Lead Analyst at CryptoEQ.io
Reputation (REP) is the ERC-20 token that serves as the backbone of the Augur ecosystem. Those who hold REP stake their tokens during the validation stage of prediction’s outcome. If a REP holder disagrees with the outcome reported, they can stake REP to challenge the result. These “reporters” are essentially declaring, with their REP, which market outcome actually matches the real-world outcome. REP can thus be viewed as a utility token whose purpose is the assignment of value to the trustworthiness of reporters (or prospective reported-outcome-challengers) in a prediction market. Simply put, REP is only used for reporting and disputing event outcomes within Augur, while Ethereum is the currency actually traded on the protocol with the addition of DAI in the upcoming v2 upgrade.
There are essentially innumerable use cases for a decentralized prediction market platform, which opens up the universe of questions that can be asked and reduces the regulatory worry that might come with a more centralized solution. Given the lack of other viable challengers to Augur in the crypto space, Augur is poised to capture this potential market though it will take time to see if it can garner any significant user attention and maintain steady growth.
Augur did not reinvent the wheel when it comes to blockchain technology; rather, it represents a smartly-coded, meticulous application of extant technologies—namely, Ethereum’s smart contracts—in order to facilitate the decentralized creation of prediction markets. While it came with no massive innovations in privacy or consensus mechanisms, Augur does represent a clean and practical application of smart contract technology, which is to be lauded.
All actions within the Augur protocol such as matching and routing orders, processing trades, and resolving markets are all operated and run on the Ethereum blockchain itself through a set of smart contracts. Miners running Ethereum nodes route, match, and process orders on the Augur protocol.
The target utility of the REP token disincentivizes HODLing and instead encourages active participation in the prediction markets. This incentive helps drive Augur’s purpose and the main benefit of using a prediction market —the promotion of the wisdom of the crowds. That said, this same limited utility necessarily lowers the prospective value of the REP token, as it is not needed for the betting portion of market participation. One could reasonably argue that these economic incentives and the overall market design of the Augur protocol were orchestrated to maximize the efficiency of and participation in the various prediction markets, even to the detriment of the value of the REP token itself. Whether or not this is a structure that the broader community will find attractive over the long term will require more time to fully understand.
Augur’s governance structure will be familiar to anyone with knowledge of Ethereum. A primary risk is obviously a series of disputes relating to a particular market that escalates to the point of forcing a fork. The team has made clear multiple times that the fork state possibility (laid out in the whitepaper) is encoded into the protocol simply to ensure that consensus will always be achieved, even though they ascribe a low likelihood to its ever being used in practice given the threshold required to prompt the fork. REP also suffers from risk exposure related to being built atop Ethereum. As Ethereum is in the midst of a significant, multi-year upgrade, any issues that may arise during the transition could also affect the Augur protocol.
Augur’s open-source development infrastructure is commendable, replete with easy to navigate GitHub pages and well-written documentation. While the worry of a 51% attack on REP is not irrational given the size of REP’s market, the incentives are not aligned to make such an attack likely. These facts paired with Augur’s solid history of security audits and active bug bounty program make the protocol attractive from a trust perspective. Augur’s biggest vulnerability may, in fact, be UI issues and lack of adoption, not a malicious attack. Without finding any product-market fit, the project is susceptible to new competition or the cryptocurrency space passing them by as new use cases for the technology are tested and implemented.
While work on the Augur project has been in flight for years, it bears remembering that the mainnet itself has only been in operation since 2018. Given how nascent that makes the application, its growth in v1 remains fairly impressive and its impact as the first decentralized prediction market to successfully launch is groundbreaking. However, the community surrounding Augur realized improvements were needed in order to truly become successful and gain meaningful adoption. Because of this, the team took on the challenge of overhauling the current protocol in favor of a v2 to launch in 2020. It is still very early in the life-cycle of decentralized prediction markets, and more time is needed to see if Augur can grow its current users and scale sustainably in usage. Finally, it bears remembering that while usage of the dApp is important, REP’s popularity and listings on prominent exchanges are also key indicators. That said, given the limited utility of REP (market resolution within Augur), it is difficult to envision REP producing wide-ranging network effects in the near future.
The three co-founders of Augur are Jeremy Gardner, Jack Peterson, and Joey Krug. While the founders at first glance may appear young and mostly inexperienced, they have behind them perhaps the most impressive advisors that a decentralized prediction market could hope for in Vitalik Buterin, Elizabeth Stark, and Ron Bernstein. The development team is diverse, approaching 30 members with ten different developers providing significant commits over the years. The project has maintained high levels of activity since 2017 projecting signs of a healthy, motivated project. Nonetheless, the lack of clarity surrounding who precisely is a part of the Forecast Foundation OU, paired with the departure of certain key staff like Jeremy Gardner after Augur’s ICO cannot go unnoticed.
Augur is non-custodial and supports a variety of wallet solutions including MetaMask, Ledger, Trezor, AirBitz, and uPort, making REP no more difficult to secure from theft than any ERC-20 token. The wallet of choice when using Augur presently appears to be MetaMask given the extra control it grants users when it comes to gas price selection. Additionally, users can easily reference the source code and block explorer to track transactions or conduct their own audits.
As admitted by the co-founder of Augur himself, the protocol is currently hamstrung by one main user experience flaw: the various fees involved with participating in the decentralized prediction market. The dApp itself is beautifully designed, quick, and performs reliably for the most part, but fees do need to come down in the long run for market participants to migrate to Augur as their go-to prediction market.
Before the self-imposed cutoff in Q3 2019, Augur v1 facilitated thousands of finalized markets with even more pending until v2 launches demonstrating that despite modest overall numbers, continued interest remains from some users. As Augur v2 looks set to rollout sometime in 2020, the upgraded protocol addresses several UX weaknesses inherent in the original version that include reducing payout times for users and the currency risk (volatility) associated with ETH as the underlying asset to make wagers.
Perhaps the most interesting thing to note when it comes to regulatory risk to Augur’s future is the overall state of the regulation of online betting in the U.S. While online prediction markets are still in many respects a legal no-man’s-land, there are encouraging signs for proponents of online prediction markets and gambling. Augur’s management and counsel appear unconcerned by potential regulatory risks facing the protocol. That said, the ambiguity of present applicable law and potential for downside risk remain concerns to be aware of.
Another regulatory hurdle for the REP token could be the question of whether or not REP can be classified as a security. This is one of the most polemical risks facing most crypto assets today and given that Augur raised money and distributed REP via an ICO only works against it in this case. It is difficult to assess the likelihood that any cryptoasset like REP would be classified as a security given the paucity of precedent, but the innovations behind Augur do not make its classification as a security any less likely
Unlike many projects in the crypto space that feature their full roadmap with anticipated dates prominently on all of their material, Augur version 1 opted instead for a system of weekly reports distributed via their official Medium page until October 2019. Once the decision was made to overhaul the project in late 2018 and launch a v2, the latest updates for the transition can be found on their website. From such posts, like this one outlining the view for Augur v2, we can glean that some long-term goals of Augur include mobile UI improvements, DAI integration, state channel trading, utilizing decentralized oracle Uniswap, off-chain trading via the 0x protocol, and improvements to the dispute resolution process. Substantial progress has been made towards v2, like the cutoff of v1, and the official date for the launch of v2 has been slated for early June 2020.
The lack of a consistently-running roadmap in a single location is a slight annoyance when it comes to attempting to track Augur’s future progression and v2 progress. This makes it difficult to know precisely when major developments might reasonably be expected as is the current case with v2. Originally planned to be released in late 2019 and then again in Q1 2020, Augur v2 has yet to fully release to the public.