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Innovations in market prediction » Brave New Coin

Augur (REP) is a decentralized prediction marketplace that is designed to forecast, and communicate, the outcome of an event based on a majority consensus principle.

 

The above is an example of an Augur market. a user can either set up an event, or, if it exists already, directly participate in it. It is very important to note that you do not need REP in order to ‘bet’ on a potential outcome. If you want to to put a wager on California seceding from the United States, the Augur platform lets you do so with Ether (ETH), and if your predicted outcome turns out to be correct you are rewarded based on the market determined odds. The market creator initially sets up odds (50/50, 80/20 etc) and then according to incoming bets, these numbers adjust.

REP tokens represent ‘Reputation’. A user is rewarded REP if they report on an event, and it matches up with the agreed consensus of the other reporters within the network. So for example in the California secession event, If California does secede and a user reports to the Augur network that it has, and the rest of the reporters in that market confirm that user’s truth, then the user is rewarded REP, which they can then use for continued participation in Augur Oracle reporting.

This is an incentive based system, so if a potential bad actor attempts to report an incorrect outcome and it doesn’t match up with the market consensus delivered outcome. The market takes note of this and punishes the dishonest reporter.

The reporters are oracles, the agents that find and verify real-world occurrences and submit this information to a blockchain to be used by smart contracts. Augur’s system  is an incentive based decentralized oracle protocol, with centralized and machine-based alternate protocols also existing.

Over traditional betting platforms, like Betfair or William Hill, Augur offers observable advantages like the freedom to create markets and cheaper fees.

The other key novel element of the Augur platform, is that it allow punters to participate in marketplaces that would have been previously inaccessible because of regulatory, or geographical barriers. For example, a user in China can make trades on the movement of stocks on the NASDAQ very easily using Augur, requiring nothing more than some BTC or ETH. Additionally; Shorting, futures trading and hedging scenarios can all be generated, because by design, Augur markets are unrestrained.

There have been concerns with how regulators will view Augur’s market making practices, the news is better than one might expect. For example, a recent decision by the US supreme court to kill federal prohibition of sports betting markets and leave regulation up to individual states has lead to a boost in Augur’s long term prospects.

Exchanges and trading pairs

 REP pairs

 The most popular trading pair for the network is the fiat-to-crypto Korean Won/REP pair, which creates over $3 million of daily volume, and makes up over 36% of REP’s trading volume. The next most popular pairs are crypto-to-crypto, with Bitcoin/REP and Ethereum/REP handling over $2 million and $1 million of daily volume respectively. Along with the five listed options, there are also US dollar, Binance token, Litecoin, REP on-ramps available.

 BTCREP pairs2

The most popular exchanges for the REP/BTC pair include Binance, Poloniex and Kraken. Binance is the world’s most busiest by 24hr trading volume, handling over 1 billion USD daily.

Major US exchange Kraken is noteworthy on this list having supported REP since October 2016, and it offers six on-ramp options (REP/XBT, REP/ETH, REP/EUR, REP/USD, REP/CAD, REP/JPY).

Decentralized oracles in practice: balancing incentives

There is added complexity to Augur smart contracts to ensure bad actors cannot game its reporting system. If the protocol was simply based on ‘decentralized reporting’ it would be vulnerable to Sybil attacks as a user could simply log in to multiple accounts, report wrong outcomes, and ensure consensus is achieved in his or her favour.

Additionally, the previous section raises a key eccentricity and quirk of the Augur network. That is that ‘Reputation’, REP, can be traded using third party platforms, and not simply earned through honest reporting. If the sole purpose of REP is continued participation in Oracle reporting, then why let it be ‘bought’ by a potentially nefarious actor who has not participated in marketplace activity, and may only acquire REP to manipulate oracle reporting to favour outcomes in their wagers in One-and-done type attacks.

The simple answer to this is to give Augur access to an influx of new marketplace participants, and provide users with liquidity options according to specific preferences.

Because of these potential vulnerabilities in a simple model of decentralized oracles, Augur has enforced a semi-decentralized reporting protocol, where a trusted, designated reporter is selected by the market creator to report on the outcome of the event within three days of its completion, before it is passed on to a ‘open reporting’, where a pool of reporters reports on the outcome and result is finalized based on consensus.

The network has a dispute mechanism, where outcomes can be challenged by the community based on either the outcome of the designated reporter, or if it goes to open reporting. There are long enough windows for disputes to be raised (7 days) ensuring the actions of any bad actors are reported before they can be made permanent.

In this sense, the oracles of most markets should be the designated reporter, all other routes are designed to correct for bad/negligent actors. Despite designated reporters being the primary reporter, other network participants are rewarded for passively for being in waiting, as part of an outcomes reporting pool.

 Augur reporting flowchart2

Augur reporting flowchart

In extreme scenarios where consensus becomes overly muddled, Augur governance will initiate a fork, which is something of a failsafe and is extremely disruptive. In the event of a fork, all other non-finalized markets, apart from the dispute market, are put on hold.

‘Child Universes’, based on the scenarios which arose from the disputed outcome, are created which are either TRUE or FALSE. A migration then occurs from the ‘Parent Universe’ towards respective Child Universes and once this has been finalized, a new Augur ecosystem exists, with funds sitting on the FALSE Child Universes, now in limbo.

What it is important to take away from the above is that it is very difficult to get away with incorrect outcome reporting. The complexity and multiple phases of dispute raising, act as strong deterrents for any agent hoping to game an Augur oracle and falsely manipulate the ecosystem.

This is a simplified summary of oracle reporting in Augur, which is explained in great detail in Augur’s latest whitepaper. However, a key takeaway is that the complexity of the oracle reporting requires a robust smart contract that is able to manage these multiple eventualities. This is where the upcoming main network, an upgrade to the underlying REP smart contract, comes into play.

A mainnet switch: new smart contracts and price jumps

Augur’s current smart contracts have been written in one of Ethereum’s oldest languages, Serpent, which said to be clunky, potentially vulnerable and had to be adjusted multiple times in Augur’s previous beta states to ensure relative efficiency. The new Augur smart contract will be fully written in Solidity, Ethereum’s most commonly used language.

The main network switch, which occurred on the 9th of July 11:01 AM PT, froze REP tokens sitting on 56,338 unique accounts. Tokens were then migrated onto a new more complex Ethereum smart contract, with updated code to handle the complexities of Augur’s Oracle reporting system.

The decision to build Augur’s new full platform on top of Ethereum, as a Dapp, involved additional steps and complexity. These would not have been concerns if a new underlying blockchain was being built.

Ethereum has had a strong historical relationship with Augur. As far back as 2015, when Augur was still developing its protocol, and well before the v2 whitepaper was written in 2018, Vitalik Buterin tweeted out strong support for the project.

 Vitalik Augur2

Post the new smart contract launch, the Augur marketplace currently has over 90 unique outcome markets including “Will the crypto market cap exceed $275,000,000,000 USD by 12th July 2018” and “Will Dwayne Johnson Win the 2020 Democratic Presidential Nomination?” (currently a 20% chance of occurring according to the Augur community).

If the ecosystem continues to expand, there are questions of the transaction speed capabilities on Ethereum. The number of pending transactions on etherscan has over 400 pages of listings. The possibility another mainnet switch in the future, to a new native network, should not be ruled out.

Between the 29th of June, to the time of the token freeze, the price of REP jumped from $30.63 (Index) to $38.72, a 26.14% jump in 10 days. There was also a strong surge in trading volumes in the days immediately before the launch.

 bnc chart 31

The graph shows the normalized USD price, and volume, of 5 different REP trading pairs.  REP/KRW, REP/BTC, REP/ETH, REP/EUR and REP/USD. The orange line represents an Index of the prices, blue is REP/KRW, yellow is REP/BTC, green is REP/ETH, navy is REP/EURO and REP/USD is turquoise. The bar charts below represent total trading volume in USD

Technical analysis

REP is one of the most popular ERC-20 projects and became the biggest Dapp on Ethereum after its platform debut. Furthermore, Augur’s consistent hype and growing user base (albeit miniscule) has translated into relative price stability and growth within the current unstable, bearish 2018 market.

Exponential Moving Averages (EMA) with Long Term Trends

On the daily chart, the bullish EMA cross, or Golden Cross, is still intact, which confirms REP’s consistent, positive price trend (channel) since its December 2016 low of $2.30; yielding ~1200% returns.

 REP TA1

Furthermore, since April 10th, the volume flow indicator (VFI) has formed a consistent uptrend and has remained above 0 since May, which shows consistent bull strength. The VFI interpretation is: a value above 0 is bullish and below 0 is bearish, with divergences between price and oscillator being high probability signals.

 REP TA2

Ichimoku Clouds with Slow Wave Trend Oscillator (SWTO)

The Ichimoku Cloud uses four metrics to determine if a trend exists; the current price in relation to the Cloud, the color of the Cloud (red for bearish, green for bullish), the Tenkan (T) and Kijun (K) cross, Lagging Span (Chikou), and Senkou Span (A & B).

The status of the current Cloud metrics on the daily time frame with singled settings (10/30/60/30) for quicker signals is bearish; price is below the Cloud, Cloud is bearish, the TK cross is bearish, and the Lagging Span is beneath the Cloud and price.

A traditional long entry would occur with a price break above the Cloud, known as a Kumo breakout, with price holding above the Cloud. From there, the trader would use either the Tenkan, Kijun, or Senkou A as their trailing stop.

REP is currently sitting at ~$30 after consolidating within a trading band between $30 and $38 (blue dashes). Currently, SWTO is mixed, neither oversold or overbought. The Senkou A level of ~$36 may act as price resistance, while breaching above ~$46 (Senkou B) will be needed to for a Kumo breakout. If successful, short term price targets are $50 (psychological) and $57 (flat Senkou B and previous failed resistance). The support levels to watch on the downside are $25, $20, and $16 (black dash levels).

REP TA3

The status of the current Cloud metrics on the daily time frame with doubled settings (20/60/120/30) for more accurate signals is bearish; price is below the Cloud, Cloud is bearish, the TK cross is bearish, and the Lagging Span is beneath the Cloud and price.

Again, REP is sitting at ~$30 with SWTO levels mixed. A Kumo breakout will need to be above $57 (flat Senkou B) with likely resistance around $41 (Senkou A resistance).

 REP TA4

Conclusion

The Augur platform has disruptive capabilities that help it stand out among the current crop of projects built on Ethereum. Its token has valuable utility, with mechanisms built into its protocol that consider fair allocations for REP even in the most extreme circumstances.

Decentralized applications are clearly a fledgling market. On Dappradar, Augur is the top used Ethereum App under ‘other’. Even so, this is with a meager 261 daily users. Contrast this with a major online betting platform like PaddyPower, which average around 55,000 daily page visits in the first six months of 2018.

Augur is its still in early stages of its product life cycle, and has space to grow and expand, particularly if the wider Dapp ecosystem achieves greater popularity in the near future.

Despite the positive, long term price trends, the Ichimoku Cloud technicals for REP are firmly bearish. Both, the prudent short term trader (10/30/60/30) and longer term trader (20/60/120/30) will await a positive TK cross and Kumo breakout above $46 and $57, respectively, before entering a long position. Short term price targets include $50 and $57, while long term price targets include $60 and $70. The key support levels for these traders are $25, $20, and $16.

One potential cue for traders as to whether the current, positive price trend will maintain or succumb to the bearish technicals will be volume metrics and market depth, especially since Augur platform just went live.

Disclaimer: This analysis has been designed for informational and educational purposes only. Readers are advised to conduct their own independent research into individual assets before making a purchase decision.

About the authors

BNC Christopher Brookins headshot pic4Christopher Brookins
Christopher Brookins is the founder and CEO of Pugilist Ventures, a quantitative investment firm focused on digital assets and blockchain technology. Chris has a deep knowledge and unique perspective on digital assets formed by his polymath experience in equity trading, credit investing, and business development at two West Coast startups (one acquired). He has been involved in the blockchain community since 2014. Follow @chris__brookins

 

Aditya Author Profile

Aditya Das
Aditya Das is Brave New Coin’s in-house market analyst. Raised in Dubai, UAE, he holds a post-graduate honors degree in Economics from the University of Auckland and a BA in Economics from the University of Sussex. Prior to joining BNC his most recent roles were as a researcher and Economics tutor at the University of Auckland. Follow @Quartlifecrypto

 

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