Long Augur
Augur is an open, global prediction market protocol that allows anyone to create a market for anything. There is no single entity that controls the protocol; it’s community owned and operated.
It is still relatively uncommon for venture funds to invest in and contribute to protocols that are community owned and operated and I thought it’d be worthwhile to share why and how we at 1confirmation are investing time, energy, and capital into the Augur ecosystem and prediction markets broadly:
Why?
Global markets by anyone on anything
The Internet allows people to communicate across borders, but the number of global markets that have significant liquidity across borders is quite limited. There are social (trust) and political (regulation) factors that have historically limited the success of global markets.
In launching Bitcoin, Satoshi created a global market for a new service: a distributed ledger. It turned out that there was strong demand for that service globally
One way to create a global market is to devise a p2p-networking layer and a consensus layer, aggregate resources, offer a service uniquely enabled by those resources, and create a token. This is what Satoshi did and many projects have followed Satoshi over the past few years in creating global markets via blockchain-based tokens. But what if there was a platform that made it easier for anyone to create their own markets for anything without doing all of that complicated work in launching a token, where the long-term value is often tenuous anyways? Enter Augur.
Permissionless prediction markets
Prediction markets are not new and have generally been thought of in the context of betting on political outcomes and sports. Betfair in Europe and PredictIt and the now defunct Intrade in the U.S. are three products in particular that have had varying degrees of success, offering users the ability to speculate on things like the next president of the U.S. and English Premier League champion.
But the prediction market related products that have existed historically have all been owned and operated by centralized entities and the types of markets, liquidity, and geographic reach have been limited due to the social and political limitations of centralized products. The promise of a permissionless protocol that no one controls and anyone can use is that it can enable a broad variety of new markets (markets on anything) and aggregate significant liquidity across borders for people that previously couldn’t participate in markets (markets for anyone).
Augur in 2018: weak UX, strong community
Augur v1 launched on the Ethereum mainnet in early July 2018. The UX of Augur in its current form is bad— the client can take hours to sync if it syncs at all. Users can only speculate on markets with ETH, which is quite volatile. There’s no easy way to discover and sort markets. It takes weeks if not months for markets to resolve. The list goes on.
Despite the bad UX, there is a small, passionate community of people actively engaged with the product. There has been over $2M worth of ETH open interest in Augur markets in total, and the Subreddit and Discord are active with hundreds of people discussing the use of the product. The early numbers are small for sure, but when there’s a small, diverse community that cares a lot about a product that is barely usable, that is often a strong signal about the long-term prospects of the product (if the UX can improve significantly over time). There’s no better example of that over the past 10 years than Bitcoin, and we think that Augur usability and usage could experience a similar trajectory.
Our bets
Reputation
We’ve invested in Augur directly via Reputation (REP), the native token to the Augur platform. REP is an Ethereum based work token — token ownership gives holders the right to contribute work to the Augur network. REP is not a token to own passively and expect to profit from; REP holders are responsible for work that happens to be critical to the success of the platform, resolving outcomes of events. If the work is not done, the token will not retain value over the long-term.
While we haven’t staked the REP we own yet to settle any disputes, we recognize we may need to in the future (perhaps soon, if the House Market doesn’t resolve Democrats in the coming weeks or perhaps later when there is a fork in the network). When Augur v2 is implemented in 2019, the “fork it or lose it” feature means that users who don’t vote at the end of the dispute period will lose their REP.
REP exists to solve a problem — how do you resolve outcomes in a trust-minimized manner without relying on a centralized third-party data source. The Augur network is only ~6 months into existing on mainnet and we’re a long way from learning whether the decentralized oracle solution will hold up in the long-term, but it is working well early on. As the tools get better to participate in dispute resolution and the financial penalty associated with not participating increases, we expect to participate in voting on disputes ourselves and we expect REP holders as a whole to become one of the most engaged groups of token holders in the crypto ecosystem.
Veil
We’ve also invested in Veil, a Cayman Islands based company building an interface that makes it easy to interact with Augur. As we’ve seen before in the case of Bitcoin and interfaces like Coinbase built on top, in many cases open protocols can benefit from centralized companies that bring a great UI/UX and trust to the network. We’re very excited about what Paul, Graham, and Mert at Veil are doing to make Augur markets more usable.
Starting tomorrow, people outside the United States, Cuba, Syria, North Korea, the Crimea region, and any OFAC-embargoed nations will be able to use Veil to trade markets like cryptocurrency derivatives, Academy Awards results, and Grin related markets on the Ethereum mainnet. Veil is curating markets to start and other markets will be added soon.
Other types of products we’d love to see built
We hope to make several additional contributions to Augur and the broader prediction market ecosystem in the coming years.
Here are some other products that we’d like to see built:
- New interfaces that allow users to interact with prediction markets in fun and accessible ways (e.g. Pdotindex)
- A service that make it dead simple to create and discover markets
- A service that allow users to easily track disputes (e.g. an improved Reporters.chat), see who is reporting and staking REP on what outcomes, and participate in dispute resolution
- A service that allows users to delegate their REP to trusted third parties who can settle disputes on their behalf
Risks
Regulation
The regulatory landscape for Augur is unclear, especially in the United States. Entrepreneurs in the U.S. must consider the CFTC when it comes to derivatives regulation for binary markets, state regulators when it comes to gambling, as well as FINCEN and CFPB when it comes to money transmission. Until more clarity is given by regulators on how they view Augur and Augur-based services, it is important to tread carefully based on your role in the ecosystem and jurisdiction.
Many US entrepreneurs in the ecosystem may end up blocking U.S. customers and educating regulators on how the tech works until there’s more clarity. There are lots of legal minds in the U.S. doing good work on this front, like DC-based Coincenter who released a piece on whether or not writing code could be considered a crime in response to CFTC Commissioner Brian Quintenz’s October speech. Bitcoin is 10+ years in and there’s been progress on regulation but still no clarity; a similar trajectory should be expected here.
Cryptoeconomics
The cryptoeconomics of Augur are unproven (and also changing significantly from v1 to v2) and it is unclear whether the system will hold up over time or the incentive model will end up breaking. There have been a number of simulations (see a write up on an Augur simulation run by Incentivai here) that have analyzed different scenarios that could play out in the network. There’s no guarantee that Augur will continue to work well as different actors with different incentives enter the system.
More
Augur was one of the first Ethereum-based projects to launch in mid 2015. Some say the traction to date from a 3+ year project is disappointing.
These people don’t recognize the fact that building a truly robust cryptoeconomic protocol that maintains a high level of decentralization (development, nodes, token holders, users, etc) is a different process than building a centralized product. Centralized products have the benefits of a high degree of coordination, fast decision-making and mature infrastructure and tools; decentralized protocols do not have any of those and their progress tends to be slower as a result. What’s important is that progress is made. I believe the Augur network is one of few protocols that has progressed significantly over the past 3+ years and the future is bright with Augur v2 in the works and services like Veil and many others launching this year.
Ways to learn more:
- View, edit, and contribute to the code: https://github.com/AugurProject/augur
- Track markets: https://predictions.global/
- Track disputes: https://reporters.chat/
- Discuss: https://www.reddit.com/r/augur
Disclosure: 1confirmation is a holder of REP tokens. This post is in no way promoting REP as an investment. In fact, you should not buy REP unless you’re a professional who is able to spend significant time understanding the complexity of the Augur system and contributing to the Augur community.
About the author: Nick runs 1confirmation, an early stage crypto fund based in San Francisco, CA. He previously worked at Coinbase where he helped lead business development and marketing efforts in the early days of the company.
