The Game of Augur
How Incentives Fuel an Open Prediction Market
Posted On March 14, 2020
Show me the incentive, and I will show you the outcome. -Charlie Munger
Augur is a game in which traders, market creators and other players seek to maximize their self interest while creating something of value for the whole.
In the game of Augur, there is no referee standing in the middle, enforcing the rules. Instead, behavior is bounded by code and driven by incentives.
Incentives are the glue that holds Augur together. They create a game that is worth playing for all its players.
Augur’s symphony of incentives drives market actors to be truthful and productive. It brings the interests of individual actors into harmony with the interests of the collective.
Traders are incentivized to predict outcomes to the best of their ability, since they profit if they are right and lose if they are wrong. Making good predictions is profitable; making bad ones is costly.
If Jane thinks that an outcome’s odds are underpriced she may buy, and if she thinks they are overpriced, she may sell. By doing so, she is pricing in her information or insight while standing to profit, if she is right.
The collective result is that Augur is an engine for absorbing the world’s knowledge, forecasting outcomes, and hedging risk.
Market creators are incentivized to create markets, because they collect fees when people trade on them.
They are incentivized to create markets that have clear, well-defined terms and verifiable outcomes. Otherwise, they will lose a “validity bond” that they deposit at the time of market creation and will forgo trading fees if the market is deemed Invalid, due to being ambiguous, subjective, or unverifiable.
Market creators are also incentivized to put up buy and sell offers with tight spreads, so their markets are more visible and draw more trading.
Creating liquid and legitimate markets is profitable, while creating illiquid and illegitimate ones may be costly.
The collective result is that Augur has liquid and legitimate markets available to traders.
Reporters are incentivized to accurately signal market outcomes. That is, to report an outcome on Augur that matches the corresponding actual, real-world outcome. If they do, they earn Reputation (REP), Augur’s native token. If they don’t, they lose REP.
Users stake REP on the market outcome they believe to be correct. Users that report (or dispute) in favor of a market’s correct outcome, defined as the outcome that future traders believe to be correct, earn additional REP. Those that dispute in favor of an incorrect outcome, lose REP.
The collective result is an oracle that resolves markets in harmony with their corresponding real-world events.
Market Makers are incentivized to add liquidity to Augur order books to capture the spread. Arbitrageurs are incentivized to capture the spread between markets on Augur and equivalent markets on other platforms.
The collective result is liquid markets that rapidly respond to real-world developments.
Affiliates are incentivized to acquire new users for Augur. Augur’s affiliate system is effectively a bounty for user acquisition. Anyone can share a link to an Augur market and whenever someone follows the link and ends up trading in any Augur market at any time, the link sharer (affiliate) may profit by collecting a portion of trading fees.
The collective result is user acquisition and marketing efforts that increase Augur usage
Developers and entrepreneurs are incentivized to build tools and user interfaces on Augur to capture market creator fees, affiliate profit or market making spreads, or to increase the value of their REP holdings.
They are incentivized to build on Augur rather than centralized alternatives, because it is open and censorship-resistant. They can reach more users with less regulatory risk.
The collective result is that Augur is more accessible, easy to use, and powerful.
Finally, Investors are motivated to buy REP, if they think Augur usage will grow, since the token is a claim on future reporting fees. Since REP’s value is ultimately a function of Augur usage, anyone may attain equity in Augur’s success buy holding REP.
The collective result is a community of stakeholders incentivized to help Augur succeed and a platform that is more secure, since it is costlier to attack.
Note: some of these incentives do not apply until Augur v2. Thank you Micah Zoltu for reviewing a draft.
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