Who Won the House?

My First Experience with Augur

Apologies in advance — no pretty pictures or charts. And Medium is being a bit weird so no subtitle either. I’ll put a tl;dr up front to entice you instead.

Conclusions:

• If something seems too good to be true, it is. I was lucky to get out flat-ish.
• Augur’s complex resolution process, coupled with its total lack of clarity via the UI, makes it really unpleasant to use and in my view, inefficient as a hedging tool. I think that without some major changes to both, it’s unlikely to ever gain anything more than a cult following.

On November 13, 2018, I synced my Augur node, logged into Metamask, and bet 2.5 ETH (at the time, about $500) that the Democrats would win a majority in the United States House of Representatives in the 2018 mid-term elections. I paid 94%, meaning that if the outcome of the election was a Democrat majority, I would earn a 6% return (less fees, which were negligible). Of course, the elections had happened a week prior and the results were in. The Democrats had won soundly. This market persisted, however, and didn’t expire until December 10th.

I made my bet and waited till the expiry to follow up on it. Really, I just wanted to play with Augur and an easy money winner seemed like a good way to get my feet wet. I was interested to see the settlement process and delivery of winnings, how the service reported, and just generally what the operational flow was like. I can now say that it isn’t great.

The following leaves out a TON of subtlety around specific roles played by the market creator, designated reporter, and more. The reporting process is so complex that a simple mind such as mine can’t grasp how it could possibly align the incentives of all participants. Be that as it may…

The settlement process occurs in sequential 7-day fee windows, during which fees are collected in REP from those reporting on the event’s outcome. Those REP are distributed to the reporters who match the consensus, and seized from those who report a non-consensus outcome. When consensus is reached, those reporters are entitled to a proportion of the market’s transaction fees (in ETH) equal to their stake in the market’s total pool of REP.

Got that? If I was good at PowerPoint I’d draw you a flow diagram. Instead I’ll make a list.

• The Market’s event occurs.
• During the Designated Reporting phase, the market’s designated reporter (specified at market creation) reports the outcome, which is labeled the tentative outcome. If the designated reporter doesn’t turn up, 3 days elapse until they’re deemed a no-show.
• If the designated reporter fails to show up, the market enters the Open Reporting phase, in which anyone can report the outcome. The first to do so collects a no-show bond from the market’s creator in the form of a stake on the reporters chosen outcome. In this case, the outcome reported by the first public reporter is now the tentative outcome.
• At this point, the market is Waiting for Next Fee Window to Begin. This is equal to 7 days minus (however long the designated reporting phase was, plus however long the open reporting phase was).
• The market enters the dispute round (another 7 day window), in which any holder of REP can stake REP on an outcome other than the tentative outcome. If the amount of REP staked on an alternative outcome is greater than the dispute bond size (predetermined by the market’s creator), the market has been successfully disputed and, at the end of this phase, enters a new dispute phase.
• This process repeats itself ad infinitum until the amount of REP staked on either outcome exceeds a certain threshold (2.5%) of total REP outstanding. At that point, if there is still no consensus, the market enters the Fork State, which frankly I don’t have the inclination to really dig in to. I will say that the whitepaper describes it as a “method of last resort” and “very disruptive”. And it takes 60 days.
• Eventually, when a market’s outcome is reported either via a dispute round in which the reporters reach a suitable consensus, or via the fork state, the market’s winners are paid out.

So this is all quite convoluted. What it means in practice is that a minimum of 14 days will pass before winnings are distributed. Which in my mind makes this platform basically useless beyond the occasional recreational wager. No marketmaker or trader is going to want to manage an uncertain settlement process whose minimum time is two weeks, and whose maximum time is theoretically infinite (though practically i would imagine three months is about as long as it would go)(very hand wavy on my part there).

Bringing this back to real life, my position was long democrats at 94%, in a market that expired December 10th. The Democrats won the house in the midterm elections, but they didn’t take control until sworn in on January 3rd. The market didn’t specify a date for Democratic control. That being the case, it was technically asking who controlled the house on December 10th, which of course was the Republicans. GOTCHA!

This nebulous market design enraged a huge number of people. (It was the most actively traded market in Augur’s history). So settlement was going to be a drawn out process. However, the UI never described ANY of what was happening behind the scenes, other than to say the market was “In Reporting”. Which, given the complexities of the reporting process, was an essentially useless tidbit of information.

On my most recent login, I noticed that the market was now 95.5%/97.5%. I hit the bid, locking in a .03 ETH loss thanks to fees. I’d rather those 2.47 ETH back in my control, rather than stuck in a smart contract dreamed up by a Reddit troll for the foreseeable future while endless 7 day reporting windows roll by.