Collective Intelligence & Augur

Ever heard of Artificial intelligence? Yes, I guess so and this is why we will be talking about collective intelligence today. The past months were turbulent in the crypto world and it looks like we are bouncing back up from a stable low. So the Augur Project was also part of the recent market movement skyrocketing from levels around 20€ to 100€ and back to 20€ currently trading somewhere between 30€  and 40€. Nevertheless I am still a big fan of the project which is currently in its beta also giving hackers and coders the opportunity to earn rewards in case they report errors in the code. 

So how does Augur relate to collective intelligence? Augur is based on the Ethereum chain and wants to create what we would call democratised prediction markets. Those markets are from a scientific point of view on average far more accurate than “experts” in their predictions and therefore a better forecast of the future. The use case of this principle can lead from simple how will Bayern Munich play against Real Madrid this week and how will be the weather in London next week to questions like where will crude oil trade in three months. 

The question arises how this has any application if we already have betting agencies and futures exchanges. The answer is of course that it is decentralised. While the advantages of decentralisation regarding single party risk are known in the whole asset class it is particularly interesting for the verification of results system we will talk about further down in the article. 

In the first place commission savings are very exciting, which can be realised using the Augur network instead of the industry services we know so far. While the current market is segmented into a few agencies which provide similar quotes for events with an expensive spread anybody can create a market in Augur setting a price in percent. The percentage will be deducted from the whole amount of liquidity which participated in the market when the event is resolved. This very simple mechanism will beat down prices for participation since if there is a market which charges 5% of funds and another will charge 0,5% of funds the first one will dry out. 

The key to Augur is the REP token which is necessary to verify outcomes of events. While this task is usually fulfilled by a single entity which again can carry conflict of interest, Augur as a network will decide if a result is true or not. Every REP token holder can view himself as a guardian of truth verifying a result and being rewarded for an honest response while at the same time being punished if trying to cheat. This mechanism is constructed to incentivise truthful evaluation of events. 

Leaving the description of the project behind I would like to talk about the bigger picture of collective intelligence. Collective Intelligence means that everybody knows everything. Obviously this is not true for every single participant but for us as a whole we can say that we are pretty smart and have a good sense of how future will look like. In todays society where the internet developed this great possibility for communication we are still sticking to so called experts which often talk about the future as they have already been there and saw what is going to happen. Don’t get me wrong I highly value people who think about the future and try to come to conclusions about it but the phrasing of there thoughts is in some cases just awful to listen to in respect to statistics how bad expert predictions are on average. 

In the case there has been in fact a person who was right for the last 6 times about who will win the super bowl final, he isn’t necessarily an expert since just by chance if you pick 100 people on the street who have no idea about American football 1,5 of them will still get the six finals right. The illusion of an expert often dissolves when you actually put some numbers into account.

Nevertheless there are people who are very dedicated to a topic, see trends and developments in certain areas and they have a deeper opinion of how things will shape out in the future but it is important to remember that every experts prediction is in the end just his personal opinion blown up in credibility by his name. 

A good example is the Bloomberg consensus mechanism for expected EPS which in fact collects different predictions of company analysts who all claim being experts in their field, pricing the future of the stock. The weird thing about it is that Bloomberg restricts their intake of knowledge to some chosen crowd who are often biased in the results anyway trying to copy each other having in mind that it is better to not stick out of the crowd rather than being right or wrong alone since this would discover which game of luck fortune telling actually is. 

Bloomberg is neglecting the power of crowd knowledge while it is interesting to see that the crowd prices an assets future better than anybody if hey have a stake in it. The best example were bets on the Bitcoins price over the past year while it was a clear offsetting of 50/50 if price will raise or fall since if the rates just slightly moved to 51/49 there was immediately somebody in the market who spotted the chance to equalise this prediction. So in the end it is interesting to see that in some cases we just don’t know what will happen while experts are projecting pin point numbers with the precision of a surgeon into the future. 

I believe that when your material well being depends on handing out predictions to others you better try to pretend that you know the future but I am very happy that we have a project with Augur who is utilising the knowledge of the crowd for a decimal of current future market prices to make our all future more predictable and stable which is in the end a good thing. 

I am aware of the fact that there are other prediction markets projects out there like Gnosis for example but I will give you three reasons why I believe Augur is the better project. 

  • -Augur has a limited amount of tokens while gnosis functions on a fraudulent Ripple mechanism
  • -Augur has an amazing very transparent developers team who is giving bounty to hackers who report bugs
  • -Augurs price was underperforming compared to the whole market and starts to slowly pick up again.

This is not an investment advice but I am long on Augur and in the ideal case I would open a spread trade on Augur long and Gnosis short since I believe that Augur is the best project out there when it comes down to prediction markets. 

By the way I started writing this article before the Munich x Real game and finished it today so unfortunately no final for Munich this year.

Greetings

Thomas

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