Launched in 2018, Augur is a peer-to-peer protocol for prediction markets, in which users receive payouts when they predict a winning outcome. Additionally, Augur acts as a decentralized oracle — a source that verifies real-world occurrences. It is built on the Ethereum blockchain.
Augur is a set of open-source smart contracts, coded in solidity, that can be deployed on the Ethereum blockchain. When executed, these smart contracts settle payments in ETH with participating users.
Augur operates with two cryptocurrencies. REP (or reputation) is a staking token used by reporters to clarify disputes on outcomes of the prediction market. Users lock REP tokens in escrow, thereby staking them, in order to assert the outcome of a particular created market. There is a specific incentive structure incorporated in augur’s platform that rewards reporting on correct outcomes, penalizes reporting on incorrect outcomes, and penalizes passive holders who don’t stake on disputes and forks.
The augur protocol is supported by The Forecast Foundation – a group of developers who contribute to the maintenance and development of the protocol, but do not own or control it. The foundation does not receive fees from the protocol and has no role in the operation of created markets among other restrictions.
As of 2019, augur had finalized 2,110 markets.
How does Augur work?
Augur was founded in 2014 by Jack Peterson and Joey Krug. They sought to create a shift away from traditional prediction markets, which are centralized, meaning participants needed a trustworthy entity to maintain an honest ledger of truth. Similarly, to determine the outcome of a predictable event, an impartial, trusted judge needed to conclude a correct outcome to distribute payouts.
Augur aimed to eliminate the risk of self-interested behavior, corruption and theft by decentralizing the prediction markets. The protocol operates through automated executable smart contracts that pull information from augur’s oracle, a source of information flowing from the real world to the blockchain. Augur markets flow in stages of creation, trading, reporting and settlement.
Launch and Issuance
In 2015, Augur facilitated one of the first initial coin offerings (ICO) on Ethereum and raised over $5 million through the sale of REP tokens. It originally sold 80%, 8.8 million REP, to raise these funds. The sale was conducted in four rounds, and the price paid was dependent on the final price of the token sale and a discount depending on which round the tokens were purchased.
The True Augur round, round one, lasted Aug. 17-22 during which participants received a 15% bonus. The Prophet round, round two, lasted Aug. 22-28 and offered a 10% bonus. The Nate Silver round, round three, offered a 5% bonus from Aug. 28-Sept. 5. The Nostradamus round, the final round, offered no bonus.
The remaining 20%, 2.3 million REP, was allocated to the Forecast Foundation, the founders and advisers.
Network Design and Security
The augur markets are a set of open-source smart contracts, coded in Solidity, that are deployed on the ethereum blockchain. When executed, these smart contracts settle payments in ETH with participating users.
Any user can create a market based on any real-world event, and upon creation, trading begins. When creating a market, the user builds a smart contract with the market’s rules outlined in the code. All users in the network have the ability to trade, until the event in which the market is based has occurred. Once the outcome is determined via augur’s oracle system, traders close out their position and potentially collect their payouts.
Reporters report on a market by staking REP tokens on a possible outcome. This is the act of a reporter declaring the “truth,” staking the real-world outcome of the market’s underlying event. The consensus of the market’s reporters is considered the “truth,” which allows augur to act as a decentralized oracle.
REP holders must stake their tokens on correct outcomes to receive an incentivized reward, a portion of the market’s settlement fees. If a report is incorrect, the reporter receives a penalty that negates the potential reward fees. REP holders that do not stake on disputes or participate in a fork (a large dispute) are also penalized. Once a market is reported and the “truth” is discovered, ETH is rewarded in settlement to those who predicted the correct outcome.
According to augur’s whitepaper, the trustworthiness of the forking process to be effective upon a large network dispute corresponds to REP’s market cap. If the market cap is large enough and attackers are economically rational, the attackers would not mount an attack because it would be too costly. If forks are trusted for large disputes, the incentives in place can encourage users to behave honestly without initiating a fork. A fork takes up to 60 days to resolve as a more stringent process for a highly disputed single market.
Additionally, Augur has a bug bounty program in which security engineers and hackers can be rewarded for disclosing identified bugs and vulnerabilities in its codebase and contracts.
The REP supply is capped at 11 million tokens, and when REP is earned it is received from another reporter on the network. When reporters report an outcome incorrectly, they are penalized, as are those users who do not participate in reporting. The REP taken as a penalty is then able to be earned by reporters correctly reporting real-life events, along with the reward of dynamically adjusted settlement fees.
Users in augur trade shares representing certain outcomes, rather than exchange value in terms of a particular currency. A complete set of shares includes one share of each possible valid outcome of a particular event. Shares are matched by augurs on-contract matching engine in order for participants to trade them. If Alice is willing to pay .6 ETH for a share of A and Bob is willing to pay .4 ETH for a share of B, 1 ETH would be held in escrow by the contract, and they would each receive their proportions of the complete set of shares. These shares would then be tradable on the free market.
The smart contracts for all of augur’s markets are executed through ethereum node operators and recorded to the ethereum blockchain.
Augur is written in Solidity.