& # 39; Augur Scam & # 39; Sparks Centralized Vs. Decentralized debate on Reddit

According to a reddit thread on March 19, traders on Augur, a decentralized oracle and peer-to-peer protocol for forecasting markets, are being scammed. The Reddit user claims that "some people" in the Augur community use a design element of the Augur protocol by deliberately creating invalid markets through ambiguous terms. This allows them to profit from gaming the system, making Augur "unusable".

Augur's co-founder, Joseph Krug, increased twitter to explain that, there is a problem, but the size of the effect on the network is trivialized. "Some people," as stated in the Reddit thread, is actually just one bad actor, according to Krug, and the defective element of the protocol will be resolved in Augur's updated v2. Krug said:

"Almost all of these deliberately confusing markets are created by one person, not by a lot of people. The activity in those markets is also by one person / address."

The very first response in the Reddit thread called for a "centralized system" as a possible solution to the problem, leading to a lengthy debate about the advantages and disadvantages of centralization versus decentralization – and both opponents and supporters weighed in.

How do forecast markets work?

Forecast markets are essentially groups of people speculating on the outcome of a future event. Traditionally, this is common in elections or sporting events, but in reality there is no limit to the situations in which forecasting markets can be applied. From speculating about whether certain shares will rise or fall in the future on a specific date, whether it will be sunny or rainy on this exact day next year, as long as the outcome results in a clear "or / or situation", a market can be made.

Market participants – or traders – will then buy a share in one of the two results. If they predict the correct outcome, they will receive a payout in proportion to the value of their share; if not, they lose their money. This is also the reason why forecast markets are often considered betting or gambling games. The main difference is that forecasting markets will rely on the wisdom of the crowd – the idea that large groups of people are collectively better informed than individual experts. The value of a bet in most cases reflects the chance that a outcome materializes. As a result, market analysts will quite often look at how a forecast market develops to form an opinion about that specific market outcome.

What is the difference with a decentralized forecasting market?

Apart from supposedly cheaper trading, the biggest difference in a decentralized forecasting market, such as Augur, is that the results are determined by the combination of an oracle and a decentralized reporter. The oracle is used to feed the information from the real world with the blockchain. Reporters then set tokens on an outcome to check if they match the real result.

In traditional markets, the results would be determined by an impartial, but centralized judge – which, ironically, Augur states in his white paper, "would oblige traders to trust the market manager not to steal money and solve markets correctly."

What is "the scam"?

Augur, who raised $ 5 million in her 2015 initial coin offering (ICO) and who Ethereum (ETH) co-founder Vitalik Buterin called out the "Uber for knowledge" has a mechanism called a validity bond, supposedly to encourage market makers to initiate markets on the basis of clearly defined events with objective, unambiguous results. The market creator places the validity bond and only receives their deposit if the outcome of the market is other than invalid. Validity bonds should increase if more than 1 percent of the finalized markets in the previous rate window were invalid. According to Krug, however, this system is currently not working properly:

"At the moment, the market invalidity band is not increasing as much as it should because of some mistake. So the more invalid markets there are, the market validity link is not increasing as much as it should."

When it is determined that a market is invalid for reporters because none of the results mentioned by the market creator are correct – or because the market formulation is ambiguous – traders who settle for the market contract receive an equal number of ETH for shares of each outcome.

Fraudsters deliberately create markets that they know lead to an invalid result, but carefully structure the wording so that it is not picked up by the majority of traders entering the market. That is why they are guaranteed to receive part of the total amount settled with the contracts, because it is redistributed for all market traders – regardless of their market position. However, they lose their tokens in the validity guarantee. But since the requirement for the validity bond does not increase as it should, it does not serve as an effective deterrent. Their share of the money that is redistributed to all traders in the event of an invalid market is potentially much higher than the money lost as part of the validity guarantee.

A recent report released by Binance Research, commissioned by the Binance cryptocurrency exchange, calls it a "design flaw attack" and continues with other issues that Augur believes are in its current iteration, including "low liquidity and participation rates, bare -bones usability functions and complex voting, settlement and decay mechanisms. "

Opinions on the Reddit debate were equally varied. Some users indicated that decentralized governance is often more difficult because there is no legal system to hold bad actors accountable, while others defend an opposing position and claim that centralized governance may be more difficult due to the lack of some error correction mechanism. Others pointed out that this is an inherent problem with any voting system and that it is not a matter of centralized versus decentralized. Such systems are played when there is sufficient incentive to do this, regardless of the type of network.

The big point of view is to see this as a learning opportunity to improve decentralized systems, according to one Reddit subscriber, RusticScentedMale:

"We are all here because we love decentralized systems. Denying all mistakes by being intentionally stupid simply robs us of the opportunity to improve and makes us stupid."

This is not the first time that Augur has evoked some controversy. In December 2016 this was the center of a hacking scandal and in May 2018 it was one of the four tokens removed from the Japanese crypto-exchange Coincheck to comply with the anti-terrorism and anti-money laundering anti-money laundering measures issued by the financial regulator of Japan. In July 2018 it emerged that the so-called "murder markets" were traded on the network, with users gambling on the death of public figures, including US President Donald Trump and the Berkshire Hathaway CEO, Warren Buffett.

And in January 2019, a founder of Tetras Capital cryptocurrency hedge fund, Alex Sunnarborg, said Augur significantly overestimated his use. In a weekly report, Augur claimed that $ 2 million was involved in bets that users had set up at that time, while Sunnarborg suggested via Twitter that it is less than $ 100,000:

"If we exclude markets that have ended, there is <$ 100k total money at stake in Augur."

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