Augur is creating a decentralized open-source prediction market platform and oracle service. The project was founded in 2014 and released an alpha version of the platform in June 2015. Due to issues with the Serpent language, which pre-dated Solidity, the team had to re-write their code in Solidity leading to a delay in development. Augur launched their beta in March 2016 and mainnet in July 2018.
Prediction markets on the platform will enable users to create a market for forecasting a specific future event, such as who will win the next election or which team will win the World Cup. Participants in the market will be able to buy “shares” of the specific outcome they see as most likely. At the end of a pre-determined period the outcome is checked and those that own shares in the correct result receive a monetary reward. Prediction markets can be useful tools in tracking the true sentiment for results, as typically only the most informed individuals will risk money when making a prediction.
The team believes that by creating a fully decentralized prediction market they can overcome issues seen in centralized markets such as needing to trust that a result is correctly reported and that a payout is received. In addition, by creating a framework for the creation of these markets users can forecast the outcome of almost any event. Once a market is created trading begins immediately. The outcome of the event is determined by Augur’s oracles which are incentivized to report on event outcomes. Upon determination of the outcome, traders can close their positions and collect their payouts.
The workflow for prediction markets in Augur can be broken down into four segments; market creation, trading, reporting, and settlement.
Markets will be created by a user that is responsible for setting parameters around the event, such as the end-date for the market and designated oracle or reporting entity. Once the end date is reached the designated oracle is responsible for providing the outcome of the event, such as who won an election. This designated oracle does not unilaterally decide the outcome of the market, and it can be disputed and corrected by the community. The creator must also choose a resolution source such as “bbc.com” and set a creator fee which is to be paid to the market creator upon trade settlement. Additionally, creators must post a validity bond in REP to incentivize the creation of well-defined events, and a no-show bond to incentivize the creator to pick a reliable reporter.
Shares can be traded freely upon creation, and market participants forecast the outcomes of events by trading shares of those possible outcomes denominated in ETH. This introduces price volatility as the price can change drastically between the creation and settlement of a market, so v2 of the protocol introduces the use of stablecoins. Using the Augur matching engine anyone can create or fill an existing order. All Augur assets – including shares in market outcomes, fee window tokens, shares in dispute bonds, and even ownership of the markets themselves are transferable at all times.
Once an event occurs, the outcome is determined by Augur’s oracles, which are profit-driven reporters incentivized to report the true real-world outcome. Anyone who owns REP tokens can participate in reporting and disputing outcomes. Reporters whose outcomes are consistent with consensus are rewarded while those whose outcomes are inconsistent are penalized.
The reporting system runs on a seven-day fee window. All fees collected during a respective window are pooled and distributed to the reporters who contributed during that window. Reporters receive rewards in proportion to the amount of REP staked during the fee window. To incentivize consistent participation during each fee window, REP holders can also purchase participation tokens, which are redeemable for a certain portion of the fee pool.
Augur levies a creator fee and reporter fee when market participants settle trades with the market contract. These fees are proportional to the amount paid out to respective users. The creator fee is set during market creation, and the reporting fee is set dynamically.
Settlement is disrupted if enough REP tokens are staked on the belief the market was not reported correctly (currently 2.5% of all tokens). If this occurs the system forks into two distinct universes for the different outcomes. During this process, all markets are frozen until the dispute is resolved. REP holders are then forced to migrate their tokens to the outcome they believe is correct, essentially "voting" with their money. The belief is the market will settle on the true outcome, and developers, service providers and other actors in the ecosystem will naturally continue to build on it.