A prediction market takes a future event, such as Hillary Clinton winning the 2016 Presidential Election, and creates a security that pays off $100 if Hillary wins and $0 otherwise. The market allow buying, selling and short selling the security and the price of the security represents that probability the event will happen. Predictwise, which aggregates prediction markets, has the probability of Hillary winning at 47% as I write this. But there are a limited amount of markets out there for Predictwise to draw from.
Intrade, which shut down due to financial improprieties in 2013, used to run markets on all aspects of elections and other current events. Many other prediction markets have disappeared over time. The Augur team put out a white paper describing their fully decentralized prediction market immune to individuals bringing it down. They build on cryptocurrencies for buying and selling and a group of "reporters" financially incentivized to announce the correct answer for each market.
It's that last part I find the most interesting, instead of having an authority that reports the results, Augur will crowdsource the truth.
A key feature of Augur is tradeable Reputation. The total amount of Reputation is a fixed quantity, determined upon the launch of Augur. Holding Reputation entitles its owner to report on the outcomes of events, after the events occur...Reputation tokens are gained and lost depending on how reliably their owner votes with the consensus.Consensus may not be "the truth". Reporters are not incentivized to report the truth but what the other reporters will report as the consensus. Those who buy and sell on the market are not betting on the truth but the outcome as it is decided by the consensus of reporters. We have an ungrounded market.
The purchasers of reputation tokens likely won't represent the public at large and biases may come to play. Would this consensus have agreed that Bush won the 2000 election?
What would have the consensus done on the North Korea controversy?
[The Intrade security] allowed speculation on whether North Korea would, by 31 July 2006, successfully fire ballistic missiles that would land outside its airspace. On 5 July 2006 the North Korean government claimed a successful test launch that would have satisfied the prediction, a launch widely reported by world media. [Intrade] declared that the contract's conditions had not been met, because the US Department of Defense had not confirmed the action, and this confirmation was specifically required by the contract. (Other government sources had confirmed the claim, but these were not the sources referenced in the contract.) Traders considered this to be in strict compliance with the stated rule but contrary to the intention of the market (which was to predict the launch event, and not whether the US Defense Department would confirm it).Since Augur will allow arbitrarily worded contracts on topics such as proofs of P v NP, the consensus reporting may lead to some interesting future blog posts.
Despite my reservations, I'm quite excited to see Augur set up a prediction market system that can't be shut down and wish them all the luck. You have to until October 1 to buy reputation if you want to be deciding the truth instead of just predicting it.