Could Augur Shift More than the Betting Paradigm?

On Dec. 25, a San Francisco non-profit company named Augur is scheduled to roll out a beta version of something it calls a “decentralized prediction market platform.” The Christmas holiday launch will go practically unnoticed by anyone in the racing industry, and Augur is very likely to remain under the sport's radar for months or even a year or two after its unveiling.

That would be a mistake, because the repercussions of Augur's initial public testing could rock horse racing's economic model as we know it.

My bet is that Augur (or, more likely, a finer-tuned offshoot of its original concept) will evolve into a paradigm-shifting force that has the power to change the way the world gambles on any future event.

This includes (and is by no means limited to) sports results, stock prices, the weather, political elections, public policy decisions, court trials, life expectancies, the outcomes of wars, and just about any proposition that can be articulated by a market-maker and eventually reported as a yea-or-nay result.

Casinos, betting exchanges, the corner bookie, and yes, even horse tracks might soon have to get in line behind other long-entrenched United States industries whose business templates have been radically disrupted by emerging technologies.

Examples of innovations bringing buyers and sellers together by cutting out the middleman and slashing commissions include retailers who have been upstaged by eBay and Etsy, hotel operators losing business to Airbnb and VRBO, and the taxicab industry getting crushed by ride-sharing services like Uber and Lyft.

In the gambling sector, the best-known example of disruptive change since 2000 has been the emergence of Betfair, which has delighted consumers and rankled bookmakers and pari-mutuel operators worldwide. To date, the only effective defense against letting exchange wagering take hold in America has been to try and declare it illegal for as long as possible.

But that might not be possible with Augur, which plans to set its bet takeout at an astoundingly low 1% while offering complete anonymity to its users. A recent article on the site Reason.com explains why, reading in part:

“Here's what's truly novel about Augur: It won't be controlled by any person or entity, nor will it operate off of any one computer network. All the money in the system will be in Bitcoin, or other types of peer-to-peer cryptocurrency, so no credit card companies or banks need to be involved. If the system runs afoul of regulators–and if it's successful, it most certainly will–they'll find that there's no company to sue, no computer hardware to pull out of the wall, and no CEO to lock up in a cage. This is new legal territory. If Augur catches on as a tool for betting on everything from basketball games to stock prices, is there anything the government can do to stop it?”

For some readers, the Bitcoin funding mechanism is bound to make Augur sound too futuristic and far-fetched to be considered a near-term threat. Since Bitcoins were invented in 2008, there has been ongoing debate over whether they represent “real money” or some different type of “medium of exchange.” Converting them to cash requires trading at fluctuating (and sometimes volatile) prices on various global exchanges; last week the U.S. Commodity Futures Trading Commission declared Bitcoins to be a commodity covered by the Commodity Exchange Act.

But even if you don't quite buy into the concept of cryptocurrency, it is the “decentralized” underpinning of cryptocurrency–made possible by the fairly recent invention of a type of distributed database known as a “blockchain”–that allows participants to buy, sell, trade (and gamble) in complete anonymity.

When transactions are executed on Augur, they will get added to the system's blockchain, and that record will be instantly rebroadcast to the entire community of participants. Think of it like a massive shared file that is constantly getting updated: Records of transactions will be fluid and will not exist in any one place.

As a separate Reason.com article puts it, “This gives the network tremendous resilience. Deleting or altering past transactions recorded to the blockchain would involve invading the homes of every person in the world running a Bitcoin client and commandeering their personal computers.”

A series of videos on the website www.augur.net explains how the betting will work. Simply put, users will be able to buy and sell shares in outcomes of future events, and will be rewarded for correctly predicting them. Ever-changing market quotes on shares will serve as the “odds,” or the probability of the event actually occurring. The more likely the event is to occur, the higher the share price will be.

Both the actual betting and the posting of official results will rely on the “wisdom of crowds” principle, which states that if you ask enough people a question, the average answer is far more accurate than one provided by any single expert.

You don't even have to place bets to earn money on Augur: You can function as a “reporter” who shares in half of the 1% takeout for participating in the crowdsourced verification of results. The other half gets distributed among market-makers who pose questions designed to generate handle, like “Will American Pharoah (Pioneerof the Nile) win the 2015 GI Breeders' Cup Classic?”

Augur is currently in “alpha” mode, and has raised $4.5 million by recruiting a legion of reporters who have bought in for the privilege of serving as results verifiers and market-makers. “Reputation tokens” that can be cashed in for real money serve as the currency for making markets and reporting results, and the crowdsource aspect of Augur is the part that is designed to keep reporters honest.

For example, if you fraudulently tried to report the incorrect winner of a horse race in an attempt to manipulate the market, your result would be flagged as being inconsistent with the crowd, and you would be financially penalized (and eventually excluded from participation) for reporting a bad result.

In an interview posted in the online publication Coinjournal.net, Augur executives were specifically asked if their market prediction platform could be applied to a horse race, which isn't necessarily a yes-or-no proposition, but instead has multiple potential winners.

“Yeah,” replied core developer Joey Krug, unfazed by the challenge. “We call those markets 'categorical' where you can have a bunch of outcomes.”

Even though horse race betting is theoretically do-able, it's likely to be awhile before Augur evolves into a serious threat to the pari-mutuel system.

First there is the obvious problem of Augur's markets not being liquid enough to compete. They certainly won't be at first. But like any emerging paradigm, if Augur is appealing and robust enough, users will eventually flock to it. When U.S. racing first switched from betting via bookmakers to pari-mutuels in the early 20th Century, liquidity was a concern cited by early detractors. Eventually, pari-mutuels became the established platform.

Then there is the difficulty of the lag time involved in reporting results by consensus. Currently in its infant stages, Augur has set a schedule that verifies and pays out on results at certain times during the month-a timetable that is clearly not workable for hundreds of races that go off at intervals measured in minutes hundreds of times during any given day. Future iterations of blockchain technology are likely to improve upon the speed of reporting and paying out.

Plus, for the time being, you have to embrace the whole “alternative economy” thing just to participate. For most folks, the need to trade in dollars to buy Bitcoins or some other unfamiliar cryptocurrency just to open an account makes Augur a non-starter. But judging by how fast technology evolves, this too could become an irrational fear in a few years' time.

Sweeping aside all of Augur's implications for the future of gambling, one of its founders did say something remarkably profound in the Coinjournal interview that had more to do with keeping existing industries honest than competing for betting dollars.

“Augur is great for creating a decentralized whistleblowing incentive system,” said the firm's director of operations, Jeremy Gardner. “A market could be made for 'Evidence that senior officials at the Securities and Exchange Commission have received bribes from Goldman Sachs will be exposed and lead to top level resignations in the next ten months.'”

Gardner continued: “The market-maker could [then] bet a bunch of money that that won't happen, and then someone at the SEC or Goldman Sachs now has a massive financial incentive to bet that it does happen and anonymously give the evidence to the Department of Justice, knowing they can be rewarded without compromising their identity.”

Transfer that financial industry analogy to horse racing, and imagine how the rewarding-of-whistleblowers aspect might be used to clean up our sport.

Perhaps the collective wisdom of racing's crowd just needs to be properly leveraged with incentives to bring about positive change.