Editor's Note: This article comes fromBlue Fox NotesEditor's Note: This article comes from
Blue Fox Notes
(ID: lanhubiji), author of this article: Paul Fletcher-Hill, original title: "Augur Market Economics Guide", translation: Blue Fox Notes Community "Li Xihe", reprinted by Odaily with authorization.
New Veil users often ask us how predictive payouts work on Veil and Augur. In this article, we will introduce these key concepts to new traders in detail. We'll cover Augur's market structure, outcome shares, binary market payouts, scalar market payouts, and how to trade them on Veil.
Before we officially start, let’s briefly introduce: Augur is a prediction market protocol built on Ethereum. Veil is a trading platform on Augur. Veil has its own market order book and uses Augur to represent and settle the market.
Augur market and result share
Augur supports many kinds of markets, but today we mainly introduce two kinds: binary markets and scalar markets. We’ll talk about their differences later, but let’s first understand how markets are implemented on the Augur protocol. Augur has two important primitives: market and outcome share.
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Academy Award Best Picture Prediction Market on Veil
Each Augur market contains a question (like will the GRIN/USD market be listed on CoinMarketCap? or will Roma win Best Picture at the 91st Academy Awards?) and an expiration date. Each prediction market is implemented as its own Ethereum smart contract that holds Ether as collateral for the market.
Rise: Refers to "certainty" or the appreciation of the underlying asset
Empty: Refers to "negative" or depreciation of the underlying asset
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Regarding outcome shares, the first rule to remember is that any full share is worth 1 eth (that is, "long" and "short" one unit within the market). And anyone can (1) create a full share by mortgaging one ether, or (2) sell a full share in the Augur market to get the equivalent of one ether.
The resultant share can have this property because a full share represents a neutral portfolio in the market—regardless of the final outcome, the value of a full share will eventually be equal to 1ETH.
Market Resolution and Repayment
When the prediction market expires, the value of both outcome shares is liquidated. The market-appointed reporter is the first to set, and Augur’s oracle system does the final settlement, but we’ll skip the resolution process in this article. Importantly, all funds escrowed in the market contract are split between the two outcome shares. Still, any full resulting share means one ether. But the proportion of 1ETH for each result share is determined by the market.
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binary market
Binary markets, sometimes called "yes/no" markets, are the easiest to understand because they are very similar to betting. Here are two examples of binary markets: Will GRIN/USD be listed on CoinMarketCap on March 16, 2019? Or will Coinbase delist Ethereum Classic (ETC) in late 2019? Every binary market has "bullish" (or "yes") outcome shares and "bearish" (or "no") outcome shares.
When you are preparing to place a bet (or buy a call or bear share) in a binary market, you should consider the probability of that event happening. If you think there is a 50% chance that GRIN/USD will be listed on CoinMarketCap - or that a "call" share will be worth one ether, then you probably shouldn't spend more than 0.5 ether to buy a "call" share. Because your expected value for a call share is 0.5 ether (that is, there is a 50% probability of getting 1eth of payout funds, and a 50% probability of getting 0eth at the same time).
Will GRIN/USD be listed on CoinMarketCap on March 16, 2019?
https://app.veil.co/market/will-grin-usd-be-listed-on-coinmarketcap-by-march-16-2019
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scalar market
Similar to binary markets, scalar markets also have two outcome shares - "bullish" and "short" - although the final liquidation is not a winner-take-all rule. A "call" and a "short" share add up to always pay off one ether, but the allocation can be anything between 0 and 1.
If you want to trade in a certain direction or don't want to face the high risk of "winner takes all", then the scalar market is a good choice. Examples are the price of REP over the weekend, the weather tomorrow, how many 3-pointers Curry has made this season for the Warriors, or when the government reopens. For these examples, we could create markets with multiple outcomes (scaled weather example, 70-72°F, 73-75°F, etc.), but this approach has three drawbacks. First, we lose precision, that is, 71°F is the same as 72°F. Second, we don't reward traders who are closer to the truth, and if the weather ends up being 70°F, betting at 73°F is just as bad as betting at 50°F. Third, the more outcomes there are, the more expensive it is to provide liquidity. And scalar markets solve all these problems - they are accurate, reward close answers, and are efficient.
A scalar market requires more than two data points to define: an upper bound and a lower bound. These boundaries are the boundaries of the final resolution values (such as the price of REP, the temperature in Fahrenheit of the weather, the number of 3-pointers, the date, etc.). In a scalar market you can trade within a predefined range of market resolutions.
To illustrate, let's use ZRX (assume the current price of $0.3) as an example and design a scalar market that should allow us to bet on the price thirty days from now. We call this market "ZRX/USD-30d" and set upper and lower boundaries - $0 as the lower bound and $0.6 as the upper bound. Like other Augur markets, our market has both "bullish" and "bearish" outcome shares.
But instead of representing a black-and-white outcome, the "bullish" and "bearish" shares represent directions that favor different boundaries. If the price after 30 days is closer to the upper limit of $0.6, the "bullish" result share will be paid; if the price after 30 days is closer to the lower limit of $0, the "short" result share will be paid. If the price is 0.3 USD, the share resolution for both parties is 0.5 ETH, no loss and no compensation. Specifically, it can be expressed by the formula in the figure below:
Note that the same one ether rule still applies: "short" and "long" shares combined are always worth one ether until expiration. But as the resolution price approaches 0.6, which is the upper boundary, the value of the "bullish" share will increase linearly and the value of the "short" share will decrease linearly, and vice versa, as the resolution price tends to $0.0.
Let us now discuss share pricing in the scalar market. Unlike the price of each share in the binary market, which represents a probability, each share in the scalar market can be understood as the execution price of the underlying asset, or any predicted price.
Case 1: buy up
Suppose there is a bullish trader who believes that ZRX/USD will reach above $0.3 by the expiration. She then checks the market for trade tickets, and it looks like she can buy a "call" share for 0.5 ether. Using the same formula as above, we can think of 0.5 ether as $0.3, since $0.3 is in the middle of the upper and lower boundaries. So the long trader buys a call share for 0.5 ether and waits for it to expire.
Case 1: buy up
On the day the market expired, ZRX/USD rose 10% to $0.33. This means that a "call" share of a market resolution bullish trader can redeem 0.55 ether, since $0.33 is 55% of 0 to 0.6. The bullish trader will have a 10% investment income, which is the same as her direct investment in ZRX.
Case 2: Buy Short
The bullish trader still sees a rise in ZRX/USD price, but she does not see a rise of more than 10% from $0.3. So she looks at the trade tickets on Veil and sees that the community is more optimistic than she is because she can buy a "short" share for 0.4 ether (or a "long" share for 0.6 ether). So, the community set the future ZRX/USD price expectation at $0.36, which is higher than her forecast of $0.33. While the bullish trader thinks ZRX/USD will rise by 10%, she decides to buy more "short" shares at 0.4 ether, which is equivalent to saying she thinks the price will go below $0.36.
Case 2: Buy Short
On the day of market expiration, the price rose another 10% to $0.33, and each "long" share was worth 0.55 ether, while each "short" share was worth 0.45 ether. This means that the bullish trader put in 0.4 ether and received 0.45 ether, a gain of 12.5%. We can refer back to the diagram of Case 2 to see how this works.
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In this last case, we will tighten the upper and lower boundaries of the market to $0.45 (upper bound) and $0.15 (lower bound), respectively. We can think of this as adding leverage to the market, as a rise in price now has a stronger effect on both "bullish" and "short" shares. As shown below:
In the graph above, if ZRX/USD goes from $0.3 to $0.45, the "call" share goes from 0.5 ether to 0.75 ether, but the "double call" share goes from 0.5 ether to 1 ether. The price movement of the underlying asset is amplified by the tightening of boundaries.
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Suppose a bullish trader is able to buy "call" shares in a new market (twice leveraged) for 0.5 ether or $0.3. And ZRX/USD rises by 10% to $0.33, then the bullish trader will receive 0.6 ether (60% of 0.15 to 0.45 at $0.33), which is 20% of the income, which is the double of the income of directly buying and holding ZRX times!
REP/USD 2019–01–19 5x leverage market: https://app.veil.co/market/rep-usd-2019-01-19-5x-2
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