an important role in keeping information honest — even as the amount of information available continues to increase. An early mover in Ethereum, Augur has continued to develop its product, and strives to remain at the forefront of prediction markets and the wider decentralized ecosystem.