Two thoughts on Augur Reputation

Augur is a decentralized prediction market that raised $5 million and is currently expected to release a final product before November, 2016 - but after an audit in July 2017.

The decentralized prediction market outcomes are based on reporting completed by Reputation holders. There are 11 million reputation tokens which were initially distributed in a crowdsale, but are now only available through peer to peer trading ( see /r/reptrader). Reputation holders are rewarded in bitcoin for providing reports on the outcomes of events (i.e. being an oracle).

Here I present two thoughts on the market forces related to Augur Reputation:

1. The value of Augur Reputation will always be relative to the local currency (USD), rather than bitcoin.

   Reputation rewards are paid proportionally to Reputation holders once every reporting period (6-8 weeks). These rewards are paid as a fraction of USD fees generated by Augur. Rewards will always be generated in USD - and the current "fair" scenario is that each Reputation will pay about $0.45 USD each year (for each$1 billion traded on Augur). The catch is that REP is traded in terms of bitcoin, currently about 0.015 BTC per Reputation, or $7.50 at today's rate. At that rate one could expect a full Return on Investment for USD in 16 years. The hitch is that Reputation is tied to the bitcoin exchange rate - which will either be significantly higher or non-existent in 16 years.

2. Augur Reputation will tend toward centralization, but it will remain decentralized.

   Eleven million Reputation were sold to 4851 holders. Every couple of weeks these reporters will need to log in and submit a report (as an oracle) to describe the outcome of events. In return, they will get a proportional share of the transaction fees paid to Augur. Suppose Augur has a transaction volume of $1 billion at a 1$0.05 USD for each report. Time is money, and a report will probably take about 15 minutes to complete. That 15 minutes is worth about $20 to me, so in order for it to be worth my while I would need to hold at least 400 Reputation tokens. (Note: This number fits my expectations, yours will vary!) If I hold less than 400 tokens it would be in my best interest to sell those tokens because a failure to report will result in a penalty (losing Reputation to accurate reporters). So let's say that I choose to hold those 400 tokens - now it's in my best interest to accumulate more tokens to increase the payment for time spent reporting. The outcome of this is that there aren't likely to be many people who hold less than a 200 or 300 Reputation tokens, and in all likelihood the tokens will gravitate toward larger sums as people who appreciate the payout maximize that payout.

   How will Reputation remain decentralized? It's simple - those token holders who hold a profitable amount will hold and improve their position as the smaller holders sell their holdings. I think it's likely that the eleven million tokens will centralize in the hands of about two thousand token holders, and they will occasionally be supplemented by parties who wish to make a substantial investment in Reputation. The moral of the story is that there simply won't be lots of people holding just a few Reputation tokens.