Blockchain case study: Prediction markets and Augur

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One of the hottest areas of development when it comes to blockchain is with prediction markets, and in the vanguard of this is Augur, a decentralized trading exchange platform that rewards users for correctly predicting events.

The company itself says it gives people the “potential to glimpse into the future”, and that is certainly what Augur and its contemporaries (including Gnosis which is featured in our report) are doing with blockchain.

Ron Bernstein from Augment Partners is an advisor to Augur and has been working on concepts in prediction markets since working at Intrade in 2000. He says the advantages of utilising blockchain in this area are clear. “Decentralization resists censorship, removes the need to trust the operator (you just have to trust the code), does not rely on traditional banking, and is effectively borderless,” he says.

The complicated nature of distributed ledger technology doesn’t obscure the simple proposition of prediction markets where users make predictions by trading virtual shares in the outcome of an event, whether that is political, financial event or sporting. It works just like a stock market with the price of the shares going up or down according to the likelihood of the given outcome.

Augur points out that prediction markets can be powerful predictive data because of the acknowledged strengths of the wisdom of the crowd i.e. that average predictions are superior to those of individuals as they act as an aggregator of wisdom. With individuals buying and selling share son an outcome in the real world, the prices reach an equilibrium that reflect the opinion of the entre group.

What Augur layers on top of the basic prediction market model is a decentralized system (built on the Ethereum blockchain) which allows anyone, anywhere to create a prediction market themselves. The market creator then provides some initial funding for the market and in return they then receive half of all the trading fees collected during the lifetime of the market.

The outcome is then reported via crowdsourcing – this eliminating the potential for mistakes or manipulation – while funds are stored in smart contracts, eliminating counter-party risk and, as with the P2P betting market example, allowing for instant settlement and transfer of funds.

Bernstein says Augur, blockchain and prediction markets have the potential to exceptionally well-matched. “The key advantages are related to providing wider and cheaper access to prediction markets, where more data points create more accurate data,” he says.

But this is still early days, he adds. “A key drawback is that because blockchain things are so young, much more adoption is required to improve the markets and the data they create.”

However, Bernstein is confident that blockchain adoption generally will move at a pace. “Adoption will take some time, but once it reaches a tipping point the take up will become extremely fast,” he says. “So many ideas are being touched on right now. Funds are being committed to the sector. As soon as some basic use cases are catered to, there's likely to be rapid investment and then adoption in a fast cycle, the good way.”