I recently created what is now the most popular market on Veil, by trading volume: “Will U.S. Presidential Candidate Pete Buttigieg Have One Million or More Twitter Followers on May 1, 2019?”
This got me thinking about how to create liquid markets on Augur. A prediction market can concern any verifiable outcome in the universe. But due to the network effects of liquidity, only a tiny fraction of outcomes will get any traction, let alone hit it big. Since market creators collect a slice of trading fees, the rewards of getting it right are high.
So how does one create a successful market that draws lots of liquidity?
Today, I’ll take a stab at this question, looking at what traits, I think, constitute a popular market outcome. It’s unlikely to find a market that has all of these traits, but the more the better. Some are musts, others are nice-to-haves.
Make a market on an outcome that people care about. Think Paul Graham’s “make something people want” but applied to prediction markets.
Offer an outcome that people want to speculate on and that people want accurate predictions on. These often coincide, but not always. For instance, people like betting on sporting events, but the broad public doesn’t care about what happens.
Political outcomes are different. Millions of people care about the outcome of a presidential election. So do the stock market and the largest firms in the world. And politics matches or even exceeds the speculatory excitement of sport: fierce competition at the highest level.
Markets on outcomes that people care about draw attention and resources from public and private entities. This could be everything from a media outlet like FiveThirtyEight or CNN citing a prediction market forecast to a presidential candidate tweeting their own odds.
Shoot for an outcome whose perceived probability will change…a lot. For example, the odds of an election outcome will frequently update based on poll releases, debate performances, caucus results, scandals etc. Every time a prediction market needs to price in a new development equals more trading volume. So the more potential developments, the better.
Markets on quantifiable outcomes that are trackable in real-time, like crypto prices or Twitter follower counts, take this to the next level. Every time the price moves or an account gets new follows, the market must choose if and how to respond. Such markets are like catnip for algorithmic traders.
If you’re creating a YES/NO market, you probably want to start as close to 50/50 odds as possible to leave room to trend in either direction. If you start a market that has 90% odds from the get go and it tips a little more likely, it’s no longer interesting.
Think of a prediction market as a game of foosball between buyers and sellers. Starting the ball in the middle of the table will, on average, result in a longer and more interesting game than dropping the ball close to one end. The most popular outcomes are probably those which remain up in the air till the last minute.
Shoot for something simple and memorable. For instance, people like big round numbers, which is part of the reason I chose *one million* followers for the Buttigieg market.
For a trade to occur in a prediction market, you more or less need a buyer and seller to take opposing sides. So select outcomes that are contentious and where people have strong, sometimes contrarian convictions. Again, politics is a natural fit.
Create markets on outcomes that are either unavailable or lacking elsewhere. For example, while there are other venues where you can speculate on political outcomes, they have low betting caps, high fees and counterparty risk. Augur blows away the competition here…or at least will, soon.
(A possible exception could be if having a similar market on another platform drives sufficient added liquidity via inter-market arbitrage or hedging).
Create markets that will draw media coverage. Why? Media coverage draws more traders which produces better forecasts, which elicits yet more media coverage. Virtuous cycle.
This is likely a subset of “make a market people care about” that only comes into play in more mature, liquid prediction markets. On a young prediction platform like Augur, this is not too relevant…yet.
This is a close cousin of “make a market people care about,” but applied to an immature prediction market like Augur. Such a prediction market will be overrepresented by certain demographics. For example, Augur users at this point in time are crypto people and crypto people tend to be more interested in Andrew Yang than, say, Elizabeth Warren. All else equal, create a market on Yang.
Since the Augur oracle leans pragmatic rather than purist, some markets are well-defined enough to resolve valid but still technically flawed enough to scare away some traders. For example, I doubt my Buttigieg market will resolve Invalid, but a small mistype in the details section has probably deterred some traders. So the goal is to be “hyper valid,” so valid that even the most obscenely literal person can’t find fault.
Can’t be gamed
Unless your goal is to create a bounty for a certain outcome, create a market outcome that cannot be easily manipulated. For example, future prices of a low volume altcoin or the follower count for a small Twitter account are probably too easy to game.
If your goal is to create multiple popular markets over time, when possible, opt for market outcomes that are reusable. For example, a market on which candidate will lead in polling on X date can be repeated weekly or monthly leading up to an election. For an event based purely on time rather than an external event e.g., Yang’s polling on X date rather than Yang’s results in the Iowa Caucus, the shorter till market expiration, the better — all else equal.
If you’re setting the fees for your market, set them low. If you set high fees for an outcome with low to medium demand, nobody will trade. And if there’s high demand, someone will create a copycat market but with lower fees.
Keep in mind…
Today, the biggest bottleneck on Augur liquidity is UX and scalability— not market quality. But as the midterms showed us, a market that is significant and attractive enough can at least somewhat overcome lacking UX and draw meaningful liquidity.
Thanks for reading. To stay ahead with fresh insights on the future of prediction markets, join The Augur Edge.