There are no safe bets in crypto.
As a facilitator, betting and gambling have been a part of cryptocurrency’s DNA since the beginning. Indeed, it can be argued that traders betting (or speculating) on the bitcoin price helped create the first price bubble and precipitated crypto’s rise to prominence.
If blind speculation represents one side of crypto’s relationship with gambling, then Augur (REP) stands for its opposite. In short, Augur might be the most sophisticated attempt ever at creating human prediction markets.
But before we get into the details of one of crypto’s most promising projects, it’s worth understanding the story behind Augur and where it stands today. Augur was founded in 2014, by Jack Peterson and Joey Krug with support from the independent Forecast Foundation.
After extensive development and testing, the project launched in July 2018. It may not surprise you to hear that internal turmoil had begun to bubble prior to the launch. Indeed, an internal power struggle culminated in a record-breaking $152 million lawsuit, filed in May of 2018, which threatened to derail the project.
Luckily, the case was dismissed on the 12th of October, with a settlement apparently reached in private. Further good news arrived in the form of political turmoil, as the midterm elections caused a significant spike in betting activity. According to this article, over $2 million dollars worth of bets were placed within 24 hours during the midterms. This is a huge amount of activity for a crypto platform.
But what exactly is Augur? What are the benefits of a decentralized gambling platform? And what does it have to do with Ethereum?
What is Augur?
Augur is a decentralized oracle and prediction market platform, that aims to revolutionize the $480 billion dollar gambling industry. In its simplest definition, Augur allows participants (known as traders) to speculate on the outcome of events. Those who speculate correctly win money, while those who speculate incorrectly lose money.
Naturally, Augur uses Ethereum smart contracts to receive, hold and pay out the bets. By utilizing blockchain technology, Augur ensures that gambling can happen in a trustless environment. More specifically, the smart contracts cannot be altered once executed, and run on the decentralized ethereum network.
As a result, Augur provides the world’s first fully decentralized and completely trustless gambling platform. Decentralization has become a buzzword in the blockchain space, but its merits are obvious in the case of a high-value prediction market. In an industry which is known for corruption, the ability to participate without the need for trust is a huge advantage.
Another advantage of the Augur platform is the flexibility of the bets. On traditional gambling sites, participants can only bet on a limited range of topics. Using Augur, participants can literally bet on anything.
Understanding how gambling works on the Augur platform
Now that we understand what Augur is and how it offers significant advantages over traditional gambling sites, let’s dig into how people can participate.
According to the white paper, Augur’s markets always follow the same four stages:
- Creation – Anyone can create a bet around a future event (Sports, politics, you name it). Importantly this also involves the determination of a reference source, like bbc.com or “The United States Department of Energy”.
- Trading – Trading begins as soon as the bet is created, and is cheap compared to traditional competitors.
- Reporting – Once the event has occurred the oracles (ie. reporters who stake REP) learn the outcome.
- Settlement – Now that the result is clear, users can immediately receive their winnings.
The most interesting step concerns reporting. Here market creators and reporters need to stake REP, Augur’s native utility token, before determining the outcome of an event. Importantly, there is always a multitude of oracles (reporters) staking REP. This ensures that the consensus always corresponds to the actual outcome of the event. If one party attempts to defraud the system by reporting an incorrect outcome, it is punished.
As is the case with most Proof-of-Stake consensus models, fraudulent actors lose their staked tokens, while good actors are paid. More precisely, participants are rewarded for staking REP and honestly reporting on the outcome of events with a portion of the market fees. Oracles who determine an incorrect result do not match the overall consensus of the oracles and subsequently, lose their staked KEY. Thus, Augur has created an incentive model which punishes fraudulent behavior and rewards good behavior.
Finally, it is important to understand that REP is not used for betting. Instead, traders can currently place either ETH or BTC.
Understanding the security and scalability concerns
The biggest concern Augur faces regard the incentive model. As long as the Augur protocol acts in accordance with the best interests of all honest participants the platform’s foundation is secure.
The fact that ETH or BTC are used for betting, while REP is used for staking and rewarding, brings up some interesting questions around security.
As specified in the whitepaper, gambling is a pastime which experiences a huge amount of volatility. Halcyon days typically result in people’s interest in gambling ebbing away. When important political or sporting events draw near, platforms like Augur experience a huge surge in popularity.
A good example of this is the of interest which accompanied the recent midterm elections in the US. According to this report from Coindesk, over $800,000 was bet through Augur on the outcome of that single event, pushing the total amount to just over $2 million. Of course, this is still peanuts compared to other sites, but it illustrates a prevalent problem that many utility tokens face.
It is intuitive to believe that the value of REP will increase as the popularity of the platform increases. If the price of REP increases to anywhere near its all-time high ($124) we may find ourselves in a situation where receiving REP is more desirable than receiving ETH or BTC. REP, after all, is required in order to participate in the prediction market, but spending REP becomes less attractive the higher its price climbs.
Another, more important, security concern regards the potential misuse of the platform to finance terrorism or other illegal activity. Given the functionality, it’s easy to imagine a scenario where terrorists are paid anonymously through the platform. Augur does not currently require KYC from its customers, meaning it would be trivial for a criminal organization to pay its members through Augur. Such a case would look something like this:
- Criminal organization creates a market. The bet would be: Person X to be alive by a given time and date (bets “yes”)
- Criminal member bets “no” on the outcome.
- Criminal assassinates the target and receives the payout from Augur.
Clearly, such a case is unlikely, but Coindesk has already reported the rise of the first assassination markets on the platform. This chilling realization calls into question the fundamental philosophy behind some cryptocurrencies.
Augur is built to be censorship resistant, meaning it might see the risk of terrorist financing as acceptable in return for a censorship-free platform.
It seems clear that government bodies will not take such a liberal approach. Instead, Augur might be shooting itself in the foot by failing to take adequate security measures now. In a world where AML and KYC are becoming increasingly important, this is an issue that needs to be resolved.
The final concern regards scalability. Augur is, after all, a decentralized application (dAPP) running on the Ethereum blockchain. As the popular dAPP Cryptokitties showed in December 2017, it is easy to overwhelm Ethereum’s blockchain with a sudden surge of transactions. The ill-suited Proof-of-Work consensus algorithm, coupled with the volatility of the gambling industry, make it likely that Augur will feel the bite of Ethereum’s relative lack of scalability.
The highly anticipated shift to Casper, a unique twist on Proof-of-Stake, will be vital in remedying this threat.
The bottom line is that Augur has the biggest upside of any currently active dAPP. Gambling is one of the oldest pastimes there is, and the demand is unquestioningly there if Augur can manage to supply it. Some good work is already being done.
Augur launched its mainnet in July 2018, and serviced more than 300 users on opening day – a milestone that remains unsurpassed. According to predictions.global, an impressive $1.7 million dollars is currently staked in over 1,500 markets. Although this is peanuts compared to the traditional gambling behemoths, it still represents a significant level of adoption in the cryptocurrency space.
Nevertheless, Augur seems to be struggling to communicate its value proposition. Despite impressive advisors like Vitalik Buterin and Pieter Thiel, user numbers fall dramatically low far too often.
One potential reason for this, might be the relatively small size of the crypto-community. If it wants to succeed, Augur needs to attract not just Metamask users, but the ordinary punters who drive the real volumes in the betting industry.
Should Augur succeed, it will have made important inroads into one of the mainstreams most hallowed grounds.