EB143 – Joey Krug: Augur - A Decentralized, Crowdsourced Prediction Market Built On Ethereum

Transcript

[Music] this episode of epicenter Bitcoin has brought you by Jax Jax is the user-friendly wallet that works across all your devices and handles both midpoint and ether go to J a double x io and embrace the future of cryptocurrency wallets and by hi dot me protect yourself against hackers and safeguard your identity online with a first-class VPN go to hi dot me slash epicenter and sign up for a free account today hi welcome to epicenter Bitcoin the show

which talks about the technologies projects and startups driving decentralization and the global cryptocurrency revolution my name is Sebastian Cujo and my name is Robin crane we're here today with Joey Cujo who is the co-founder of augur many of you have probably heard of augur order is a prediction market that raised about 5 million US dollars in a crowd sale a quite a while ago and then he was previously was a computer science student at Pomona College and it's been very young but diving fully into into the crypto world and into the world of prediction markets so thanks so much for coming on Joey thanks for having me and so this is a topic that we somehow don't

seem to be able to get away from so we've done I don't know how many episodes already on prediction market this is certainly the fifth or sixth episode or even more that we've done here probably even more and auger I think is probably the best-known project in in the cryptocurrency space the best known prediction market project for maybe along with gnosis now would always probably still be better known and yeah they they did a big crowd sale quite a while ago which got a lot of attention and now it's still sort of you know they're building it and and a lot of people are waiting to see the launch so look

forward to diving into this today so maybe to get started Joey can it tell us a little bit about how did occur come about like what's the origin story yeah so so the like the idea for auger was kind of it's really kind of a combination of like three three different ideas proposed by other people we just kind of combine them in an interesting way so there was a paper in 2014 called decentralizing prediction markets and limit order books and that was paper written by some guys at Princeton and it was basically the idea to make a decentralized prediction market and so like our order book mechanism the mechanism for issuing shares things like that all came from there then there was a blog post by metalic called shelling coin which was

this idea for getting real world information into the blockchain using basically in the set of mechanism and the idea is that you'd like put up a bond with ether and if you were wrong you lose the bond so we use that and then the third thing we use is there's this project called truth coin which proposed using similar system to what schelling coin did except instead of using something like ether as the bond you'd create a new token that was directly tied to the prediction market which makes it easier to reason about the security and also kind of prevents like you know if you use ether maybe two percent of people either would participate if a whale comes in they can mess up the entire system what do you have a token where you know everyone's participating even

if they're not they're losing it then it's the easier to reason about security so basically combine those three things to kind of create augur we started working on it in 2014 and we are initially building on the Bitcoin core and ended up switching to aetherium and what made you excited about this idea of prediction market and particularly decentralized prediction markets so the most interesting thing to me is really that it kind of allows for the first time a few things it allows for there to be a global kind of financial market where anyone can go to it you know it's how capital controls person and trying to compress the paid on this one in the US can today that's not really the case for most financial

markets it's also relative to certain things it can be cheaper and then the other thing it's kind of interesting to me is just the idea of using prediction markets to actually like predict things you know currently today we don't have very good information about the future well we do have it's mostly from people like pundits who you know are kind of like broken clocks they're right you know couple times a day and that's about it and so with prediction markets we can aim to get better information about the future yeah and of course we have yeah we have plenty of episodes that explored this this topic in depth and we can get back into that a little bit as well and of course we will have links to that so you mentioned that originally augur was

based on Bitcoin and it was to build it as a Bitcoin sidechain what happened there why did you end up switching to etherium yeah so originally the idea was like to add some op codes to Bitcoin actually quite a few out codes and then once side chains came out we'd make a two-way peg between Bitcoin and you know our sidechain of Bitcoin the way we kind of got building on aetherium was I'd been working on it on the Bitcoin about a month and I'd added a few off codes for like trading stuff basically and one weekend I was sitting around I was like I thought about using

the Tyrian much like maybe I should just check it out to see what it's like so I decided to try to build what I built you know over the past month on aetherium and I was able to do it in one day the same same work that I'd spent you know 30 days on on Bitcoin so then that kind of made me think well if we're making all these modifications to Bitcoin are we really getting a whole lot of Bitcoin security model by doing that and the answer I kind of concluded was no not really and it made more sense for us to just kind of take the gamble with aetherium as opposed to building on Bitcoin and the the ability to make stuff a lot faster on on a theory Imus is also pretty useful because if Bitcoin you

have these really low-level opcodes and on aetherium you have you know relatively high level programming languages that you can build applications with of course like if you compare a bit going to etherium you anything would be the logical the logical blockchain on which you would build something like this because you know that much more flexibility do you do you think that something like augur could potentially live and become successful on a sidechain or have you given up that idea completely so I mean like it could but I basically kind of ditched that idea you know I think I think what would be most interesting is if there were a good side chain between it's very moving

Bitcoin so there's like vtc relayed right now it'd be great if there were like a two-way peg sidechain the only kind of problem with that is the people at block stream aren't really willing to add support for verification of sha-3 proofs to Bitcoin which is a problem since the theorem uses sha-3 so you'd probably have to have some like intermediary sidechain which will get kind of complicated so let's dive into prediction markets as I mentioned this is a topic that we've covered extensively on the show so we're not going to go in too deep into prediction markets but I I'd like to just reiterate some of the ore for you to to give us your perspective on some what are some of the best use cases for prediction markets today again I think the most most useful use case you know

like today like if I were alive right now I think would be allowing people to trade things that they normally you know wouldn't be able to trade for whatever reasons so my favorite example is you know if your Chinese national and you want to buy something like Apple but you can't there's too many capital controls if you're a huge whale and you have you know big institutional connections you can do it but as an average Chinese middle class citizen you're kind of stuck with the current Chinese markets which most the stocks aren't that good and you also have lots of problems with people like average Chinese middle class citizens are trading commodities at twenty to one leverage because they want to speculate on stuff that they can't and so the stuff respect lady Ahn is just kind of crazy and so I think if you

use prediction markets something like aetherium you can actually get the same profit and loss of something like Apple of course you don't have any dividends but it allows people to trade things that they never were able to trade before which i think is pretty useful and you you it's interesting how you use this this word speculation and especially with you know sort of the Chinese market there's this interesting sort of thing that happens with prediction markets where some of the people that talk about it's definitely look at it as as as a speculative tool and something you could use for essentially gambling and others would look at it as something that can be very useful for society you know I would I would encourage our listeners to go back to the Robert the

Ralph Merkle interview what is your position on I where you stand with regards to prediction markets and and there are you sort of usefulness for society or do you see them more as is really a speculative tool so I would say I mean I see them as both I think I think speculative tools are inherently useful for society you know of course like Occupy Wall Street people would disagree with me but there's a great paper by The Economist Frederick Hayek it's called the geese of knowledge in society and it's basically about how speculative markets or financial markets have prices and prices are equivalent to information so better prices means better information in society so I think that you know there kind of intertwine

you can't really separate them from each other so by virtue of having better financial markets you have better prices so you have better information that society can use to make decisions so I kind of view it it's like if you want to make better decisions there's a couple ways to do it I mean one is to just you know ask an expert and hopefully they'll give you a good answer the other is to use something like a prediction market and try to make the market as you know liquid and and healthy as possible to give you the best answer that you can get and so I think the speculation kind of ties in very nicely there you know you can't have prediction markets out speculation and you can't really have the information without it either they're they're both like yin and yang you need both of them so there's been a

lot of kind of repression of prediction markets but they're there the concepts been around for a long time at the same time they're not really used very much although of course you can think of some of the existing markets as prediction markets but kind of like pure prediction markets are very marginalized thing they're the biggest one in trade was shut down or forced to shut down why do you think there is so much so much difficulty around creating and operating prediction markets when at the same time a lot of financial markets are you know governments support a regulated etc right so I think if you look at the history of financial markets they

they've always kind of been like this like the stock market was initially considered just gambling and it was basically something that you know it shouldn't exist and governments didn't like the idea of having stock markets and you see the same thing for almost every other type of financial market in history same thing for options markets same things for futures and so it's kind of natural that prediction markets as a sort of different category of financial market which follow the same progression where they're kind of ignored and people don't really get them or they kind of don't think it's a good idea at first so it makes sense to me that that we kind of you know that's happening it so I think it's just like a natural thing that eventually they'll become you know a more widely

recognised type of financial market that people will participate in you know like a good example is if you're a global macro investor and you want to make you know a trade on something where you have some macro information a production markets almost always given that it has a clarity a way better way to do that than existing financial market because you cannot get the exact contract that you want where's that the prediction market you can have a contract on anything any future event so I think eventually they'll kind of be recognized as normal financial markets but it just takes time so you think this is really because prediction markets are fairly young and because they're not too well understood but once that changes they will be accepted there's nothing

deeper that's creating a bit of aversion and resistance to prediction markets so I agree with that for the most part there is I mean there's one kind of small bit of a version that you can have a prediction markets which is that since they're a very broad financial tool they're basically a financial market where it says you can make a financial market on any future event and that's kind of what a prediction like it is since they're so broad you can use them for things that are like kind of you know things that people wanted want to speculate on makes people kind of weary of them so if you look at like the future map project on the mid-2000s which is a project like with the CIA and DARPA they were going to have prediction markets on predicting basically geopolitical events like Paris attacks

or you know whether a certain dictator would be disposed things like that and so there is a version for those reasons but unlike the financial side like you know predicting some economic data like say GDP or something directly I don't I don't think there's much of version their prediction markets have been shown to work pretty well for you know big popular culture phenomenons like they're very much using political to make political project predictions sporting also the I was sort of surprised to learn that there's a lot of prediction markets around Hollywood movies and which ones are going to gross the most etc so you know these categories seem to seem to work very well with prediction

markets do you see other categories in which they are successful or other categories which may emerge in the future where prediction markets could be a good tool to predict outcomes yeah I think and that's one of the most interesting you know things you can predict with them is like data surrounding companies so like you know how many sales a certain product will do whether Apple's gonna release X or Y first things like that would be very interesting as opposed to just hearing them from like the rumor mill things like that and there's also the really wild out ones you know like Robin Hanson talks about where you have like a market on like should we fire the CEO of X publicly traded company and what would

the stock price do if we did that I think somebody will probably make a market like that on auger and can be very interesting Microsoft in the mid-2000s could have avoided you know a long slow decline if they had had a market like that I think is it after the last CEO left and then you know Satya Nadella or whatever whatever his name is became CEO the stock price jumped quite a bit they've been doing pretty well since then so if you had markets like the kind of you know had stuff like that early I think I think he'd be a good thing for for society I was I was watching the there was a panel at DEFCON with a believe your co-founder on prediction markets and the moderator gave this example of

how could you establish a prediction market to find out whether or not Walmart was doing well as as a publicly traded company and one way you could do that is have local prediction markets on how well the stores are doing or if the construction of new stores is going on schedule and then so this sort of micro economic indicator at a very local level would allow you to establish predictions at a more macro level and you know how is this company doing yeah I like I like that idea of using it like one thing that they're also really good for is like predicting deadlines for things predict pretty sure markets pretty accurate like on that I can we like just

recently I started a prediction market internally in augur for a deadline for like the next version of the beta it's not like that it's kind of cool because you can see what people actually think you know from like a level where they're willing to lose money if they're wrong which is a lot different than what you get it you just ask someone a question let's take a short break to talk about Jax Jax is a crypto currency wallet created by the people at the central now there are two cryptocurrencies that matter at the moment one is Bitcoin and one is ether but using them can be tricky what wallet to use how do you

secure them where did I leave my umbrella it's all a big mess and that's where Jax comes in Jax is a unified wallet it works across all your devices it works for the android phone apple iphone it works for your desktop computer and they have browser extensions for Chrome and Firefox and it works for both currencies at the same time it works for Bitcoin and it works to either what are the things that makes Jack's as delightful as walking through the fifth a whole G small of Paris on a Sunday morning and getting a whiff of fresh pastries is how they leverage HD wallets so they use this 12 word single backup seed for all three currencies and make it super easy to sync your wallets across all your devices so if you're

using the Chrome extension or the desktop app you just whip out your phone scan the QR code and boom your wallets are synced and plus the people at backs take your security very seriously it's open source so anybody can look at the code and plus they never hold any customer funds all the keys are stored locally on the client-side so go to Jack's dot IO that's J a double X do download the text wallet right now and understand what it's like to use the next-generation wallet we'd like to thank Jack's for those support of epicenter you mentioned that prediction markets are well good I have a good track record now one of the things you said or that was written on the website is that prediction markets kind of leveraged

this idea of the wisdom of the crowds now I was just kind of reading a little bit about that book and in that book he says that one of the assumptions to have this wisdom of the crowds effect is that you have independence so you know different people make predictions and let's say you know if we talk about GDP right I'm gonna say okay GDP next year in the u.s. is gonna be grow by one percent and and then sort of all of those are taken together and then you take the average you have this kind of wisdom to clouds effect but when you don't have independence of course is when I see what everybody else is doing like you have in kind of regular markets so what is your fault on that how do you

think about independence and and its effect on only usefulness and accuracy of prediction markets yeah so you know the Western of the crowd like if you read that book I think it's by James Surowiecki it talks about like most of the markets markets starting out markets most of the examples they use are not actually like financial markets so I think that independence matters a lot more and things that aren't financial markets because you don't have money on the line so when you have money on the line your thinking comes a bit becomes a bit clearer because you know you're going to lose money if you if you make the wrong decision and he does touch on like financial markets he talks

about how I don't remember if it was challenger or or which NASA messed up with the o-rings but the stock market basically pointed out which company made the o-rings because based off of his huge decline in their stock a few days after the crash so I think I think it works in financial markets - it's just that independence is a bit different because you have you don't really have as much independence you just have a price and people are still saying whether they think the price is long or not the nice thing about financial markets is though or any market in general as everyone thinks they know more than everyone else or at least the most most participants do which is why you see like you know the vast majority of hedge funds lose lose money compared to just

buying this and II and so I think that that kind of counteracts the the drawbacks of having lack of independence the real money factor basically yeah I know that I think that's a that's a valid point and and I guess prediction markets are going to be as efficient in that regard as other financial markets right so of course they will not be perfect and there will be strange phenomena but that's that's just the same thing we have with stock market prices or exchange rates and stuff so moving on to go a little bit more in depth with auger what does all auras

architecture look like what are the different components in there yes there's really kind of like three main roles an auger so there's the market creation side of things which is you know traditionally forth frictional markets you just kind of stuck with whatever markets the place you're going has and so you can't create another one if you want to I with augur anyone can kind of create their own prediction market contract in a few minutes on etherium and so there's that role there's also the trader role which is you know the person who obviously is buying and selling shares on in the markets and then the third role is the reporting role which is used to kind of resolve the markets in auger so if I understand correctly the the first thing that you said is that

anybody can create predictions so what you're saying is that with with auger anybody can create their own predictions independent of you know the communities will or some central authorities desire to host those predictions is is that sort of the general value proposition or something like this right yep okay let's talk about reporting this is an interesting sort of concept where in a typical prediction market you would have some sort of a central authority or a central body that would be bringing in data feeds and and reporting on the outcome of a prediction or an event how does that occur in augur how does augur

get its data on on the outcome of an event right so the way augur kind of does it is it has a supporting process where this basically you know basically we sold this thing called reputation in the crowd cell which is a very crypto economic reputation it's basically saying that I'm willing to you know have this thing that's worth value and I'm willing to lose it if I report inaccurately or dishonestly and so the reporting process kind of has three different phases to it and everything goes well you only get to defer to the first one and the way it works is initially people are randomly selected to report on events so there may be a market about as a nun chilectra there may be one about the share price of

apple and you get selected to report I'm one of those I get selected to report on the other something like that you submit your report and then what happens is it basically takes basically a simple average of there are reports and then someone can kind of challenge it if they think it's wrong and to do this they post a bond or they put money up and then everyone reports on it and at that point if their answer is the same thing we agreed on the person loses the bond because they basically just wasted the system's time if it's different then they actually get money back because they you know challenged the system and we're actually right it's in the final part of reporting is you

can actually actually fork the network if it's this phase where everyone reported everything ended up getting it wrong as well and so the way reporting works is kind of every two months you're selected to report on a random subset of events and the idea here so with reputation which is the thing that you sold during the crowd sale then the expectation two years now if I hold some of this reputation tokens it gives me two things one is kind of it gives me like a job right so I have to report on event and then the other thing is it gives me some kind of a chance for a return which could be through either the appreciation of the token right it

gains some value it's tradable or through through some fees that could pay to me is that correct yeah that's right so the way the fees work is when someone creates the market half the fees go to the reporters other half are split up amongst the person who created the market and people who are market making on the market or providing liquidity I'm curious here why did you call this reputation because reputation as how I looked up the definition before and it said reputation is the beliefs and opinions that are held about someone and so when we think about reputation in our life then you know it's I had this person as a reputation be reliable to be a frost or something like that

and that's very much kind of attached to that person and their actions now you're making this reputation tradable which seems to be completely contrary to how we commonly understand reputation so how does that make sense so we thought about tons of different names and this is kind of the one we stuck on I I kind of thought it was kind of a bad name for those reasons as well but we couldn't think of a better one it's a very it's a very crypto economic reputation so yeah if you think about reputation you traditionally think of something like oh that guy's a reputable person you know he'll pay you money back if you load them $50 or that person has you know 200

something stars on eBay it's probably fine to buy from them or this person has a four and a half star rating on Amazon they seem like a good seller with augur though yeah it's it's quite a bit different it's a very it's very economic reputation it's basically saying that because then because in crypto systems at least as of you know 20 there's not a real good way to kind of have that sort of ephemeral reputation that you have with Amazon or the fact that you just know someone and so basically to do like things like simple attacks and you did in fact people or pseudonymous and so to get something that's kind of more secure you really need an economic one where it's basically saying I'm reputable and I'm going to prove to

you that I'm reputable is that I'm willing to lose a bunch of money if I try to screw you over it's kind of what it is it's that's that's kind of the way it the way it works okay very interesting so does that mean let's say now the situation have been different and there were good reputation systems decentralized blockchain based reputation system when you guys started auger do you think that would have been better to rely on on a more sort of real sense of reputation the way we know it from from life versus this tradable reputation that you currently have that's interesting question um I think I think so from a purely

economics game theory perspective the answer would be no because you want it to be such that if someone you want for someone to have no incentive to do something wrong so you want them to like lose so much money that anybody they can make from doing something wrong it's far less than what they actually lose from just doing the wrong behavior so from an economic standpoint answer's no more a practical standpoint I mean yeah if you had something that we're like like you could have like you know some way to prove that someone was like a hundred percent perfectly reputable then yeah I'd probably be simpler I don't think I don't think I don't think you can even do that in real life you know there's no way to prove that someone's like always reputable and

never going to make a bad decision like if you look at even in trade and traders all too few markets wrong and they're like the most part for the British market that's existed so far so I think the you know the economists in me would say that I like the set of mechanisms better of having an economic education as opposed to more feel-good stylin so let's come back on how this mechanism works exactly so as as predictions come to term you have these reputations the people that hold recommendation tokens make will will vote on the outcome of that

prediction and when one point that Brian made earlier would when we were talking about this which I thought was interesting is that as this as you know augur becomes larger this may become hard to scale and so you may start seeing similar things that happened in Bitcoin for instance which is you know the pooling of miners well you perhaps you would see pooling of those reputation tokens into one central authority main which which will be able to take in perhaps data feeds externally and and sort of manage the voting on those predictions in a much

more efficient way do you is this something how do you how do you plan on keeping it so that it's so that reputation tokens holders and the voting on the outcome of predictions Stacey centralized when you know I guess the desired outcome is that augur becomes some huge prediction market right so the one thing that really helps with that is to randomize reporting so the fact that you're only having to report on the subset of events I mean I've played around with the math a bit you can get to a few hundred thousand defense a year and as an average reporter even if someone was a good amount of rep like me you're not going to have like to work quite a whole

lot like I think it was it's a matter of I have I had to work maybe a few hours every two months reporting an augur if there were a couple hundred thousand events a year now if it's guilt even farther than that so there's two things like with a couple hundred thousand events you can get the vast majority of volume on on the vast majority things people want to speculate in the world today if you look at like the Chicago Mercantile Exchange they only have maybe 40 or 50 things you can trade on the total amount of stocks in the US as I think if you count like the main publicly traded exchanges I think it's it's maybe like around ten fifteen thousand and so so you can get quite far with with a not large amount of events if it's still even farther beyond that

people start using offered really micro things like the Walmart examples then yeah does become more concern about about like cooling and things like that the nice thing about auger is the sense it's a very economic reputation the incentive still holds regardless of whether it's pooled or not and so basically that kind of kind of idea is that if if Marcus had these things called outstanding shares and so at the end of a market most people have probably sold their shares and exchanged them and got out of the market long before it's reported on but there may be a few percent of people who still have their outstanding shares held so the idea is that if at any point

the value of the outstanding shares it's worth more than market cap of reputation then it becomes like economically viable to do an attack on this on the network the nice property though is that the network can fork which means that it could split in two sets of reputation and the idea is that the market you know outside of augur so ignoring auga markets would value the setter reputation that actually reflects the reality so if one set says Obama won in 2012 and one said says McCain won you only require a tiny bit of the efficient market hypothesis for the market to valued the set that says Obama want higher and so I think that like while pooling is a concern

it's more about the economic incentives rather than the exact like number of reporters but so let's say now I you know I'm speculating different assets right different cryptocurrencies that are a lot of people you know do that you know some some may buy it some may be bought rap right and they I mean you know you were talking about a few hours every every few months a few hours a few hours right so I think most people would not wanna do that right so and if you look at something like Bitcoin a lot of people hold their coins on exchanges and in hosted wallets etc and the reason

there is really kind of a very minor gaining convenience and then to take into account you know significant loss in security and here it seems like incentive is much bigger because a few hours of work you know let's say someone's time is worth $30 right now my PE three hours of work even every two months right there might be $100 so $50 a month right might be $600 a year that one would essentially be be spending in time whereas like if I can put it in in some hosted service that just does it for me

don't you think it's inevitable that the vast majority of people are gonna do that yeah I think think long term people probably will do that but it's it's like not something that it's not something that I'm super worried about because the the incentives still hold regardless of whether those pooling and there's always the final backs off of you know forking the network so so it's it's not something that I'm like super worried about I guess that's what I'd say okay good because then the other thing that maybe is worth diving into a little bit about right so if you don't vote you're gonna get some punishment is that correct right so so the way the way it works is there's like there's two types of wrap there's you know dormant wrap which is where you

don't get any trading fees and you basically can't use it to report it's basically mint so if you wanted to trade it you'd switch it to dormant and then trade it and then switch it back to active the other type of wrap is active where you get trading fees you have to report so if you have your app active you're you know claiming fees and you don't report you're going to lose part of your reputation and then you also have if I remember correctly and you know if that the shelling coin idea the point is also that if you're too far out from if you're an outlier right if you don't of aggregate throughout the consensus you also get punished correct that's right so if there's a market on

you know how many inches of rain will fall somewhere and the mediating answer is twelve point five and you say twenty three you're going to lose prep for doing that today's magic word is reputation are e pu ta TI o n po head over to let's talk Bitcoin comm to sign it enter the match word and claim your part of the listener award [Music] so you mentioned with the rain thing you a you an outlier consensus is 23 you you voted 12 and and now you get some punishment now my concern here too is so

let's say you have some pooling going on some people put this funds in there now and all of a sudden 30 40 % of the reps are held by that I mean then their predictions really start to set that selling point and this not become that selling point so I mean I think number one is right if I want to vote on my own it becomes more risky the more people put their money into the service that kind of boats together and so I think that's that's one thing that actually makes it less attractive to do that and they did the other concern I guess would be once they have yeah 40% 50% or something couldn't they

just you know dictate the events and then what what makes it that those that those reports would actually be the true the true value and not some other thing so few things so you don't actually know how the pool is going to report ahead of time because it's a commitment reveal but there's still the valid point of I made should I join the pool just so that you know always hear reporting with them anyway and then the answer to that is I think you know it's one of those things 99% of the time it will be less risky but the issue is what if the pool messes up so it's kind of like it's kind of like you

know playing playing rushing the rat with a lot of a lot of empty barrels in the chamber and once in a while the pool may screw up someone may attack the pool and reports wrongly or the pool operator may just do something malicious and the problem is once that happens then the backstop stick in and and those would kind of screwed people in the pool over and the reason is the first backstop is everyone reports on everything I don't least go up for that and say the pool has 60% so even that doesn't work and then Network Forks and a two sets of reputation and in this one it's really not the reporters deciding things so much as much as the traders who are trading reputation and

the reason is because the trainers should value the set that represents reality hire and it's something that's like it's like it doesn't rely it a bit on the efficient markets but it's like if markets are so inefficient they can't choose something to create or flex reality and maybe prediction markets aren't such a good idea in the first place so it's something we're comfortable relying on but so in this case let's say now 60% are in this pool and they boat the wrong result I mean a fork because 60% of the funds are in there it also means that the private keys for 60% of the tokens are in there so how did that for how would that actually happen you couldn't actually be able to fork then no

so the way a fork works on augers actually just basically post a bond like 1% of rep so you do need like 1% of people to basically either pool their money together or you know if there's some whale that has a bunch then the whale could do it and it can only be done after the second backstop of reporting everything or everyone reporting on something and so if someone posts the bond to fork what happens is the people who the pool of 60% whatever is going to lose like around 40% of the rep in the fork the person who posts the bond is going to lose their rep in the original branch and they're going to get double back

so the incentive there's you know for someone to do the fork so they basically make money and and so it doesn't matter if they own 60% of rep because they're going to lose a lot of it in the fork and other thing is you don't need it's it's not like you know Bitcoin or theory on where you need a actually I guess even in Bitcoin answer you don't need a majority to fork the thing is people will just ignore you if you for bad fork like say I wanted to fork aetherium and it was just over some random saying say I lost I've had a key and I want to get my money back and I fork it people just ignore it but was something like this you know if I fork the auger Network and it's because the network said that Trump won even though he didn't then

there's a there's quite a bit incentive for people to actually follow my fork as opposed to just ignoring it if I have that choice right but if my money is lying when the pool and I actually not be able to access it at that point yes that's the big danger if using a pool is that's what I meant when I said it's you know it's less rescue 99.99% of the time right but it's the one you know the one bullet in the chamber that you might accidentally get shot with if if the pool messes up so yeah you would lower the way a fork works is you get you have to set certification so you have one set you know in the pool and your other set you did it on the fork except you would have like less rep because you're on the side

that you know committed to the pre fork pre fork report but yeah I mean you're certainly right ad there would be I mean in anyway the risk of putting your app into a pool it's kind of comparable to the risk of leaving your coins in any change right like goes well 99% and yeah sure you may be risk but yeah I guess my concern is just that in this case it seems like the incentives are so strong to do that much stronger than with Bitcoin that at least that concerns me a little but anyway I said I see yeah you had a question yeah so let's uh let's talk about the user experience side so can you tell us how you know what what what is a typical guy

like me who wants to use the prediction market like augur have to do to use it basically so the the way it kind of works is we're making the UI basically a web interface so you'd go to a website and it downloads all the code basically to your browser on its all-around client side from there if you had in the theory of noting in the background that would use that otherwise it would ping I uses ether camps posted notes so what it does is it all your transactions are signed in the browser and they're submitted to the network so if you wanted to trade on something you would you know there's two things you could do one is you could search for a market so if you have a real specific idea what you want to trade on so you're looking to trade in a

presidential election market might search presidential elections or 2016 US elections something like that if you're just kind of browsing around there's a category system where you can basically kind of filter by different tags that people can choose for their markets and there's also filters by volume and fees so as a trader you're gonna want to search for like lowest fees highest volume markets cuz that's where you're going to be able to trade the most to get the best prices and what you would do is you click on the market you like and it'll be you know multiple outcomes if it's a binary market just two outcomes and you can you know buy yes that it will happen or buy think it's not going to happen and there's an order book and you can input how many shares you want to buy

the max amount you're willing to spend so basically uses limit orders market orders something like auger aren't really a super good idea because like while you can pick up orders on the book it can be very dangerous and in like the early days when there's not a lot of little clarity you know if I play some record order on the New York Stock Exchange that's fine I place it on auger I could be buying at 99 cents a share if I'm not careful so uses limo orders by default you'll click buy it'll commit your trade and then it will reveal a block later it does that to prevent front-running so a miner can't just sit there and front-run all the trades and then you'll have your shares and then so you can do two things you

can you know hold them or you can sell them to another person or the third thing you can do which is kind of weird so I don't think most people do maybe like the professionals will which is you can buy the other outcome is in exchange it for a complete set and the reason is in a binary market you have two outcomes yes and no the combined they're worth one so if you own the yes and you buy the know then you can exchange them for a complete set and get one back and makes it immediately or you can just sell your note or you sell your yes to someone else okay that that's interesting so either you either you hold it you know me these are the three outcomes so either you hold your points either you can sell other shares you can sell those

shares to someone else or you can just you get you could buy the whole the whole outcome and have that as the basis for to basically bet on another prediction is it yeah it's kind of like that so it's like say we had keep it simple say we have presidential election market and the two outcomes are Hillary and Trump and say you're long Hillary see you buy Hillary 60 cents a share and she goes up to 80 say Trump's has been saying some really stupid stuff she goes up to 80 percent and you want to sell so you can just sell it to someone else the other thing you can do is you can buy Trump for 20 and then sell the

complete set and the reason is because the reason that completes has success at all is if you think about traditional financial markets like like the New York Stock Exchange Apple shares already exist they may issue more at some point in the future they may buy some back they're probably not going to go bankrupt to get acquired so the shares are already there but with prediction market shares don't exist if you make a new market on auger in the presidential election the shares kind of have to be traded and then where they're created is with this complete sets thing so if I'm a market trader or market maker and I'm gonna provide some liquidity to a market I may spend $500 buy 500 complete sets and then offer them on the order book for people to buy let's take a short break and talk about

hi dummy hi dummy is a VPN provider and if you don't know yet why you should need a VPN credit let us help you I'm sure you'll like me and when all the crazy revelations came out during the Snowden time of all the spying that is being done by the NSA in other government agencies you were shocked and you said not with me with my own right now the way government agencies can spy on you there's many of them but the most easiest way is by simply going to your ISP and getting all your traffic capturing all your traffic and the VPN can protect you from that it can give you a secure tunnel from your computer to any of the exit nodes all over the world so that all the traffic goes the

secure pipe that's encrypted and cannot be intruded on and we've hiked up mean you can choose any of their 30 exit nodes all over the world so you can enter the Internet in a secure location the best thing about hideout me is that they have a free plan which includes two gigabytes of unthe rata bandwidth per month so you can go to high dot me slash epicenter to create your free account and when you use that URL you'll automatically get 35% off if ever you decide to go premium now the premium plans are really great they include unlimited bandwidth access to all of the 30 exit nodes that Hidemi provides and you can install it on up to five devices at a time so you can have this running on your phone your tablet your computer

at work your personal computer and just be completely protected all the time and of course hide that many accepts Bitcoin so we'd like to thank hide me for those support of epicentre of Bitcoin I'd like to come back to the to the software so you mentioned that it's a web app this means that I can run the augur client locally and I can connect it to my own ether node and I can connect it to the contract and make those commits myself and fund they contract myself basically from from my own machine right right okay so then this brings me to the next question it is then what is the business model for augur where where do

you guys fit in all this so you know like basically we're just order reporters in the system so when we did the rap distribution 16% of its distributed amongst like around 20 people founders and advisors and employees and 4% is held by the foundation which is used for things like we've given some to people in the community who have done cool stuff like someone made it like a bunch of auger shirts we gave him a little bit of rep things like that we'll probably give away some of that and like bug bounties and so that's kind of you know right now we're mostly focused on building the protocol and the platform and getting it out there and then later on would be

focused on building more like possibly like for-profit ventures around it there's some like really cool things you can do it's at like if you think of the UI we have right now it's not super easy to use because you have to do lots of stuff to make it be a hundred percent decentralized so like we can't store the users private keys that means you can't have something like block shaitaan info or [Music] we can't store it really a cache of the data so we have to rely on the community to do it so that makes kind of slow so there's lots of things like that but you know before profit could potentially build like a UI around it that's easier to use maybe you could do something really cool like some ID I've been playing around with this the idea of having like ads in the UI but giving

part of the revenue from them to the people who trade their trade in the UI to subsidize their trades so like if you use that UI you basically have lower trading fees that's kind of cool stuff you can do with crypto that isn't really feasible with like you know say PayPal or something okay I know should I matter now I wanted to talk also about security so this is something that sort of come up since the DAO attack and especially around aetherium and you know the you know the ability of these off of these contracts written in solidity have you taken anything away from that what have you learned from the DAO a hack and what are the what are the some of the things that auger is doing

differently from that project to ensure that this type of thing wouldn't happen in in the DAO in the algorithm or contract right yeah so yeah I paid attention pretty closely to the Sadao once I got attacked I didn't really follow it too closely until then so there's quite a few things so if you look at you know the the types of vulnerabilities that occurred in the Dow like to call that value issues where you're just kind of sending gas to a contract that may or may not be trusted in the case of the attackers contract it was definitely not to be trusted and so there's a lot of things we're doing to

kind of mitigate that we try to use send wherever possible as opposed to supposed to call that value to send only sends a minimal amount of gas and then all the our contracts themselves some of the stuff that's already always been planned like we want to have a whitelist on them so that we can basically trust the other contracts to communicate with each other but it doesn't really trust others this thing's like mutexes which is that game where you make it so your contract can't be recursively called so he looked at the dow what happened was basically they just kept recalling the split down function over and over again so you can prevent that with this thing called new Texas where you basically

just check the functions in called more than once and if it has you don't let it feed and then some of the other stuff we've been doing is I've been reading all the like NASA and JPL programming guidelines the mistral ones from the automobile industry and then I've been implementing them all in our code base so there's lots of stuff you can do to make it so your code base is more simple and easier to follow and there's basically we've been implementing all those security guidelines in our code base to you know give it as best a chance as possible as it can have and then another thing we'll be doing this is lots of bug bounties I think if the Dow had bounties it may be a like a $10,000 bounty I think there's a decent chance that that

bug would have been found or the vulnerability would have been found so I think stuff like that is key and the final thing is making it so that you can recover from an attack or a hack without you know relying on forking aetherium is a huge lesson so it's something we all got hacked you'd want it so that we can upgrade the contracts quickly and resolve it on contract as opposed to you know hoping that a three and we'll fork around this we mentioned bug bounties are people finding bugs and auger and claiming those bike bounties so we've only you only started one for like the this contract that we're going to use for for like the rep distribution

we started a bounty for that I need to increase it it's like at $1,000 right now I need to make it like ten thousand nobody's found any bugs yet so if I have a post about that soon and then the core contracts on chain we haven't started bug bounties for those yet because I'm still fixing some stuff basically I'm still I'm still making a bunch of edits to them to make the comply with the NASA guidelines and the automobile guidelines I don't want to start the the bounties until after that's done and of course one one should say a new guys sort of a defense defense may be the wrong word but I mean so that the crowd

sale was in 2014 you know it's it's all two years later or round two years later and you know you're sort of still working on it right whereas our guys was like let's just go ahead no raise on a 50 million so I I think they were a little bit particular in that regard speaking of that what's the timeline here when is augur going to launch and and and are there going to be different stages to that yeah so so the timeline so we did about a year development for 2014 to 2015 then we did the crowd sale it's sort of like maybe ten days from now a year ago today and so now it's like a year later

and yeah we've been taking our time just you know iterating on it as far as timeline what we're looking to do is basically enter security audits once once I finish getting this this stuff done to make the comply as NASA guidelines there aren't really any more features to add to the backend besides like security ones what we're taking our time with so we should be able start security audits relatively soon or aiming to launch a new version of the badda beta the beta a couple of weeks that we'll have like limit orders and some of the new reporting stuff from

the back end in an order book where's old bay that only had a market scoring roll and so yeah we're basically taking are trying to try to get it as secure as possible it's a few bucks as possible and then as far as like phases for the launch I think the way we would do it is initially start out where like we have maybe like a multi-sig that allows us to modify the contracts very quickly so in the early days if something goes wrong we can push a fix later on you know what's the system matures then we could have people have the reporters basically vote updates the contracts so that's kind of like a difference between you know when it

would first launch and later on I suppose like from a feature level it'll have binary market scalar markets and categorical markets from day one we remove multi-dimensional markets after the Dow attack because we thought they were too complicated and we decided to just avoid that and that's that's kind of words that I want to come back to a topic that maybe you should have discussed earlier but I guess that this is a good time to talk about so the ethical aspects of prediction markets and we have been criticized I mean generally prediction markets have been criticized for this is that the ability to have predictions on things like that's things like

assassinations on things like terrorist attacks occurring or not occurring you know with something like a decentralized prediction market of course it makes a lot harder to regulate whether or not those predictions can make it onto the market or not well what is your stance on like do you think that there should be norms around those kind of things or should we just let people make predictions about whatever the hell they want I think there should be norms so there's like there's like two answers to this question one's a cop-out but a practical answer and one is like how it actually works on augers so on auger reporters basically can judge whether the market is unethical or not

so when you report you can also submit whether you think of markets on cool I suspect that you know only like very egregious things we get reported as unethical so things like assassination markets were all markets that would cause harm to other people like I so I made a market to incentivize robbing a bank or killing someone or something I'd hope that reporters would report that as unethical I certainly would from a practical standpoint I think the concerns are a bit overblown because the traditional financial markets today these incentives would all at play and nothing really happens so if you look at so the example of this is take any fortune 500 company you can buy options

that expire within a few days if you were to assassinate the CEO and buy cut options you know the day before you can make way more money than you could probably make on augur doing something similar but there's it doesn't happen and so these kind of incentives already exists in the real world and you know it's a nice I guess it's a it's a nice thing to make you have faith in humanity I guess that they don't actually happen hmm and so that there's like there's also like the idea is like you could also make way better ways to incentivize this sort of stuff on aetherium which is kind of another cop-out answer you know prediction markets are not the best way to do this

if you did want to kill someone you could use a dominant insurance contract where all the money goes to the person who actually kills them on a production market people can buy the other side which means that you're not actually doing that in the most you know economically efficient way because you're giving a lot of money peep to people who didn't actually do the job that's like a very cop-out answer but it's it's you know definitely true yeah actually so I I was watching this panel as I mentioned earlier and your co-founder Jack Peterson mentioned that you could have a vote on whether or not a question was a prediction was ethical or not I mean then then you're kind of

sudden you mentioned earlier that you you reporters will will set the bar and and define whether a question is ethical or not then then the question becomes you know where'd you set that bar they you know that bar may differ from person to person or from culture to culture if you could have a way to votes on whether or not questions were ethical then you're essentially you know layering on like you know the prediction on top of the prediction and perhaps getting a better representation of whether or not a question was I think well I mean I think this would only really be useful at like large scales as you mentioned it's a it's a lot easier to make money there's a there's better ways that you can make

money than to go assassinate someone and make a prediction about it on the prediction market but on some like you know at the edges there may be other perhaps not so you know predictions that it wouldn't be so grave but could potentially be considered unethical in certain places where you might want to get some sort of wisdom of the crowds around the ethical aspects of that prediction yeah I think with like with our conservative reporting system is kind of so global and distributed you know at least now ignoring the pool problem you you kind of really get a global set of

norms it's like the things that people considered unethical are probably going to be only things that are kind of globally considered unethical so things like like most cultures would consider you know assassinating someone to be unethical most consider stealing from someone to be unethical but then it's other like waste waste you know way less grave things that that might not be considered unethical that might be made people uneasy I can't think of any off the top of my head I guess maybe maybe like a geopolitical market you know something like the CIA would love to have like well Russia renovate Estonia within the next five years I don't think that would get reported as unethical an auger that that's like a good example of one that's kind of great but but do the Estonians

would you know the Estonians would probably consider that to be an ethical they probably I don't know they're pretty pretty technologically advanced country i but i bet they didn't want a market like that so they could have better odds you know that better better probability of knowing what's what's coming or not yeah and of course here the the kind of danger don't live in well if Russia says we're really low on money we need to make money some way oh there's this big prediction market on us invading Estonia let's bet their invaded and take that part which is of course an absurd scenario right so that's not gonna happen sorry yes yes pretty assertive and it's also like it's also like relies on the fact that you know people in the

Russian government want an insider trade and front-run those trades which which you know what would happen obviously yeah yeah now one last topic we do have and we want to talk about it and it's it's also a topic that we kind of revisit very very regularly and that's the the kind of topic of governance and again our listeners probable not need much of an introduction to that but the best example I think of governance that isn't really working so well is Bitcoin right where there's a lot of division and no agreement on how to evolve the protocol and and no way to to come to an agreement here now presumably augurs also going to need to evolve and to update be upgraded etc so

is there is there gonna be a process for that how will these decisions get made yeah so right now it's it's a very simple governance metric it's basically just reporters can vote on upgrades to the contracts so the way it kind of works is there's a registry contract which maintains the latest version of you know each of the contracts and reporters couldn't vote on whether to update them or not you know longer term you have more interesting things like future are key and things like that but it for the early days of the system we're kind of trying to keep it simple as opposed to you know going with something that probably met her in theory but much more complicated I guess

so you guys would propose a new contract and then the reporters would essentially vote on you know do they want to improve that or not yeah yeah basically or you know if I propose a contract and everyone hates it some random person from the community can propose another contract that you know modifies two lines and the reporters like better or something okay great well Joey with that I think we're at the end of our episode thanks so much for coming on I think it was really interesting to to dive into order to hear a little bit about how you you guys are approaching things so thanks so much yeah thanks for having me and and of course we are very much looking

forward to you know see it in action we were playing around a little bit with the beta before so that's possible to do of course we will have links to the order website to the application the beta application where you can play around with test points and to some other resources if people want to learn more about augur and of course we'll also link to to some of our previous episodes on prediction markets if people want to dive more into that so thanks so much for coming on and thanks so much to our listeners for listening so we are part of their lesser big on network you can find this show and lots of other shows on let's solve it on comm so we put either episodes out every Monday you can subscribe to the

show on your favorite listening app whether that's on mobile or SoundCloud or whether you'd like to watch the videos on on youtube.com slash episode of Big Foot so thanks so much and we look forward to be back next week [Music] [Music]