The website Intrade gained almost mythical status in certain circles during the 2012 presidential election by letting users bet on how the elections would turn out. Gamblers thought it was fun, and economists marveled at how well the prediction market produced accurate forecasts. Intrade users traded contracts that paid out if a certain event happened in the future. If a $10 "Obama wins Ohio" contract was trading for $6, that meant the market gave him a 60 percent chance of taking the state. Intrade's users guessed right on 49 of 50 states. But Intrade's biggest success was followed almost immediately by a lawsuit from the U.S. Commodity Futures Trading Commission, which forced the company to close its doors in March 2013.
Jeremy Gardner, Augur's director of operations, compares Intrade to Napster, the music file-sharing service. Both Intrade and Napster processed transactions through a centralized server, and both were shut down. After Napster, music piracy moved to services based on BitTorrent, a type of decentralized software that exists on machines in millions of people's homes. It has bedeviled the entertainment industry ever since. A prediction market built the same way should be similarly immune to legal crackdowns. “What we’ve done is create a platform. We don’t own it, we don’t operate it, we don’t profit from it," says Gardner.
Truthcoin and Augur were both born out of the same research paper by Truthcoin's founder, Paul Sztorc. An early Intrade enthusiast, Sztorc had followed the site since he was a teenager and was working at Yale's department of economics around the time it was shuttered. Months later, he posted a paper online showing how to use the technology underlying Bitcoin to build a more durable prediction market. Sztorc’s system relied on its network of users to decide which markets to create and report on the outcome of events people were betting on.
At first, Sztorc didn’t want to build the technology himself. He saw what had happened to Intrade. “No one knows where the legality of this is, and I’ll just write the papers,” Sztorc said of his thinking at the time. “I can just be famous for it, but I don’t have to be involved.”
The paper created a bit of a buzz in Bitcoin circles, where a new plan for undermining centralized authority is always welcome. Augur were one of the groups that tried to execute the vision.Their efforts began building steam, drawing support from such people as Ron Bernstein, one of Intrade’s founders. “I’ve suffered over the past three or four years trying to build a future for Intrade, and these guys have figured it out,” he said.
At first, Sztorc was also on board and was helping advise Augur. But by this spring he had soured on the relationship. The conflict, according to both sides, was rooted in a technical dispute.
Truthcoin and Augur are trying to solve the same problem that Bitcoin solves: creating trustworthy transactions between people who don’t know one another, without relying on some central referee. Bitcoin does this by asking users to verify each transaction, which is then recorded in a single public record called the blockchain. Users who verify the transactions are rewarded with Bitcoin. In the blockchain version of a prediction market, referees are asked to verify the outcome of events. The technology looks at all the referees' answers and determines that the most popular answer is the correct one. Those referees who provided the consensus answer are rewarded.
Sztorc thought building a network like this could be done using an altered form of the technology that underlies Bitcoin; Augur wanted to use a new technology called Ethereum. Each side thought the other approach was fundamentally flawed. What followed was a textbook fight between coders. Soon Sztorc was accusing Augur of being “a way to scam money from gullible Ethereum users,” and Augur's Gardner was saying that Truthcoin was the “most manipulatable system possible.”
Each side is attracting the resources to prove that it's right. Augur recently raised nearly $5 million in a crowdfunding campaign. Sztorc’s project is being backed by prominent Bitcoin investor Roger Ver, mostly because he thinks it's the option more likely to actually work. Both Augur and Ethereum are untested technologies, said Ver, and “either one could have serious bugs that have serious problems."
The legal prospects for Truthcoin and Augur are also unclear. Augur has been talking to the Commodity Futures Trading Commission in hopes of getting a no-action letter, which would explicitly say that the company doesn’t need to register as a commodities market. The CFTC has given two such letters for political prediction markets run by academic institutions for research purposes. In 2012, it rejected a plan by the North American Derivatives Exchange to trade contracts based on political events. A CFTC spokesman declined to comment.
At the same time, Sztorc and Gardner both say they don’t feel like they really need the CFTC’s endorsement. The commission regulates commodities markets; they’re making software. “You can’t sue a gun manufacturer because someone uses their gun to kill someone,” said Gardner.
Nate Cardozo, a lawyer at the Electronic Frontier Foundation, says this reasoning may be shaky. “If a judge looks at your system and it looks like a gambling site or unregulated derivatives, a judge is probably going to treat it as what it looks like, all your cute arguments aside,” he said. The fact that Augur and Truthcoin are explicitly designed to facilitate betting on politics is not likely to help their cause.
A crackdown would be a problem for the people who built the trading platforms, but maybe not the platforms themselves. The only real way to crack down on software designed like this is to stop it before it's built. If either Augur or Truthcoin becomes the BitTorrent of prediction markets, suing the people who made them won't do a whole lot.
Correction: Corrects previous version of this story which misstated the name of Ron Bernstein.