Augur and REP explained

Augur is a decentralized prediction market platform based on Ethereum and developed by the Forecast Foundation, which was founded by Jack Peterson and Joy Krug in 2014. As one of the early pioneers in the industry, Augur held an ICO in 2015 raising $5.5 million by selling 8.8 million REP tokens, and went live successfully in 2018.

In a prediction market, you bet on the outcome of future events. The less likely an event is to occur, the bigger the reward is that you can earn by predicting its success. In a horse race, number 7 with a limp has the lowest chance of winning, therefore the payout is higher for anyone that does take that bet and gets it right.

But as a blockchain-based platform, what Augur actually does is a little bit more complex than just offering prediction markets. It is an oracle that brings off-chain data on-chain. The biggest difference between these two types of data is that on-chain data is objective whereas off-chain data is subjective.

An example of on-chain data would be a transaction between two wallets. The network records the transaction, and there typically wouldn’t be anything to dispute. Off-chain data however can be interpreted differently as we rely on reports and accounts of what happened. Augur aims to turn real-world off-chain events into wagerable events recorded on the blockchain towards undisputable conclusion, similar to what the likes of Chainlink and Brand Protocol are attempting to do.

How Augur works

There are two main actions users can to on Augur: create markets and trade event shares.

Creating markets

Anyone with a connected wallet can create a prediction market on Augur in one of three categories: Yes/No market, categorical market with up to 8 choices, and scalar market ranging from 0 to 100. A market has a question, like “Will AAB/USDT reach $7 on AAX”, with an expiration date. Each market is implemented as its own smart contract on Ethereum which holds the collateral for that market as Ether.

Market creators set a fee, which is between 0 and 50 percent of the rewards that winning traders receive. As a market creator, you want to keep the creator fee low enough to incentivize people to bid using your market. However, they need to be high enough to cover the initial cost incurred by you when creating the market.

Taking a market position

In the case of a Yes/No market for example, there are two outcome shares which are unique ERC-20 tokens representing a distinct answer to the market’s question. If you were to look at the market asking “Will AAB/USDT reach $7 on AAX”, you bet on Yes by going long and No by going short.

Any complete set of shares (like one “Long” and one “Short” in a given market) is worth 1 ETH. And anyone can escrow 1 ETH to create a complete set of shares or exchange a complete set of shares for 1 ETH of the money held in that Augur market. Outcome shares have this property because a complete set of shares represents a neutral portfolio in a market—regardless of the ultimate outcome, the set of shares will ultimately sum to 1 ETH.

When a market expires, the value of each of the two outcome shares is set. This is first set by the market’s designated reporter and is ultimately finalized by Augur’s oracle system. Then all the money escrowed in the market contract is allocated between the two outcome shares. A complete set of outcome shares is still worth 1 ETH, but the fraction of 1 ETH for each outcome share is set by the market.

Traders that prefer to use a less volatile asset can also bet in markets using DAI, a stablecoin running on top of Ethereum.

Native token REP

Reputation (REP) is a staking token used by reporters on the Augur platform to clarify disputes or outcomes of the prediction market. Reporters report on a market by locking their tokens in escrow, staking the REP tokens on a possible outcome. The consensus of the market’s reporters is considered truth and is what allows Augur to act as a decentralized oracle.

To dispute the outcome of a market, other reporters can stake REP and report a different outcome. When consensus is reached, the market is finalized. If consensus is not reached, the last resort is to fork Augur. However that would be a highly disruptive process as it can take up to 60 days to resolve a single market and only one market can be resolved at a time. All other non-finalized markets will be put on hold during that time.

Besides simply being the utility token, REP is also an income-generating asset. Owning REP and participating in the accurate reporting on the outcomes of each event, provides users with a portion of Augur’s market fees. Each REP token entitles you to 1/22,000,000 of Augur’s total market fees.

During the rally of 2020 and 2021, REP was not able to surpass the $99.80 mark, its all-time-high printed back in 2018. However, things may improve in the near future as new features are released. In May 2021, Augur announced the launch of Augur Turbo, a new sports book based on Ethereum layer 2 Polygon which both widens the scope of prediction markets and drastically cuts down on fees on the platform at the same time.

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