The highly anticipated decentralized app Augur has finally launched on the Ethereum Mainnet after over 4 years in development. Enduring many challenges including the need to rewrite the entire smart contract in a new language, port over their ERC20 token (REP) to a new language & contract, and ride the wave of Ethereum security issues that plagued projects like The DAO and Parity Wallet (twice), it’s finally here. Augur was the first ICO on the Ethereum platform, and it sparked the wave of excitement for decentralized apps. But what is it and why is it such a big deal?
Augur is a decentralized prediction market. It allows anyone, anywhere in the world with an Internet connection and cryptocurrency to create a market on the future outcome of an event. It then gives anyone access to buy shares in the possible outcomes of that event or to report on the actual outcome. All of this happens without a third party custodian of funds, or control over who can participate in this market, or ability to fraud the outcome of the event.
The Augur project is a big deal because it allows markets to be created that were never possible with the legacy financial infrastructure.
Let’s take the farming industry as an example. A farmer in Harare, Zimbabwe looking to hedge against a possible drought could create a marketplace based on the total amount of rainfall in a given year. People from anywhere in the world would be able to purchase shares in two possible outcomes.
On average, Harare sees 31.7 inches of rainfall per year. Two possible outcomes of the farmer’s marketplace could be either more than 31.7 inches of rain in a year or less than 31.7 in a year. Other farmers looking to hedge against their potential losses would purchase shares in the outcome of less than 31.7 inches of rain.
The funds used to purchase the shares are sent to the Augur Ethereum smart contract and locked until the end of the year. At the end of the year, people with Augur REP tokens can report on the actual amount of rainfall in Harare and their report is communicated to the smart contract. Should a majority of reporters claim that there was less than 31.7 inches of rainfall, the smart contract then deploys a small percentage of the total funds to the farmer that created the market, with additional percentages going to the reporters, and the remainder to the farmers that purchased shares for the outcome of less than the average. The farmers who purchased shares of “less than 31.7 inches” still got paid out on their least desired outcome at roughly one in seven odds (droughts occur on average every 7 years in Zimbabwe).
What you’ve just witnessed was the creation, deployment, and claim of an insurance program without an insurance company. And as mentioned, it was accessible by anyone, anywhere in the world with an Internet connection and cryptocurrency.
Many people criticize prediction markets as betting or gambling platforms, and it’s true they enable such activity. But realize that the entire financial services industry is one big betting table. Most every financial service, from loans, insurance, securities, derivatives, and stocks are a form of a bet. Augur is simply enabling these financial products for the global market, making them globally accessible and uncensorable to complement the currencies it is built on top of.