A Matter of Incentive
somewhat radical notion of decentralized organization is exemplified in the
prediction market Augur, which is currently in
beta testing. The platform is derived from the idea that the combined
predictions of the crowd will be closer to the actual outcome of an event than
the prediction made by any single individual.
result is an efficient forecasting tool and correlated opportunities for
real-money trading. Because Augur is founded on a belief in the “wisdom of the
crowd,” the platform depends on its individual members to make good judgments.
To say it another way, Augur’s forecasting tool would lose value if a
significant portion of its members used poor judgment when voting on potential
outcomes. So, how does Augur ensure its members behave in a manner that
supports the overall organization? The short answer: game theory.
theory predicts that rational actors tend to make choices that result in higher
rewards and less punishment. As described in Augur’s white paper, “Those who forecast the outcome
correctly win money, and those who forecast incorrectly lose money.”
accordance with game theory principles, if an Augur speculator fails to guess
an outcome correctly, due to either carelessness or bad intent, they suffer economic
consequences (i.e., punishment). On the other hand, if the speculator guesses
an outcome correctly, they win economic rewards.
of relying on a centralized system to determine the correct outcome of events,
Augur again relies on members of its community, called “reporters.” To use an
example: if the question was, “Will Obama win the presidency in 2012?” reporters
would note an outcome of “yes” once the event occurred. The consensus of the reporters’
findings is considered to be the actual outcome of the event. Like the built-in
incentives encouraging good behavior from speculators, reporters earn rewards
in the form of Augur’s native token, the reputation (REP), for noting true
outcomes, and lose REP for noting false outcomes.
most blockchain startups are not pure DAOs, many deploy the principles of game
theory to endow their members with extraordinary decision-making capabilities. Platforms
such as Steemit, Storj and Viuly channel the principles
of game theory to incentivize members to act in ways that benefit the entire network,
and dissuade detrimental and malicious behavior. In many token-based platforms,
holders are vested in the success of the network because their tokens increase
in value when the network thrives, and decrease in value when the network
a grand demonstration of confidence, Augur may soon invite its members to
bet for or against its own success by presenting them with the provocative question
“Will Augur be hacked?”
Augur’s sensational test market succeeds, both government and corporate
entities would do well to take a hard look at the value of DAOs and the role
blockchain technology plays in incentivizing productive behavior throughout an
course, legacy institutions will have to think long and hard about how best to
apply the principles being leveraged by Augur for their own purposes. The
application of game theory through a decentralized, autonomous agent for
financial institutions, in which price speculation is already a regular
practice, seems clear. Whether governments could find a way to automate and
decentralize their voting or other processes is a thornier issue.