Prediction markets make use of the concept called the Wisdom of Crowds to arrive at market driven forecasts which feature a high degree of success.
Using Augur, participants buy and sell shares in the outcomes of everything from elections to the destruction of our solar system. The current market price of a share is an estimate of the probability of an event occurring. Imagine a weather report, but for everything including real world events, trends, opportunities, and threats.
If there’s a prediction market on whether Donald Trump will win the 2016 election, a share of yes that costs60 cents means he has a 60% chance of winning according to the market. If one’s right they’ll get $1 per share back. A centralized market, the Iowa Electronic Markets (IEM), allows its users to wager on the outcomes of U.S. political events. Per the IEM, it typically predicts elections within one percent, more accurate than polls or expert opinions. Since 1988, it has also correctly predicted the outcome of every U.S. presidential election. Augur is built on Ethereum, a decentralized blockchain network similar to the Bitcoin network.
Utilizing this technology, its markets can effectively eliminate counterparty risk and centralized servers while creating a global market by employing cryptocurrencies such as bitcoin. On Augur, users have the power to create a prediction market on any subject they’re interested in. Market makers receive half the trading fees from markets. After an event occurs, the correct outcome (the one that actually happened, say who won an election) needs to be selected to pay out wagerers in the market. Instead of relying on third parties, Augur uses the crowd to report on these outcomes. Reporters get half the trading fees too (based on how much reputation they own, which is being sold in Augur’s crowdfunding campaign). Any reporters who disagree with the consensus lose reputation.