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The Beginner's Guide to Augur

20 days ago

8 min read

Augur is your global no-limit betting platform. It is a system that allows anyone, anywhere to buy and sell real-money stakes in event outcomes.

This could mean speculating on anything from the price of a cryptocurrency, to how many earthquakes will hit California this year, or when a vaccine for a virus will be developed and validated.

Example:

Will the price of LINK/USD exceed 10.00 anytime between the open of July 25, 2020 and close of August 1st, 2020, according to TradingView.com?

YES - Buy .58 / .41 Sell
NO - Buy .40 / .59 Sell

All outcome tokens are priced between $0.01 and $0.99. Winning outcomes pay $1 and losing ones pay $0.

Blockchain Basics

Unlike traditional betting platforms, the Augur protocol is built on a blockchain (Ethereum, in this case). This means Augur runs without any central group facilitating trading and creating or settling markets. Instead, Augur is run by its users, who are distributed across the globe.

At a high level, a market's lifecycle begins with its creation by a user (by defining the market question and rules of resolution). Users then trade on a market by buying or selling outcome tokens—escrowing their bet amount into what's called a smart contract in exchange for tokens representing their bet.

After the market reaches its end date, a group of participants known as reporters tell the smart contract who won. The proceeds are then automatically paid to those who hold winning outcome tokens.

Because Augur has no business or central group controlling its operation, it means that there are no exorbitant fees taken to pay for continuing operation. Instead, small fees on Augur are paid by winning traders (usually around 1-2%) and are split between market creators and the users who report on winning outcomes.

Another feature of using a blockchain is that as long the Ethereum network is running, Augur cannot be shut down, modified or restricted. The Augur protocol itself cannot prevent any one user or group from using its system however they choose. Augur is decentralized and censorship resistant, meaning it cannot restrict any markets or trading activity.

Along with these features of building on blockchain, there are a few quirks for the newly initiated. Don't worry, these may seem kind of strange at first, but you'll be able to get it in no time:

1. Wallet

You will need a wallet to connect to Augur. Luckily, you can choose to sign up for one from a variety of choices directly on the app.

Your wallet can be thought of as similar to Venmo or Cash App (except your wallet provider cannot access your funds), but it can also be used to log-in and use money within apps (like Augur). Unlike most apps, which require a log-in and password sequence for each one, your single wallet allows you to log-in and interact with most Ethereum apps.

Your wallet displays your balances and allows you to send and receive money using your public address and private keys.

Whenever you make trades on Augur, you send and receive your money and outcome tokens from a ‌public address‌. It might look scary, but this harmless little number sequence is unique to you, and can be thought of as similar to an email address.

Example of public address: 0xDC25EF3F5B8A186998338A2ADA83795FBE

Wallets will also give you a ‌private key‌, which you can think of as a password required to access and spend the funds in your wallet.

Example of private key: 8da4ef21b864d2cc526dbdb2a120bd2874c36c9d0a1fb7f8c

If you lose your key to your wallet, there may be no way to help you regain access to it and your funds. ‌Always keep your private key a secret and ensure that you have it safely backed up elsewhere.‌‌

Your wallet provider will also give you access to a backup phrase that will help recover your wallet in case you lose or forget your private key. ‌Nobody has the ability to recover your wallet or funds if you lose your private key AND backup phrase.

Example of backup phrase: jealous expect hundred young unlock disagree major siren surge acoustic machine catalog

Note: Augur will have easy-to-use wallet providers within the app which will allow you to sign up and secure funds with a username and password

2. Cryptocurrency

‌The digital money you keep inside of your wallet is called cryptocurrency. ‌On Augur, you'll only need to have DAI to bet.‌ DAI is a cryptocurrency that attempts to mirror the dollar; meaning, generally, ‌1 DAI = 1 USD in value.

In most geographies, you can purchase DAI directly with a credit card; or you can purchase another cryptocurrency of your choice, such as ETH, which can be converted into DAI directly within the app.‌

When you wish to withdraw or move into fiat money, you'll simply sell your DAI for the relevant currency.

Note: Augur's built in wallet providers will allow you to buy DAI directly with a credit card

3. Transactions

While Augur has exceedingly low fees for winning traders, its use of a blockchain means that additional transaction fees (called gas) must be paid for actions* such as taking a trade from the order book (while making an unmatched trade does not require a fee).‌

*In addition, when first signing up, activating your account will trigger a one-time transaction fee which facilitates the ability to bet and pay gas in the same currency, whereas otherwise you would need to use separate ones.‌

The activation will set aside a portion of your DAI, called fee reserve, for paying fees and top off this amount when it gets low. You can always withdraw any unused DAI from your fee reserve.

These fees are not paid to Augur, but rather are paid to a group of participants on Ethereum called miners. When you submit a transaction; in other words, validate that the transaction is coming from you; your order gets sent to miners.‌

These miners process your request by deducting or increasing your balance and the balance held by the smart contract for your market.

⚠️ An Important Note on Transaction Fees / Gas Prices

As of this writing, the Ethereum network is experiencing abnormally high gas fees. This may be prohibitive to making profitable trades for small amounts of outcome tokens, as the gas fee is related to the speed of being processed on Ethereum and not the size of the orders.

With that said, the fee does not get larger with the size of your order, making Augur very good for large bets even when Ethereum’s fees are high!

Market Creation

Next, we'll briefly walk through the process of market creation, trading, and market resolution.‌

All markets are created by Augur users. These markets will will seek to provide an objective answer to a question about a future event.

There are 3 types of markets available: ‌

  • YES/NO: "Will Joe Biden win the popular vote in 2020..."
  • Multiple Choice: "Which team will win the 2020 NBA Championship..."
  • Scalar: "How many inches of snowfall in Sioux Falls in 2020..."

The market creator can use a template or create a custom market. Template markets have more rigid controls, but have a lesser likelihood of resolving as invalid*.

*Because Augur cannot answer subjective or poorly worded markets, there is a filtering mechanism in the form of "invalid market" outcome tokens. If a market resolves as "invalid market" during market settlement, all outcomes other than "invalid market" pay $0, while those who own outcome tokens for "invalid market" pay $1.‌

The Augur interface attempts to automatically filter out markets that have a sufficiently high (%) chance of resolving to "invalid market", based on how the outcomes are trading. As a trader, if you see a market trading with more than a 5% chance of resolving as invalid, it is advisable to proceed cautiously.

On top of defining the market details and question, market creators designate an initial reporter of the outcome and set the fee which they receive from the market (as a % of open interest). Market creators must also put up two bonds, which are to be repaid on the condition the market resolves to a valid outcome and/or the initial reporter they designate shows up to report.

It is expected that the market creator also provides initial liquidity to kick off the ability for others to trade. Markets without liquidity will be filtered out by default.

Trading / Betting

Augur allows you to buy (bet for) or sell (bet against) each outcome. It then allows you to trade your bets in at the current market price anytime before the market is finalized.

Each Augur market trading page has an order form, order books for each outcome and various data about the market.

Probabilities and Payouts

If you wish to have your order filled immediately, you'll want to 'take' orders directly from the order book. You can pre-fill the order ticket by simply clicking on the best price within the order book. While you will be subject to a transaction fee for taking the other side of an order that exists, you are ensured that your order is filled.

If you wish to place an order above the current best ask or below the current best bid, your order will not be filled immediately (and perhaps not at all). However, if someone does end up filling your order, you will pay no transaction fee for the trade.

The price of an outcome token correlates with the market's belief in the probability of the event happening. To get an idea of how prices correspond with probabilities and payouts, here's a handy chart:

Probabilities and Payouts

*minus fee

Market Resolution

Market resolution starts with the reporting process. At a high level, reporting is when a group of participants come together to determine the results of a market; so that the winners may be paid and the market resolved.‌

After the market's end date is reached, the reporting phase begins with designated reporting. Once a market enters reporting, the designated reporter, chosen during market creation (and typically the creator, themselves) has 24 hours to submit a report on the market’s outcome.

Whichever outcome the designated reporter selects becomes the tentative winning outcome. Once a designated reporter submits the tentative winning outcome, it is open to dispute.

A dispute is triggered when reporters stake enough money (in the form of Augur's REP token) on an outcome other than the tentative winning outcome. This is called the dispute bond.

Disputes can last up to 16 rounds, with each side needing to double the other side's previous dispute bond in each successive round, until it does not reach the threshold to continue*.

In what would be an unprecedented occurrence, if no side has won the dispute at the end of 16 rounds (with both sides staking millions of dollars) the dispute can fork Augur. We'll spare you forking discussion for the 201 or 301 level Augur class.

It's a bit of a deeper topic of game theory, but in short, REP token holders always have a financial incentive to correct outcomes that they believe do not accurately reflect reality.

Once a market fails to be disputed in the initial 24 hours, or a disputed outcome fails to fill the required dispute bond, the market finalizes and those who hold winning outcome tokens are able to claim proceeds.

Conclusion

You've got a lot to digest! Hopefully you have a better understanding of how the Augur system works and the tradeoffs made within the system's design.

If you're unfamiliar with the basic concepts of blockchain and cryptocurrencies, Augur can take a second to get a hang of. But fear not, these concepts are more intuitive than they seem at first or second glance.

If you have any follow up questions, be sure to join the community discussion in the Augur Discord Chat!