The Augur guide to market economics

Paul Fletcher-Hill

Original title:Augur guide to market economics

Recently, the topic of Defi and Dapp has become hot again, and the fourth Token Summit will be held in New York on May 16. In this article, Blockbeats will introduce how the Veil and Augur protocol of the market prediction project work in detail.

The article is divided into two parts.

Augur is a predictive market protocol built on ethereum. There are two important fundamentals of Augur: market and result sharing. Market can be understood as every question published on the platform based on the Augur protocol. For convenience of understanding, this word can also be understood as a quiz question. Outcome shares are shares that have been bet on the market. Blockbeats further explained to you this time, the result share is just like the user thinks there will be traffic jam tomorrow, so he buys 100 eth in the market and gets stuck in traffic, then the 100 eth that will get stuck in traffic is called the result share.

Augur supports multiple markets, two of which are described below: binary markets and scalar markets.

Each Augur market contains a question (will the movie Avengers make more than $275 million in its U.S. opening weekend? Or how many followers will Andrew Yang have on twitter by June 29, 2019?) And the due date of the problem. Each prediction is implemented as its own ethereum smart contract, which holds Ether as collateral for the market.

There are also two types of market shares, in the form of erc-20 tokens, that represent clear answers to market questions (such as bullish or bearish). "Bullish" and "bearish" are generic. They can refer to many things based on the market.

• Inflation: refers to an "affirmation" or appreciation of the underlying asset

• Null: refers to the "negative" or depreciation of the underlying asset

Full result share

First, each full share is worth 1eth (that is, one unit of "bullish" and "bearish" within the market). Anyone could: create a full share of the ether by mortgaging it, or sell a full share in the Augur market for an equivalent amount of ether money.

The resulting share has this property because a full share represents a neutral portfolio within the market -- regardless of the final outcome, the value of a full share will eventually equal 1ETH.

marketResolution and compensationpay

The value of the two outcome shares is liquidated when the guess period on the topic in the forecast market expires. Set first by a market-appointed reporter and finally settled by Augur's predictor system, it is important that all funds held in custody in the market contract are divided between the two outcome shares. Nevertheless, each complete set of results is worth 1eth, but the percentage of 1eth for each result is determined by the market.

Binary market

Binary markets, sometimes called "yes/no" markets, are as easy to understand as a bet. Here are two examples of binary markets: will GRIN/USD be included in CoinMarketCap on March 16, 2019? Or will Coinbase take ethereum classics (ETC) off the shelves by the end of 2019?

These questions are closed questions, which means that there are only two answers, with "bullish" (or "yes") and "bearish" (or "no") outcome shares.

The duality of these markets stems from the "winner-takes-all" game, in which the bulls take all the money or the bears take all the money. So, in the above market, if GRIN/USD is listed on the CoinMarketCap website on March 16, every bullish share will be worth one ether, and every bearish share will be worth zero.

In a binary market the price of the outcome share is associated with probability. To put it simply, a "bullish" or "yes" share sold for 0.25 is a 3 to 1 chance, or 25% chance that it will happen.

Scalar market

Like binary markets, scalar markets have two outcome shares - "bullish" and "bearish" - although the final liquidation is not a winner-takes-all rule. A "bullish" and a "bearish" share always add up to pay off an ether, but the allocation can be anything between 0 and 1.

If you want to trade on a trend or don't want to face the high risk of winner-takes-all, the scalar market is a good choice. Examples include REP prices over the weekend, weather tomorrow, how many 3-pointers curry made this season for the warriors, or when the government will reopen. For these examples, we can create markets with multiple outcomes (the proportional weather example, 70-72°F, 73-75°F, etc.), but this approach has three disadvantages. First, we lose accuracy, which means that 71 degrees is the same as 72 degrees. Second, we don't reward traders who are closer to the truth. If the weather turns out to be 70°F, betting at 73°F is as bad as betting at 50°F. Third, the more outcomes, the higher the cost of providing liquidity. And the scalar market solves all of these problems -- they're accurate, they reward close answers, and they're efficient.

The scalar market requires more than two data points to define: upper and lower limits. These boundaries are the boundaries of the final resolution value (e.g. REP price, weather Fahrenheit, number of 3-pointers, date, etc.). In a scalar market you can trade within a predefined range of market decisions.

To illustrate, let's take the crypto-asset ZRX (assuming a current price of $0.30) as an example and design a scalar market that should allow us to bet on the price in 30 days. We call this market "ZRX/USD-30d" and set the upper and lower boundaries -- $0 for lower and $0.6 for upper. Like other Augur markets, our market has both "bullish" and "bearish" outcome shares.

But instead of representing a black-and-white outcome, "bullish" and "bearish" shares represent directions that tend to be on different boundaries. If the price after 30 days is closer to the upper limit of $0.60, the "bullish" result share is paid; If the price after 30 days is lower than the lower limit of $0, the "short" result share is paid. If the price is $0.3, then both sides of the share resolution is 0.5ETH, no loss no loss. The details can be expressed by the formula in the following figure:

The chart below represents the payoffs for "long" and "short" shares as the price changes from $0 to $0.6.

Note that the same etheric rule still applies: "bearish" and "bullish" shares always add up to a single etheric value until expiration. But as the resolution price moves toward 0.6, the upper bound, the value of the "bullish" shares increases linearly and the value of the "bearish" shares declines linearly, and vice versa, because the resolution price tends to $0.0.

Now let's talk about scalar market share pricing. Unlike the price of each share in a binary market which represents probability, each share in a scalar market can be understood as the strike price of the underlying asset, or any predicted price.

One bullish trader thinks the ZRX/USD will reach $0.30 or more by expiration. She went to check the trades in the market and it looked as if she could buy a "bullish" share for 0.5 ether. Using the same formula as above, we can view 0.5 ether as $0.3 because $0.3 is in the middle of the upper and lower boundaries. So the bullish trader buys a bullish piece at 0.5 ether and waits for it to expire.

On the day the market expired, the ZRX/USD increased by 10% to $0.33. This means that market resolution bullish traders can redeem their "bullish" shares of 0.55 ether, since $0.33 is 55% of 0 to 0.6. The bullish trader gets a 10% return on her investment, the same as she would get if she invested directly in ZRX.

Case 2: buy short

The bullish trader still thinks the ZRX/USD price will rise, but she doesn't think it will be more than 10% of $0.30. So she looked at the trading order on the Veil and saw that the community was more optimistic than she was because she was able to buy a "bearish" share of ether for 0.4 (or a "bullish" share of ether for 0.6). Therefore, the community set the future ZRX/USD price expectation at $0.36, higher than her expectation of $0.33. While the bullish trader thinks the ZRX/USD will rise 10%, she decided to buy more "bearish" shares at 0.4ether, which means she thinks the price will be lower than $0.36.

& have spent On the market's expiration day, the price rose another 10 percent to $0.33, and each "bullish" share was worth 0.55 ether, while each "bearish" share was worth 0.45 ether. That means the bullish trader put 0.4ether and received 0.45ether, yielding 12.5%. We can review the diagram in case 2 to see how this works.

caseExample 3: leverage

In this last case, we will tighten the upper and lower boundaries of the market to $0.45 (upper limit) and $0.15 (lower limit). Think of this as adding leverage to the market, as rising prices now have a stronger impact on both "bullish" and "bearish" shares. As shown in the figure below:

In the figure above, if the ZRX/USD goes from $0.3 to $0.45, the "bullish" share goes from 0.5 ether to 0.75 ether, but the "double bullish" share goes from 0.5 ether to 1 ether. Price movements in underlying assets have been magnified by tighter boundaries.

Suppose a bullish trader was able to buy "bullish" shares in a new market (double leverage) for 0.5 ether or $0.3. And if the ZRX/USD rises 10% to $0.33, then the bullish trader will receive 0.6ether (60% of 0.15 to 0.45 at $0.33), which is a 20% return, twice the return of buying and holding ZRX directly!

Back to the Veil, let's look at the list of hanging orders in the scalar market in Veil:

conclusion

This article has only scratched the surface of the range of possibilities opened up by Augur and Veil, but hopefully you now have a better understanding of the market and share structure of Augur and how binary and scalar markets are priced and resolved. The scalar market is a very powerful building block, and we will continue to use it to build exciting products.

Notes on the blue foxUnderstanding the operation of Augur market economics

Welcome to join the official BlockBeats community:

Telegram Subscription Group: https://t.me/theblockbeats

Telegram Discussion Group: https://t.me/BlockBeats_App

Official Twitter Account: https://twitter.com/BlockBeatsAsia