Predictions have long been a stalwart of the economy, the political situation and pretty much everything else.

As long ago as the late 19th century, people would bet on political elections outside of the New York Stock Exchange. Newspapers would then essentially crowd source opinion and make predictions in their polls.

Since then, it’s the economists that have been hard at work predicting the future. Using the noise of the crowds on the internet, many other sectors have joined the prediction market. Everything from who’s going to be President to stock market prices are predicted constantly by people using data sourced from other people’s attitudes.

The wisdom of crowds

The wisdom of crowds has given rise to a new, very 21st century way of predicting the future: the blockchain. We all know that the blockchain acts as a global ledger to record Bitcoin transactions. Crucially, it isn’t controlled by any central entity, allowing it to grow organically in real time. It’s also moved away from exclusive Bitcoin use – new services are being built on its back and potentially changing everything.

It’s the openness of blockchain that could deliver more powerful predictions than ever before. Online communities and start ups are grabbing the concept and running with it.

Augur and accessibility

One of these you’ll have heard about is Joey Krug. He’s part of the team behind behind Augur, the San-Francisco based non-profit organisation that’s working on building a service using the Ethereum blockchain.

Their aim is to create a service that is accessible to anyone who wants to launch or build on one of these markets. They’ll have access to a huge amount of people and the regulators will be happy. Blockchain doesn’t care where you’re from. All kinds of people can trade who couldn’t do so before. It’s the perfect tool for a market in predictions.

The problem is with media polls is that there is no accountability if they get it wrong. The predictions are often wrong, but at little cost to those who make them. Prediction markets are driven by counterintuitive dynamics and could eventually form much more accurate predictions because of this.

What is a prediction market?

Think stock market but for predictions. So, you’re not buying stock in companies, you’re buying in stock in what might happen. Take an example like the Presidential election. The prediction market will give you the chance to buy into Candidate A winning or losing. If your prediction turns out to be correct then you get paid. If not, then you leave with nothing.

In the same way as the stock market, you can sell your ‘prediction’ shares. You want to buy low and sell high, just the same. Therefore, if enough people trade in predictions, eventually there will be enough to affect the trading price, which will form the production.

The theory goes that the more accurate the information, the more money you’ll bet. A service such as Augur takes this dynamic further by removing betting limits. Using a blockchain, more people can be brought in and more money made. If enough people bet digital currency on an increasing number of outcomes then the market will become an accurate way to predict the future.

Accountability and blockchain

To pay out, the market has to have the facts on what happened. Who did become President, for example?

Augur uses its blockchain to record outcomes as soon as they happen. It’s a way of cementing the truth for posterity, albeit digitally. As Richard Craib, founder of Numerai, a blockchain hedge fund that invested in Augur, says: “It’s not just about predicting the future. It’s about knowing what’s happening in the present.”

A ‘truth’ blockchain

With Augur, when one group joins a predictions market and trades on an outcome, another group of people will be paid by Augur to verify the truth of what actually happened.

This second group isn’t paid in a flat fee, however. Augur has its own cryptocurrency (Rep), which is there to encourage people to tell the truth. If they don’t, they lose money. Rep is there to track the person’s reputation, not to buy and sell with.

People will bet their Rep that they are genuinely reporting facts and if most others agree then they get their tokens back and receive payment in cash. This arrangement of coercing alignment of the overall aims of users is becoming more common with these business services that are built on top of a blockchain.

It’s a system that’s potentially open to bribery, but generally if everyone is moving towards the truth then everyone else has the same incentive to. The reporting engine developed by Augur could potentially become the basis for other applications that use real world data.

Digital market for truth and facts

The reporting engine premise could automate financial contracts, for example. But further than that, if real scalability can be achieved, then the possibilities are extremely interesting.

For example, if a major news story breaks, a blockchain could become the ‘bible’ of truth as Rep-funded traders verify facts. With the disturbing rise of fake news and no distinct line between satire, hoax news and the truth, this idea of a digital trading market for facts is a fascinating premise.

As it stands, the reporting engine is unproven as it doesn’t have enough people participating. In addition, Ethereum tokens (used to trade in these prediction markets) aren’t stable. But sometimes, the biggest, boldest ideas make the biggest, boldest changes to our future.

Keep an eye on it.