🧭Augur FAQ
On the wisdom of crowds
What is Augur?
It is a free and open-source (developed by Forecast Foundation, OU) prediction market or betting exchange protocol that is operated in a peer-to-peer basis by its users; utilizing smart contracts, deployed to the Ethereum blockchain, to govern the rules of engagement between them.
Prediction markets allow participants to bet on the potential outcomes of future events by trading shares at varying prices. Historically, prediction markets have been limited in scope to narrow domains such as sports gambling or politics due to varying legal restrictions throughout the world. By leveraging the decentralized nature of Ethereum, Augur allows anyone to wager any amount on any potential future event that is publicly verifiable.
This censorship resistance is key to allowing Augur to unleash the full potential of the “wisdom of the crowd”. By allowing anyone with useful information about an event to “put their money where their mouth is”, more accurate forecasts are made possible which can be useful information for everyone. This information is also brought on chain which means it can be used by other applications on Ethereum. That makes Augur a decentralized oracle as well.
What is a prediction market?
A prediction market is a group of people exchanging information in the form of the prices in shares of future event outcomes.
Prediction markets can concern any future event e.g., whether the Dolphins will win on Sunday, will America’s GDP will go up next quarter or if Dwayne Johnson will be elected president.
There are two types of shares in a simple prediction market: long shares and short shares. Long shares generally increase in value as an event becomes likelier and pay out more if the event in question occurs. Short shares generally increase in value as an event becomes less likely and pay out more if the event does not occur.
In a simple YES/NO prediction market on Augur, each YES (long) share pays out a one dollar (or Dai) [link] if the event in question occurs and pays out nothing if it does not occur. Each NO (short) share pays out a dollar (or Dai) if the event does not occur and nothing if it does.
Prices in a prediction market may change as buyers and sellers react to, or price in, new information or events that affect the likelihood of the outcome in question.
At any point in time, the price may be interpreted as a rough signal of present perceived probability of an event occurring. For instance, if YES shares just traded at .45 Dai, that may be interpreted as “the market thinks there’s a 45% chance that the event in question will occur.” This is a generalization and does not always apply.
Why are prediction markets useful?
Prediction markets can help forecast any verifiable outcome whether political elections, the weather, economic growth, housing prices, the spread of flu outbreaks…you name it. They incentivize a diverse crowd to disclose all of their private knowledge and do so as soon as possible lest others beat them to the punch.
Studies indicate that prediction markets outperform traditional forecasting methods like expert panels and political polls. Iowa Electronic Markets, a political prediction market, was found to produce more accurate forecasts than professional pollsters, making correct election calls 451 out of 596 times.
An internal prediction market at Hewlett-Packard more accurately forecasted printer sales than a team of company executives. Another study showed that orange juice futures produce more accurate weather predictions than the National Weather Service.
Keep in mind that these studies are based on centralized prediction markets, which may be limited in their predictive powers compared to decentralized alternatives like Augur.
Prediction markets incentivize participants to predict honestly and to the best of their abilities, since they have “skin in the game” and stand to lose or gain based on the quality of their forecasts.
Prediction markets not only extract existing knowledge but motivate the production of new knowledge. For example, prediction markets on the weather might motivate meteorologists to develop improved forecasting models. Prediction markets make the creation and revelation of knowledge competitive and meritocratic.
By compensating good predictions and imposing costs for bad ones, prediction markets reward greater leverage to so-called superforecasters over time while discouraging dishonest or inaccurate ones.
Prediction markets can be used not only to predict the future, but to prepare for the future by letting individuals and organizations hedge risk. For example, a Chilean farmer who relies on the weather could protect against the risk of drought by forecasting a low amount of rainfall on a prediction market. If it rains, his crop flourishes, but otherwise, he gets a payout from his hedge.A 2008 paper penned by several Nobel Laureates and Google’s Chief Economist made the case that prediction markets can let governments and businesses make better forecasts and policy decisions. They encouraged regulators to take a tolerant stance toward prediction markets since they can help manage economic risk and enhance social welfare. James Surowiecki’s 2004 book, The Wisdom of Crowds, also championed prediction markets as a means to unleash collective insight.
What are the limits of centralized prediction markets & betting exchanges?
Centralized prediction markets suffer from what could be called the three Cs of centralization: they are Closed, Costly and Constrained. These factors limit traders, liquidity, and the market’s ability to absorb information and produce accurate predictions.
Closed
Centralized prediction markets are siloed and segregated by borders, capital controls, and regulation. Market operators and regulators act as gatekeepers that limit who can participate and what they can speculate on.
Costly
Centralized prediction markets charge fees in the form of cuts on profit or withdrawal fees.
Constrained (and Censored)
Centralized prediction markets impose low betting caps, which prevent high-confidence actors from sufficiently expressing their conviction and moving the markets by trading higher amounts. This limits the predictive powers of these markets. The risk of markets being shut down by regulators also discourages participation.
What are the advantages of a decentralized betting exchange?
Low Fees
Decentralized Prediction Markets (DPMs) only impose fees where needed to secure the network. Fees tend to be minimal and likely trend toward zero over time.
No Limits
Unlike centralized prediction markets with low caps, Augur imposes no limits: users may trade or bet as much as they like.
Reliable
DPMs eliminate counterparty risk and shady operators; participants need not trust anyone to custody their funds.
Open
DPMs are borderless and unrestricted. They let anyone, anywhere, anytime trade in and create markets on any outcome, and in theory get exposure to any asset in the world by speculating on its future value.
Resilient
DPMs are more resistant to censorship and nefarious actors. They cannot be arbitrarily shut down, and since they are distributed, they have no single point of failure.
Better Liquidity, Better Predictions
These traits lead not just to a superior experience for users but to a global, borderless liquidity pool that serves as a more efficient market for absorbing and aggregating the world’s information and producing robust predictions.
What types of events and outcomes can I trade on Augur?
Anything. Sports, elections, asset prices, entertainment, you name it. On Augur, anyone may create a market on anything.
What determines the price of shares?
The short answer is however much buyers are willing to pay and sellers are willing to accept, as the price in any financial market is the meeting point of buyers and sellers. So then the question becomes: how do buyers and sellers decide how much they are willing to pay or accept?
Many things inform traders’ price points, but the most salient factor in a prediction market is how likely they believe the event in question is to occur; or similarly how likely is it that other traders’ sentiment will change in the interim.
The end payout for winning and losing shares in a prediction market is fixed and known from the beginning. A winning share pays out one DAI in a YES/NO market; losing shares pay out zero.
So if you apply a 50% probability that an event likely to occur, then it makes sense to spend no more than .50 on YES shares, since your model assumes that there is a 50% chance you will get a payout of one DAI and a 50% chance you will get a payout of zero, which averages out to .50 DAI.
So the current price that an outcome is trading at roughly equals the market’s present perceived probability that the event in question will occur.
For example, if YES shares are currently trading at .75 in “Will the Dolphins Win on Sunday?” that signals a perceived 75% chance that the Dolphins will win.
Prediction markets on real-world events contain uncertainty, market actors with differing information, views and intuitions, and any number of factors that may affect the outcome. The net result is that the perceived probability of the event occurring varies across individuals and across time, and shifts as the market absorbs more information, more participants and prices in new developments.
For instance, given a market on whether Candidate X will be elected president, if some scandal surfaces that diminishes his chances, the price for YES shares may adjust downward as buyers will now be willing to pay less.
In a Scalar market, the price signals the expected numerical outcome. For example, in a market on how many points the Dolphins will score on Sunday, if the current price is 21, that signals that the market “thinks” the Dolphins will score ~21 points. Remember, “the market” is simply a group of buyers and sellers expressing their varying information, intuitions and insights.
What is the Augur Oracle?
An Oracle is a mechanism that feeds real-world information on to a blockchain. In the case of Augur, the Oracle transfers information about what market outcome occurred e.g., if the Dolphins won on Sunday onto the Ethereum blockchain. The Oracle uses a communal reporting and dispute system driven by incentives to determine the outcome of markets.
What is the Oracle Problem?
A Decentralized Prediction Market is, in essence, a set of smart contracts that say who will get paid how much if X or Y event occurs. But who decides which outcome actually occurred? In a centralized prediction market, it’s easy. Once a market expires, the operator says whether X or Y happened. But in a DPM there’s no operator!
This is an example of a broader conundrum called The Oracle Problem. An oracle is whatever feeds truth about the real world into a blockchain. Blockchains are immutable, tamper-proof ledgers, but the real-world is messy and rife with misinformation. So how can a blockchain interact with the real world while preserving its truthfulness? In the case of a Decentralized Prediction Market, how can you ensure accurate market outcomes?
What is ETH?
Ether (ETH) is Ethereum's digital token, which is a cryptocurrency similar to Bitcoin. It has value within the market and it is used to facilitate the information exchange on the Ethereum blockchain. Developers wanting to build DApps and users who want to interact with the smart contracts on the Ethereum blockchain are required to use Ether (ETH). Ethereum has the functionality of using smart contracts. The smart contract is written in code into a blockchain, and once the terms of the contract have been met by each party, the deal will be executed and agreed transaction would take place.
What is DAI?
DAI is pegged 1:1 with the US Dollar and it is the currency which is accepted to make trades. Using DAI is functionally equivalent to using dollars and DAI can be redeemed for dollars from services such as Coinbase. Note: DAI is the only currency necessary to trade on Augur.
For a more detailed understanding of DAI, go here.
What is REP?
REP is a currency unique to Augur, which is only necessary if you are creating markets or participating in the reporting / disputing process. You can stake REP in order to earn fees for reporting / disputing outcomes.
What is Cryptocurrency?
Cryptocurrencies are digital equivalents of currencies, where the record of every transaction is stored on a public blockchain. Limitations and scarcity are imposed on the digital currencies to reflect the nature of real world currencies, with sophisticated programming implemented to make it difficult to counterfeit the currency.
What is Blockchain?
Blockhain is the underlying technology that supports cryptocurrencies. A public blockchain is a digital record of information that is duplicated and shared across a network of many computers instead of a single central server. Updating the digital record requires a complex computational process to ensure that only the right information is added to the blockchain. The public record of information stored across the network ensures that no one entity is able to control, corrupt and change the data, keeping the record secure and verifiable.
What is a DApp?
Unlike a normal web application which communicates with its database on a central server, a DApp or decentralised app, does not host it files or database on such central servers. To access this information, the DApp serves as the client to pull all the necessary data from the blockchain to operate.
What is GAS price?
The GAS price is the transaction fee required to carry out your transaction. Once signing for a transaction, your transaction is sent to a pool of other signed transactions. The miners maintaining the blockchain then prioritize the highest gas prices to process and add that transaction into a block, and subsequently add it into the chain.
Can other people see my transaction?
All transactions made on the Ethereum blockchain is public and verifiable, but only your public key and amount of cryptocurrencies transferred within the transaction can be viewed.
Is there a transaction charge?
Transaction fees are incurred on every transaction on the blockchain, which is the reward paid to miners who update and maintain the network. When you are purchasing Cryptocurrencies from a provider, they might charge you an additional fee on top of the exchange rate that you're paying for.
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