Augur: The Future of Prediction Markets
If Regulators Don’t Kill it First…
REP is an investable token with a sound cryptoeconomic foundation. These positives are mitigated by a disengaged community and above average risk profile due to potential for regulatory scrutiny. Resulting in a token score of 37.5 out of 50.
How to Conduct Your Token Audits like Crypto Jungle
Overview
Augur is a decentralized oracle and prediction market protocol built on the Ethereum blockchain. Users create markets for forecasting future events and place wagers on the outcomes.
Users wagering on the correct outcome are paid out based on the odds assigned to their prediction being correct.
The REP token ensures these markets are created and settled fairly.
Cryptoeconomics (5 points out of 5)
REP is used for staking the creation and resolution of prediction markets on Augur’s protocol. Aligning incentives across creators, users, and resolvers of these prediction markets results.
Supply increases are limited and only possible when resolving a disputed market requires a fork. Value is generated from the transaction fees used to create and participate in markets.
Creation of markets is the primary network effect. Markets require REP to open and resolve, increasing demand as markets are opened. Causing the price to rise as creators and resolvers acquire tokens to participate in the expanding ecosystem of markets.
Investability (4 out of 5)
The project does not have a formal treasury since it has already decentralized. The Forecast Foundation was set up by the project leads to support development and its spending has been disciplined to date.
The project is actively used. Recently growth has plateaued. Actively participating in market resolution is how REP holders capture value because resolvers are entitled to a share of transaction fees.
Augur is well branded as the only actively operating decentralized prediction market. A defensible position given adjacent competitors such as Gnosis are not pursuing the decentralized oracle approach Augur employs.
Distribution (3.5 out of 5)
Insider token allocations were not subject to vesting or lock up. Supply is fixed at 11 million. Although it could nominally increase when forks are required to resolve disputed markets.
Because when a fork is required to resolve a disputed outcome. REP holders willing to pledge their REP to a fork to help resolve the outcome. Are rewarded with an additional 5% allocation of REP if their fork ends up resolving the dispute.
Somewhat offsetting the negative impact to long term usage. The fixed supply ICO model Augur used to distribute REP. Was an equitable and broad token sale. 80% of supply was sold directly to the public during the offering period from 8/17/15 to 10/1/2015.
Team (3.5 out of 5)
A formal Augur team does not exist since the project is fully decentralized. Informally, the initial project leads continue to support Augur in a variety of ways primarily via the Forecast Foundation. Project founders Joey Krug and Marco Santori have a distinguished track record in crypto as the Co-CIO of Pantera Capital and President of Blockchain respectively.
The Forecast Foundation has a unique combination of individuals with backgrounds in marketing, operations, and legal affairs to compliment the technical talent focused on enhancing the protocol. There does not appear to be anyone previously involved in operating a prediction market however.
Allusions to experience building distributed computing systems are included in the technical teams’ background information. Details are not readily available to fully assess.
Prominent supporters of the project behave ethically. Transparency is sometimes hindered due to valid concerns regarding how regulators may react to markets Augur potentially enables, leading to a natural reticence when discussing it publicly.
Project (4.5 out of 5)
The project is live with consistent growing usage and is open source. The initial white paper was well written. Adding to its quality was an updated version released in 2018 further expanding on how a functioning decentralized oracle could be designed and operated. Offering users a unique value proposition since it is the only prediction market project using this approach.
Author’s Note – It appears another white paper update is in process.
While comments outlining the vision for Augur are frequent and detailed. Comments on other approaches have been minimal. Due to the natural reluctance of project supporters to provide commentary they feel will draw unwanted attention.
Scalability (3.5 out of 5)
While not formally affiliated with the project. The Forecast Foundation is well staffed with talented individuals focused on supporting Augur.
Project development is active and ongoing indicating sustainable funding. Because the project does not have a dedicated treasury all of these efforts and funds are contributed voluntarily.
The roadmap outlining project objectives is dated. Many of the objectives have already been achieved. The developer experience is continually improving as new tools are rolled out to assist with building out Augur’s capabilities and interface.
Usage is currently dominated by Anglo-Saxon English speakers (UK, US, Canada). Primarily because development of non-English user interfaces to set up and access markets has been minimal to date.
Securability (4 out of 5)
The foundation of Augur’s security is the Ethereum protocol and its expansive network of nodes. It does not employ its own nodes for security.
Instead it establishes equilibrium by setting fees high enough to deter spammers and other malicious actors from creating markets, but low enough legitimate creators are not deterred. The fees are quoted as a % of REPs current market cap.
Making equilibrium challenging to maintain when REPs price is in a drawdown. Because the amount of REP needed to establish markets rises as the value decreases.
The project maintains and active bug bounty program. Staking is concentrated amongst early adopters as user interface work continues to make the protocol more accessible.
Resolvers on the correct side of determining market outcomes are allocated a portion of transaction fees based on the size of their stake. As an ERC-20 token it is easily stored securely.
Decentralization (4 out of 5)
Over 50 developers have contributed to the project and the projects development score calculated by FCAS is 855. Augur completed decentralizing in July 2018, burning the kill switch accessible to the project leads capable of turning markets off.
Ownership exhibits some concentration. The top 10 non-exchange holders own around 33% while the top 100 own around 55%. Dispersion of ownership is aided by the number of exchanges were it can be purchased.
Exchanges hold over 17.5% of total supply. Presumably spread amongst a large number of individual investors.
Augur does function normally without its creators. Burning the kill switch effectively took control out of the founding team’s hands and it has continued to function as it should since then.
Accessibility is challenging for non-English speakers because non-English user interface development has been minimal to date, concentrating usage in North America and the UK.
Engagement (2.5 out of 5)
Developers have been adopting the protocol to build applications. A prominent partner, Veil, focused on building a user interface to make markets more accessible. Shut down in July 2019 as it struggled to gain traction.
The project is actively commented on in Reddit. With discussion focused on the mechanics of operating prediction markets. The project’s Discord has a large membership and deep engagement across its channels.
Mentions on Twitter are low and sentiment around the project is neutral, minimal Google Trends activity indicates a lack of mainstream attention.
Risk Management (3 out of 5)
All versions of Augur’s code have been fully audited. Funds were raised in USD.
Demonstrated anti-fragility when the dispute of the US House election outcome in 2017 was resolved in favor of wagers on the Democrats. Further evidence the project can survive disputed and invalid markets needed to confirm anti-fragility.
The major attack vectors for Augur are markets resolving incorrectly and parasitic markets. The forking mechanism theoretically protects against incorrect market resolution. It is untested to date. Successful dispute resolution via forking needed to confirm robustness.
Parasitic markets resolve without paying reporting fees. If set up of parasitic markets were to overwhelm set up of standard markets, the value of REP could decrease substantially.
While Augur’s kill switch was burned to protect against regulatory shut down and its prominent supporters closely monitor how there public comments could be received. Regulatory risk is inevitable given the potential set up of markets at any time drawing unwanted scrutiny from authorities.
Want to get started conducting your own audits. Download the Audit Template Here!
Steve Miller
Stay up to date on his research by subscribing to his newsletter.
The CFA designation is globally recognized and attests to a charterholder’s success in a rigorous and comprehensive study program in the field of investment management and research analysis.
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.