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🏗️ Market Creation Explained
How new markets are added to Augur.
Who Creates Markets?
Augur is an open, permissionless system. Because of this, anyone can create a market. Every single market on Augur is created by another user.
Note: Because they are created by users, not all markets are going to be high quality.
A market should ask an objective question about a future event that is publicly verifiable in some way. Common topics include the outcome of sports games, political events, financial trading, insurance, bug bounties, the weather, and more. Augur cannot answer subjective questions based on opinion.
Why Create a Market?
Market creators are typically incentivized by one or more of the following:
- To know the public’s forecast of the probability of an event outcome.
- Prediction market can be utilized to improve forecast and has a potential application to test lab-based information theories based on its feature of information aggregation. Researchers have applied prediction markets to assess unobservable information in Google's IPO valuation ahead of time.[17]
- In healthcare, predictive markets can help forecast the spread of infectious disease. In a pilot study, a statewide influenza in Iowa was predicted by these markets 2–4 weeks in advance with clinical data volunteered from participating health care workers.[18]
- Some corporations have harnessed internal predictive markets for decisions and forecasts. In these cases, employees can use virtual currency to bet on what they think will happen for this company in the future. The most accurate guesser will win a money prize as payoff. For example, Best Buy once experimented on using the predictive market to predict whether a Shanghai store can be open on time.[19]
- To profit from the popularity of a particular question/market.
- As a market creator you have the opportunity to earn money by setting a market creator fee on the market. This fee is a %, typically in the range of 0-5%. You can also do “market making” where you provide liquidity (i.e. orders) in the order book for both sides of an outcome, earning profit on the spread. This attracts more trading in your market, providing you more opportunities to capture a cut with your market creator fee.While creating can earn you money, it is important to note that creating a market does cost a significant amount of Gas (in order for the Ethereum blockchain to process your market creation), typically on the order of a few US dollars, depending on Gas prices at the time. There are also a few different bonds you have to provide up front which are returned to you if you create a valid market and report on it quickly and correctly at the market’s end time.
Market Creation Challenges
It takes very careful consideration to make markets that are considered "valid". Invalid markets resolve to the
invalid market outcome (and a market creator's validity bond is not returned to them), leading to a poor user experience for traders who buy other outcomes believing the market is valid.The number one problem people have when trying to create valid markets is poor wording. You may have a clear intention in your mind about the question you want to ask, but some of that intention can be lost when writing it down, or there may be some other factors or interpretations you hadn’t considered.
Here is a list of some of the things to consider before completing your market:
- Is my market question objective and unambiguous?
- Will my market question only have one answer?
- Will the answer to my market question be known before the market end date/time?
- Does any of the information provided in my market conflict with other parts of the market?
- Have I considered all possible edge cases with my market?
- Have I added details about the intent of the market?
- Does the time of day matter? If so, have I specified a timezone for my market?
- Will reporters in the future be able to verify the answer using the resolution source provided?
- Does the resolution source only show a snapshot of what you are trying to measure, or does it keep the history available?
- Will people from all over the world be reasonably able to understand the market question?
- Could I add more information to help traders and reporters understand the intent of my market?
- Do I have enough ETH and REP available to post the required bonds?
- Will I be adding liquidity to this market, and what is my market making strategy?
- Will I be available to be the designated reporter during the 3-day initial report window after the market end date?
- For categorical markets: Have I included all possibilities as answers? Sometimes an “Other” outcome is handy to catch edge cases.
- For scalar/numerical range markets: Have I included rounding rules in the additional details, just in case the reported answer does not match the precision of the market?
Adhering to these questions should help prevent yourself from creating an invalid market.
Because of this complexity, Augur is equipped with pre-defined templates which make the process of creating valid markets easier for market creators. Templates have rigid parameters which don't allow the market creator to deviate from a structure that is highly likely to produce a valid outcome.
Otherwise, market creators are free to create custom, free-form markets. It should be noted that custom markets are marked in the UI and will generally have a higher chance of resolving as
invalid.Parameters for Creating a Market
If you think you have an idea for a market and want to create one, there are a few parameters you must be aware of that are required to create a market on Augur.
- Market Question - The question that you want the world to predict, and it is also the title of the market. It should be about something in the future since traders won’t bother with events that have already happened. Put a good amount of thought into this, since Augur has limitations and can’t answer everything. You should be picking a question where you are certain (beyond a reasonable doubt) that the answer will be publicly verifiable by the market end time (also called market expiration). The question can’t be subjective or ambiguous, there needs to be one final truth that Augur reporters can agree on when the time comes. You don’t need to put every little detail into the title, as there is more room for lots of text in the “Additional Details” section of the market. The title can short and catchy to attract attention, but it also can’t conflict with what the rest of your market parameters are. Market questions typically have some sort of time requirement, like “Will X happen by Y date?” - Be careful with date/time formatting and put in a timezone since Augur is a global platform, otherwise UTC time will generally be assumed. Putting the timezone in the additional details section is also acceptable.
- Category/Tags - Used by the Augur UI to help sort your market and make it more findable by other users.
- Market Type - Augur currently supports three different kinds of markets which determine the potential answers to your Market Question: Yes/No - The simplest option, and the best to start with if you are new. The only answers to your market question are “Yes” and “No” (or Invalid, but that is not a tradeable outcome in version 1 of the Augur smart contracts). Selecting this option means you need to phrase your Market Question such that the answer is yes or no. Presently, the Augur UI only shows the order book for the “Yes” option, which helps consolidate liquidity and keeps things simpler in the UI which is another benefit to beginners. Multiple Choice / Categorical - You get to pick from 2 to 8 possible answers, and there will be a separate order book for each. If you create this type of market, be careful to consider full coverage of all the different possibilities the answer to your market question could end up being. A simple trick is to include one of your options as “Other”. Numerical Range / Scalar - These are more complex and will not be covered by this guide in detail. Avoid these until you are much more comfortable with Augur and have used it extensively. You will be provided with a few extra parameters: A min and max value (the bounds of the range), a denomination (dollars, degrees Celsius, etc.), and the precision.
- Additional Details - A large text field for you to put in as much detailed information about the market as you would like. Use this field to provide all of the pertinent and meticulous specifics about what you are asking about. Sometimes getting across all the details can be very difficult, so you can also use this to clarify the intent of the question just to guard against edge case interpretations that you hadn’t considered at the time you wrote the market question. You could also use this field to provide additional resolution source details or how to find the answer to the question.
- Resolution Source - This can either be “General knowledge”, or “Outcome will be detailed on a public website”, in which you then provide the public website address. You should probably default to using general knowledge for most questions, unless it is likely that multiple answers will be possible and you want to use a specific web site as the singular answer. This is common for cryptocurrency financial markets, where different exchanges have slightly different answers for what the price of a cryptocurrency is at a specific time. Note that the answer to the market question needs to be able to be historically referenced by reporters, potentially months after the market end time (due to the dispute and forking process). Some resolution sources might give you the answer to your question, but only for a short time period. This can present issues for reporters looking up the market answer later on, and can result in the market resolving as invalid. Sometimes an archive tool like The Internet Archive can be used to find the historical answer, but it is not 100% reliable. It is possible that an archiving tool specifically for Augur may be created in the future to improve the reliability of using specific web sites as resolution sources. But for now, try to stick to general knowledge markets if you are new to Augur.
- Designated Reporter - The Ethereum address that is allowed to do the initial report for the market to determine its initial tentative outcome. Note that this address cannot unilaterally decide what the answer to the market is, as any REP holder can dispute the answer. The designated reporter can be the same address used to create the market, and it most commonly is. There is a “no-show” bond that must be put up by the market creator which is lost if the designated reporter doesn’t show up on time (within 3 days of the market end time) to put forth the initial tentative outcome.
- Market End Time - Also known as “Market Expiration” or “Reporting Start Time”. This is the time where the market enters the reporting phase to determine what the correct answer is. The answer to the market must be known before the market end time. If the answer to the market is not known by this time, the market will be invalid. It is recommended to set the market end time well after the event is expected to occur, to give plenty of wiggle room for unexpected delays. Potential delays can vary dramatically between domains: sports games usually resolve within a day but political election results can be delayed for weeks. Note that timezones also matter. If a timezone was not specified in the market question/additional details, UTC will generally be used. The Augur UI will convert timestamp fields to your local time for display, but are actually stored in UTC on the blockchain. If you don’t want to think too hard about this, just set the market end time at least one day after the answer to your market question should be known.
- Market Creator Fee - This is where you get to potentially make some money. This fee is your compensation for asking an interesting question on Augur that people want to trade on, and incentivizes you to advertise your market. This parameter is a percentage cut that you will receive from traders settling their market shares for ETH with the market itself, which can happen during regular trading (if both traders in the trade have shares they want to cash in for ETH) of a non-finalized market and also when a market is finalized and the winners want their winnings. Note that market creator fees that are 5% or greater will be filtered out by default in the Augur UI, since it is unlikely to be a useful market for traders to trade on. Typical fees are usually set somewhere around 1%.
- Initial Liquidity - This can be done during the market creation process or afterward. A market with liquidity (i.e. open orders) is much more attractive to traders and can help you get your market some attention. This is a complex topic, so if you want to learn more you should look up “market making”. The basics are that you want to estimate the probability that the event will occur and place orders above and below that estimated probability. If you get lots of trades on one side, you adjust your orders to compensate. This requires vigilance over the state of your market, and is aided greatly by programmed bots/tools. Note that your open orders stay in the order book, even if the market is in reporting or finalized. They should probably be cancelled before that time, otherwise it may be “free money” for someone else.
Required Bonds
Creating a market in Augur requires some capital to be locked up, which is used to incentivize desired behaviors in the platform. Assuming you play by the rules and do what you are supposed to do, these bonds will be returned to you.
- Validity Bond - Payable in ETH. You can get this back once your market resolves to anything other than invalid. This help prevent market creators from creating poorly defined markets.
- No Show Bond - Payable in REP. You can get this back once your designated reporter (likely the same address as the market creator) shows up in time to give the initial report of the answer for the market. There is a time limit to do this, which is currently set to 3 days after the market end time.
- Designated Reporter Stake - Payable in REP. When the designated reporter does the initial report, this bond is put up to incentivize other reporters to make sure the answer is correct. If reporters think the initial report is incorrect, they can dispute the answer to earn the designated reporter bond as a reward. If the initial report was found to be the correct answer (disputed or not), the bond can be returned to the designated reporter."