In late 2017, the Chicago Mercantile Exchange started trading Bitcoin futures. In the near future, Augur will start trading stock futures.

The traditional financial system is peering into the murky world of cryptocurrencies. And the crypto world is staring right back.

A Brief Introduction to Augur

Augur’s soon-to-be-released decentralized app will allow gamblers and investors to “bet on anything, anywhere.”

“Bet on anything, anywhere.” That’s the slogan, plastered on the front page of an elegant, IDEO-designed user interface. But buried deep in the code, there’s some other, more thought provoking use cases.

Augur is many things. It’s an inexpensive bookie. It’s a flexible market for financial derivatives. It’s a platform that pays token holders to accurately report on events.

The genius of the system lies in how it ties together these different value propositions. By leveraging game theory and a blockchain, Augur’s creators have designed a public, trustless, probabilistic oracle. To understand what that means, let’s pick it apart one word at a time.

Oracle: An “oracle” is a source of information. Ask an oracle a question (e.g. who won the 2016 superbowl?), and it will provide an answer.

Trustless: A “trustless” system doesn’t rely on honesty. Augur’s decentralized system reliably reports the true outcome of events.

Probabilistic: Augur’s oracle doesn’t just provide an accurate record of what has occurred. It also describes how likely it is that future events will occur.

Public: The oracle will be available to everyone.

So what will it mean if a public, trustless, probabilistic oracle comes into existence?

Well, by establishing a commonly accepted baseline of facts, it could help eliminate “fake news.” And by publicizing humanity’s best guesses regarding upcoming events, we could all make better plans for the future.

A Proposal For Responsible Regulation of Augur

Augur could be a very good thing for humanity. But I think that the technology has some serious issues that need to be dealt with now. Below, I will discuss:

Augur’s Incentives Issues with Augur How we might regulate Augur

Augur’s Incentives

Augur economically incentivizes everyone to broadcast their knowledge of the future. For example, if an Apple employee knew that the next iPhone’s release would be delayed, they could profit by betting on Augur.

Today, for Apple employees and everyone else, there is no safe, standard way to profit from insider knowledge. Augur could change that. It provides a mechanism to anonymously broadcast (and profit from) knowledge. And, since it is decentralized, it can’t be shut down. It cannot be turned off by the government, or even by its own creators.

One important characteristic of this system is that it “lowers coordination costs.” By incentivizing the publication of knowledge, the system is likely to give the public more reasonable expectations about what has occurred in the past, and what is likely to occur in the future. That shared and accurate understanding could significantly accelerate economic progress. And as Augur’s credibility grows, it’s public record of facts could help to keep governments and powerful corporations accountable.

Issues with Augur

However, the software could also have some side effects.

In quantum physics, there is something called the “observer” effect. According to wikipedia, the observer effect is the fact that simply observing a situation or phenomenon necessarily changes that phenomenon. Similarly to physics, Augur’s “observation” of the probability of events could change their real world outcomes.

This “observer effect” may show up in subtle ways. But it becomes obvious when you consider the incentives created by Augur’s “observation” of highly improbable events.

Let me give an example. When the software’s creators (a not-for-profit called the Forecast Foundation) launch the main-net deployment of Augur’s protocol in a few months, their first “prediction market” will be a question. The question will be something like this: “will Augur be proven to have a major security flaw in 2018?”

The Forecast Foundation’s tentative plan is to bet a substantial amount of money on this market. If anyone is able to hack the system, they’ll get great betting odds (possibly something like 1000 to 1). Effectively, the Forecast Foundation will be offering cash to anyone who can reveal a security flaw in Augur.

Incentivizing a low probability event isn’t necessarily a bad thing. But, if left unregulated, bad actors could exploit this same mechanism to wreck havoc. For example, ISIS could create a prediction market. Their market might say something like “will terrorism event X occur in 2019?” By betting against this, they would effectively be writing an anonymous check to anyone who commits an act of terror on their behalf.

How We Might Regulate Augur

How can we prevent ISIS (and other bad actors) from abusing Augur?

Well, it’s complicated. But, at a high level, it is sufficient to know that Augur’s token holders can mark markets as “invalid.” If token holders decide that terror markets (or any other type of market) shouldn’t be allowed, they just need to declare that the market is “invalid.”

Our justice system carefully studies historical trials. Judicial precedents help judges determine the outcomes of new court cases. Similarly, over the next few years, Augur’s token holders will collectively decide what constitutes “valid” uses of the system. Augur’s first few prediction markets are likely to create important precedents with far reaching consequences.

Poorly thought through precedents, decided in the heat of the moment, could be dangerous. I strongly believe that Augur’s community should take a proactive approach to regulation.

First, we need to carefully study Augur’s potential impacts. This will involve public discussion and deep analysis of the consequences of various types of markets. More informed discussions will in turn lead to better precedents being set.

And we could be even more proactive than that. Although it hasn’t been discussed by the Forecast Foundation (to my knowledge), I see potential to bake a set of regulations right into Augur’s blockchain. This would allow Augur’s token holders to share crystal clear expectations concerning what constitutes a valid market, before questionable markets are ever created.

A proposed regulation might look something like this:

“Any market whose outcome resulted from the deliberate destruction of economic or societal value is invalid.”

Regulations like that one could be debated and clarified by lawyers, representatives of the SEC and CFTC, anthropologists, business leaders, and technologists. Then, once the regulation reaches some threshold of support, a corresponding Augur market could be created. The market would predict whether the regulation will go into effect. If Augur’s token holders report that a regulation has gone into effect, it would effectively become a part of Augur’s regulatory framework.

I think that baking regulation right into Augur’s blockchain is worth considering. But it may not be the best way of doing things. Among other potential issues, a proliferation of proposed laws could be chaotic. There are multiple valid approaches to regulating a blockchain. Vitalik Buterin (Ethereum’s founder) has a great blog post analyzing the pros and cons of coordinating governance on-chain versus off-chain.

Augur’s system has a number of other aspects that I haven’t mentioned. I haven’t discussed why Augur is trustworthy, or under what conditions it fails. But I won’t dive into the rabbit holes of Keynesian beauty contests, parallel universes, or reporting dispute resolution. All of those things have implications for how the system could be regulated. If you’re interested in learning more, I highly recommend reading the Augur whitepaper.

Conclusion

The cat is out of the bag.

Companies can be shut down. But the oncoming wave of decentralized apps aren’t run by companies, or controlled by individuals. Augur is a public protocol. Protocols are more like a culture, idea, or body of scientific knowledge. They’re utilized and propagated by any individuals who find them useful.

This particular protocol allows anyone to broadcast information about the world, in exchange for money.

I recently read a book called Sapiens. In this book, the author discusses the characteristics which have elevated humans to the top of the food chain. He points towards our ability to communicate complex concepts. Even an ant can communicate “there’s food over there” to other ants. But only humans can say “there’s lions by the watering hole, every evening at dusk.”

As history has progressed, we’ve developed increasingly sophisticated concepts. Our ability to conceptualize money and governments has allowed humanity to coordinate our activities on an unprecedented scale. This sophisticated coordination has generated tremendous wealth. Soon, we’ll be able to coordinate even better. With tools such as Augur, “there’s lions by the watering hole every evening at dusk” could evolve into “there’s a 70% chance that widespread violence in Syria will continue through the year 2020.”

I view Augur as a small piece of something called the “Fourth Industrial Revolution.” This revolution is characterized by technological change, occurring at an unprecedented, accelerating rate. Value is being created faster and faster. And, as leaders from the World Economic Forum have noted, upcoming disruptive change could significantly increase global volatility.

Humanity is charting a path into a new era, brimming with incredible, yet inscrutable change. Platforms such as Augur, which help set global expectations, could inject some much needed stability into the economy.

An accelerating rate of technological change creates all sorts of new challenges. It isn’t clear that we could stop this change, even if we wanted to. We can only do our best to manage it. In this environment, regulation needs to be fast, thoughtful, and work towards the goal of promoting universal human values.

Disclaimer

I am not associated with the Forecast Foundation. I do own some REP. I hope to help facilitate an informed, public discourse on what Augur’s potential effects are likely to be, and on how we should respond. I do not advocate the usage of Augur for any illegal purposes.