Augur is a decentralized oracle and prediction market platform that acts as a framework for the creation, trading, reporting, and settlement of individual, user-generated prediction markets. Notably, Augur itself is not a prediction market; rather, it exists as a set of smart contract platforms on the Ethereum blockchain defining oracle processes to arbitrate markets based on the outcomes of real world events. By serving merely as a protocol for the creation and facilitation of prediction markets, Augur intends to remain unbound by laws governing both gambling and traditional binary trading service platforms. Believing predictions markets to be the optimal way to accurately forecast events, Joey Krug and Jack Peterson founded Augur in 2014 with assistance from the Forecast Foundation and launched the project’s mainnet in July, 2018.
Augur is an open-source, decentralized protocol for the creation and implementation of prediction markets. In many regards, Augur functions similarly to centralized prediction market and binary trading platforms such as Nadex: it is a marketplace in which users may purchase shares whose intermediate and ultimate value depends on the likelihood and eventual outcome of real-world events, respectively. In contrast with such platforms, markets' outcomes on Augur are determined by an oracle system that incentivizes accuracy and consensus among 'reporter' submitted reports, rather than relying on a single entity to report outcomes. Users can also generate their own prediction markets for specified events, with the onus on the user to create valid, unambiguous market. As of V.1, Augur’s series of smart contracts, written in Solidity and operating on the Ethereum blockchain, define processes through which the protocol’s four main functions are conducted. At a high level, these functions are:
- Creation: Any user holding REP tokens may create a prediction market in Augur’s ecosystem and charge traders a ‘creator fee’ for investing in the market. To do so, a market creator must clearly define an event along with its possible outcomes and end date (i.e. “Will the price of gold be over or under $1,500/oz by November 1st?”). This individual must also specify a designated reporter, whose reporting is based on a specified source of information and whom determines the accepted outcome of the event, subject to checks by the Augur community as outlined in the “Reporting” section below. Further, they must post two bonds, a ‘validity bond’ and a ‘no-show bond,’ to be held in one of Augur’s smart contracts until their market’s successful resolution. Market parameters and bonds are submitted to Augur’s smart contracts via a single transaction on the Ethereum blockchain, at which point a market is created and becomes live.
- Trading: To participate in a prediction market, users may use ETH to purchase ‘shares’ corresponding to specific outcomes of a given event whose ultimate value is determined by the occurrence, or lack thereof, of its specified outcome. Shares issued directly by the Augur smart contract itself are sold in ‘complete sets’ of two reciprocal outcome shares, the required sum of whose prices is specified by the market creator. For example, given the specified cost of a complete set in a market is 1 ETH, if Alice wishes to purchase a “yes” share for 0.6 ETH, the smart contract will ‘match’ her with Bob, who wishes to purchase a “no” share for 0.4 ETH, and mint these two new shares. Augur also maintains an order book, through which existing shares are freely-tradable and ‘matches’ are made between buyers and sellers rather than two buyers of reciprocal shares. In either case, a share’s price is determined by the likelihood of its specified outcome occurring, as shares for probable—and thus, profitable—outcomes will generate greater demand and command higher prices.
- Reporting: Following a market’s specified end date, its outcome must be determined before settlement can occur. The ‘oracle’ employed by Augur for this purpose is more accurately described as a set of incentive-based procedures by which an event’s outcome is initially reported by a designated entity and verified by the greater Augur community. Immediately following a market’s end date is the ‘designated reporting period,’ during which the designated reporter has three days to report and stake REP against a ‘tentative outcome.’ Then begins the ‘dispute round,’ a seven-day period during which REP holders may dispute a tentative outcome by staking REP on an alternative outcome. A dispute is considered successful if the amount of REP staked on the alternative outcome surpasses a dynamic, mathematically-determined ‘dispute bond size.’ Unsuccessful disputes result in the tentative outcome becoming the ‘final outcome’ and the market moving to the settlement phase. Once an outcome is finalized, all staked REP, including that bonded by the designated reporter, is distributed to users who staked REP on the final outcome on a pro rata basis.
- Settlement: Upon an outcome’s finalization, the market moves into its settlement phase. At this point, shares representing the finalized outcome become worth the original specified price of a complete set, and those representing the rejected outcome become worthless. Users may send the former to an Augur smart contract, which will immediately return the predetermined amount of ETH, less fees; this includes the ‘creator fee’ specified by the market maker during the creation period, which can be between 1% and 50% of the share’s final value. Alternatively, bearers of winning shares may continue to trade them during the settlement phase, though there is little, if any, economic incentive to do so.
To combat exploits involving the deliberate creation of invalid markets, in June of 2019, Augur introduced a liquidity sorting mechanism and experimental invalidity filter. Changes proposed for V.2 of the oracle process aim to speed up the market resolution system.
The Augur ecosystem uses a variety of cryptoassets. The native platform-wide token REP is used to pay fees, such as those paid to reporters and market creators, and to participate in markets through bonding and staking against certain outcomes. Accurately staking REP against a given outcome entitles the holder to a proportionate amount of the entire pool of staked REP in a market. In addition, Augur allows users to purchase non-tradable ‘participation tokens’ for one attoREP—the smallest tradable fraction of REP— each. Participation tokens entitle holders to a portion of the fees collected in a given market, incentivizing otherwise idle users to monitor the market in the event additional user participation is required. Finally, Augur uses ETH, the Ethereum blockchain’s native asset, as the currency in which Augur prediction market shares are purchased and settled, though the use of stablecoins, such as DAI, to do so will reportedly be possible in the future.
For an in-depth look at Augur and its potential applications, please read Smith + Crown’s research analysis piece.