The Risk of Illiquid Clone Markets on Augur v2

Imagine a version of Coinbase that had twenty separate markets for Bitcoin, each one with its own order book. Suppose the default display did not sort these markets by liquidity. As a result, capital would fragment among the markets, new users would not reliably see the most liquid one, and the network effects of liquidity-begets-liquidity would never take hold.

Augur v2 may be at risk of something like this. If users land on Augur and they see a dozen clone markets on the presidential election and the first couple they click on lack liquidity, they may give up on Augur. If they do trade, they may not find the best deal or trade as much as they would otherwise. And they might not come back.

Why This Risk?

Augur v2 is at *greater* risk of fragmented liquidity than (late) v1 for a few reasons:

  1. Lag with fetching 0x mesh state means that users may not see markets sorted by liquidity by default.
  2. Market creation is effectively limited to preset templates in v2, which means more people creating markets on fewer topics, amplifying the risk of clone markets (users may still create custom markets but they are not displayed by default on the Reference UI, so users are disincentivized from doing so).
  3. v2 coincides with perhaps the most predicted-upon event in the world: the U.S. Presidential Election. Many users may want to create markets on this topic.

One thing that’s never been an issue on Augur is the number of markets. Despite the costs and risks entailed in v1, users created many markets. Templates may further catalyze market creation while effectively narrowing the universe of potential topics.

Creating a new market on Augur is useful for traders if and only if 1) the market’s outcome isn’t available to trade on yet or 2) the creator can provide better liquidity, fees, or resolution terms than existing markets on the same topic. Otherwise, market creation can be a parasitic activity that siloes liquidity.

Copycat markets with fragmented liquidity are a risk in Augur v2

Augur has the potential to create global liquidity pools on given outcomes. This is essential for delivering optimal odds and depth for users and for producing accurate price signals and forecasts. But you cannot have a global liquidity pool if capital is split among 20 markets on a given topic. It isn’t only bad for traders but for market creators too as most of them will not recoup the costs of market creation.

Potential Solutions

Thankfully, this is a solvable issue. Pursuing just one of the following solutions in an effective manner may suffice:

  1. Show markets sorted by liquidity by default under all circumstances, especially for first-time users. (Because of lag, this may require launching new users directly into the signup flow while markets load). Augur’s liquidity sort is the best solution to deliver users what they want and provide market creators the right incentives. It can’t be gamed in that market creators can only rank higher by providing more utility for users, as in better spreads and depth. Another useful feature is that it helps protect users from Invalid markets since unfilled bids on any outcome other than Invalid are a strong signal that a market is valid
  2. If a user creates a new market using the same template as an existing market and the new one has less liquidity, it gets flagged as a potential clone market and is demoted to the bottom of the market list. This may result in false positives, since you can create different outcomes with the same template, but this may be an acceptable cost if no other solution here is viable. 
  3. Aggregate orders on clone markets into single, shared books, assuming the terms match up, including expiration times. This may only be practical if users are shown similar existing markets at the time of market creation and prompted to use matching terms. 
  4. Lean heavily on Augur explorers for market discovery, only linking to specific markets on the Reference UI while avoiding its market list page at all costs. This solution may be less effective in fixing fragmented liquidity, but it has a side benefit of facilitating discovery of custom markets, as they do not show up by default on the Reference UI. 
  5. Show a curated list of markets, by default, on the Reference UI. This curation would need to be communal and relatively decentralized. AugurDAO (more on this new project soon) could help with this. This solution would also allow for the display of custom markets. 
  6. If none of the above can be implemented, then the only viable alternative may be to focus on driving users to overlays with curated markets rather than the Reference UI.  

Overcoming the Paradox of Choice 

What will people see when they first land on Augur v2? Clone, illiquid markets with fragmented books or highly liquid markets on unique outcomes?

Coinbase exemplifies the power of having few choices: limited assets to trade on and only one market per asset. Even an application like Balancer that is more open and has many pools and assets, still has a small whitelist of tokens displayed by default. 

With liquidity concentrated around one market on each outcome, powerful network effects can flourish on Augur. The platform can begin to realize its potential for global liquidity pools. Rather than creating clone markets, users will be incentivized to get creative and produce markets on new topics, further enhancing trader UX.

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