One generally does not think of a prediction market as a global utility. Betting on a sports game or a presidential outcome is the use case that initially comes to mind, neither of which seem have a societal benefit. But when you step back and think about how the world has worked historically and then envision a world with liquid, global prediction markets, you start to realize the promise of a platform that allows anyone to create a prediction market about anything.

Hayek wrote about the concepts behind prediction markets in the 1940s

The Use of Knowledge in Society

In 1945, economist Friedrich Hayek wrote “The Use of Knowledge in Society.” In the essay, he argues against central economic planning and suggests that what is known by a single person or group is only a small fraction of the sum of total knowledge held by all members of society. His belief was that aggregate knowledge in society was crucial for good decision making.

What if we had global, liquid prediction markets for anything, enabling anyone with knowledge to earn and anyone seeking knowledge to create a prediction market for it? Might the desire to earn from individual knowledge create an knowledge aggregation mechanism the world’s never seen before and improve the flow of information in the world dramatically?

I think it could. Hayek would have been excited about the blockchain-based prediction markets we’re seeing emerge today and here’s why:

The need for better information today

The cost of disseminating information is free on the internet today and the opportunity cost of bad information is low for most people. As a result, the quality of information we consume is bad. There’s generally no strong financial incentive for the people that know things to share and so we see things like the mainstream U.S. media completely missing the Trump campaign success and many people being shocked by the outcome.

People are fundamentally incentivized by money, and a system that allows people to monetize by betting correctly on outcomes drives better information in the world. This information could be used to create better policies, to build better businesses, and to broadly increase aggregate progress by humanity.

A brief history on prediction markets

A primary reason that prediction markets haven’t been massively successful to date is because no one has successfully created an inclusive, multi-purpose platform with significant liquidity. Commodities futures are actually prediction markets themselves and many commodities like oil and gold trade in the US on the Chicago Mercantile Exchange (CME). But even the CME fails as a truly efficient global source of aggregate information, as people in most of the world are excluded from trading on the CME and many commodities are not traded. For example, onions were once the most actively traded commodity on the CME, but Congress passed a law to ban them in 1955. That law remains intact to this day.

The CIA and DARPA wanted to create a prediction market in 2001, but that project got shut down as a result of criticism by Congress. The CIA, an organization that’s sole objective is to acquire information that can help protect the U.S., hoped to use the prediction markets to do its job better.

Augur founder and Thiel Fellow Joey Krug will be at Token Summit discussing Augur on May 25th

Augur: A user-controlled, decentralized prediction market

Led by developers Joey Krug and Jack Peterson, the Augur project has been in progress since August 2015, when the team raised $5M in a token sale to build the platform. Since their token sale, they’ve been building the back end Ethereum-based smart contracts and front end UI to bring real-value prediction markets to the world. Some in the community have been curious why it’s taken them to bring a live product to market, but when it comes to real money smart contracts I think a deliberate and careful approach is best in the long-term.

What makes the Augur DAO truly decentralized and user-controlled is its solution to the oracle problem, which is how to assess outcomes of events in a decentralized way. Outcomes in a prediction market can be assessed easily in a centralized way by calling the APIs of known data sources like ESPN.com for sports, ABC.com for politics, and others. But to enable a decentralized prediction market, the oracle problem must be solved and Augur did that with it’s own token called Reputation (REP).

Reputation holders are workers in the Augur DAO, verifying outcomes and earning fees for their service. Unlike many of the recent ICOs that we’ve seen hit the market, there is a clear economic role the token plays in the system for the system to function properly. REP holders are economically incentivized to report accurately.

Open Questions

There are lots of open questions about Augur and the future of prediction markets:

Can Augur ship a secure, real-value product?

Will that product be usable for a non-technical user? After all, the promise is that these markets become liquid — without liquidity there is no knowledge.

How will regulation impact these markets? Augur is decentralized autonomous organization that’s building a protocol that can’t be shut down, but individuals using the platform can and likely will be regulated.

Will competitors like Gnosis, who has a token sale planned later this quarter, take market share?

These are all important questions that we will see play out over the coming years. I’m personally excited to see it happen.

How to learn more

The Token Summit is May 25th in NYC at the Paulson Auditorium at NYU Stern School of Business

Augur founder Joey Krug will be attending the Token Summit and speaking about Augur. Get your ticket now to meet Joey and other leaders from many of the leading blockchain projects in the world on May 25th.