Futarchy in Action: The Meta-DAO's Experiment in Market-Driven Governance

The problems with Democratic Governance

The shortcomings of the prevailing governance methods in global political and corporate institutions are widely recognized within the blockchain community, leading to the emergence of decentralized autonomous organizations. It is commonly held that today's governance frameworks have failed to solve the problem of the commons and remain outdated in the face of rapid advancements in information technology, which hold great potential to improve organizational governance.

Although the idea of DAOs was brought in to completely change how governance works, it has shown to have its own problems[2][3]. Some of these issues are surprisingly similar to the very governance methods it aims to replace. Even though DAOs hold more than 40 billion USD in value, they haven't been very successful in developing sophisticated systems for making decisions. The method they use for making decisions, which involves voting based on how many tokens a person has, seems to have flaws [5][8].

DAOs aim to embody democratic principles in governance, yet the application of democratic voting often results in centralization. A report from 2022 disclosed that fewer than 1% of all holders of DAO governance tokens wield 90% of the voting power.

Additionally, DAO decision-making faces several challenges, including initial centralization of voting power, low voter turnout or apathy, a lack of transparency and accountability, and a misalignment between individual and institutional needs[9][10], among others. While various governance models seek to address these shortcomings, this article will focus on Futarchy.

What is a Futarchy?

Futarchy was initially proposed by economist Robin Hanson to address the shortcomings of traditional democracy. It has since then gained traction in the blockchain community through blog posts by notable figures such as Vitalik Buterin and Ralph Merkle. At its core, Futarchy suggests moving away from traditional appointed decision-makers. Instead, it incentivizes individuals to use their own analysis and judgment to predict the most beneficial policies for an organization and to back their predictions in a prediction market. The collective wisdom gathered from the market's participants is then utilized to arrive at final decisions.

Vote Values, Bet Beliefs: Futarchy distinguishes between choosing an organization's core values and the practical decisions on achieving or upholding those values.

In a Futarchy system, we judge the value of a policy by a pre-defined welfare measure, a specific indicator that reflects the overall well-being of the organization. Decisions favor policies that boost this welfare measure.

For any proposal, we set up two prediction markets: one if it's accepted, another if it's rejected, each holding a unique asset. If the proposal passes, we cancel all bets in the 'rejection' market. Meanwhile, in the 'acceptance' market, traders get a payout per token after a while, based on a success metric we choose. If the proposal is turned down, it's the other way around. These markets run for a set time, and in the end, we go with the option that has the higher token price on average. Take, for instance, a company debating whether to run a certain ad. Here's how Futarchy would tackle this:

• First, set a welfare measure, such as the company's stock price improvement.
• Then, establish two trading markets for the company's stock: one assuming the ad is published, and another assuming it isn't.
• Traders bet on the outcome they believe will benefit the company long-term: buying stock in the 'publish ad' market if they support the ad, and selling in the 'don't publish ad' market if they don't.
• After a set trading period, compare the price of the stock in both markets. Invest in the ad if the 'publish ad' market shows a higher price, otherwise, don't.
• Any trades in the less successful market are then reverted, ensuring that only the beneficial decision is finalized.

In this example, if the prediction market favors running the ad and it subsequently proves to increase the stock price, those who supported this outcome through their trades in the 'publish ad' market will see financial gains as the value of their long positions rises. Conversely, participants who bet against the ad by investing in the 'don't publish ad' market will face financial losses.

In a futarchy, the decision for the proposal is determined by the last market standing. If the 'accept' market outperforms the 'reject' market, the proposal is accepted. If the 'reject' market outperforms the 'accept' market, the proposal is rejected.

Over time, this approach tends to favor those who are good at predicting what will work best for the company, allowing them to build up wealth and influence. It not only rewards their insight but also incentivizes a deeper understanding and analysis of the organization's direction and the potential impact of various policies. Essentially, Futarchy aims to align personal financial gains with the company's overall success, ensuring that decision-making progressively evolves to reflect the most informed and beneficial choices for its future.

The Argument For: Benefits of a Futarchy

The benefits of this system of decision-making are numerous. Firstly, it fixes the problem of inadequate voter-participation and irrational decision-making by providing incentives for individuals to actively probe for information that gives them an edge in the markets.

Futarchy introduces individual responsibility for obvious reasons: if you make good bets, you get more coins, and if you make bad bets you lose your coins — Vitalik Buterin[8]

Secondly, markets are hard to manipulate. A common criticism of Futarchy is that of market manipulation. However, when compared to alternatives like token-based voting, even deep-pocketed individuals will have trouble moving a decision in the wrong direction because doing so would open opportunities to trade against them and make a profit at their expense, correcting the mispricing in the process. As long as those aiming to profit by stopping manipulation have more market influence than the manipulator, the honest players will come out on top, taking a significant amount of money from the manipulator in the process.

The above critique and its counterargument emerged during a debate between Robin Hanson and Mencius Moldbug[32]. Hanson concluded that undermining a futarchy would necessitate a 51% attack.

Thirdly, taking authority over decisions from elected representatives and giving it to the markets removes the lack-of-accountability problem. The principal-agent problem is avoided, where representatives put their interests ahead of the group's. Decisions are based purely on merit, specifically on improving the welfare measure; thus, those who advocate for ineffective or corrupt policies face economic repercussions.

Incorporating prediction markets into governance allows participants to make decisions informed by the collective intelligence of the community. This approach fosters a more knowledgeable, engaged, and resilient community, where decisions are not only made but are also deeply comprehended and actively influenced by its members[24]. Additionally, markets naturally reward better predictors over time, as successful forecasts directly boost a trader's capital and enhance their capacity to attract investment. This cycle of success leads to increasingly accurate predictions and improved outcomes.

Futarchy isn't perfect, but then again, nothing is. Many criticisms of this model exist, and debates have been had (and are still being had) about its feasibility in actual governance [33][34][35].

The Meta-DAO

Futarchy was first thought up for governments, but it turns out it's even better for DAOs. The adaptation to DAOs is more seamless compared to national governments, largely due to the complex challenge governments face in reaching a consensus on what values to optimize. In contrast, a DAO can have a straightforward optimization goal, such as enhancing the value of its token. This makes futarchy particularly apt for decentralized organizations.

For DAOs to function effectively, they require a governance model that aligns with their decentralized nature.

While other organizations have employed the use of prediction markets in their decision-making, the Meta-DAO is the first organization that's truly governed by a futarchy. The Meta-DAO represents a new approach to governance, one that aims to spearhead the advent of a new era of truly decentralized decision-making. To tackle one of futarchy's limitations—that it is more suitable for broad decisions rather than detailed tasks—the Meta-DAO innovatively segments itself into distinct members. Each of these members is its own single-product profit-seeking entity, equipped with its own treasury and specific token.

“The Meta-DAO is a collection of intellectuals and free-thinkers that aims to fundamentally reform human coordination by proving a system called futarchy” [image credits]

The Meta-DAO is built on the Solana blockchain and utilizes the OpenBook v2 program's central limit orderbook. It is primarily composed of 3 open-source programs: a conditional vault program, a Time-Weighted Average Price(TWAP) program, and autocrat, the program that orchestrates futarchy. Its token is called META.

Its approach to futarchy[23] is the classic one described above involving two conditional markets, and allows for trading META/USDC. Since blockchain transactions are immutable, conditional markets are implemented using conditional tokens[21].

Conditional tokens are a type of digital asset that holders can exchange for other tokens if certain conditions are met. These conditions are usually verified through smart contracts, which also manage the transfer of the underlying tokens. Conditional markets facilitate the trading of these conditional tokens. For a deeper dive into how conditional markets work and their broader implications, the Meta-DAO manifesto is a great resource.

For a Meta-DAO proposal, pMETA and pUSDC are used to trade the pass market, while fMETA and fUSDC are used to trade the fail market. These conditional tokens are minted by depositing either $META or $USDC, but have no immediate value on mint. They are locked up but will be redeemable for an underlying token after the proposal is finalized. In the Meta-DAO, the trading time-period for the conditional markets is usually 5 days, and a difference of >5% between the pass market and fail market's META's Time-Weighted average price(TWAP) is required for the proposal to pass.

The story of Meta-DAO's proposal 3 as told by MetaProph3t, founder of the Meta-DAO.

Typical flow of proposals in the Meta-DAO. When a proposal ends, the autocrat program checks if the Time-weighted Average Price(TWAP) of the pass market is higher than the TWAP of the fail market and determines if the proposal passed or failed.

Participating in Futarchy within the Meta-DAO is open to anyone interested, offering a variety of roles to dive into. You could be an analyst, engaging with the markets to help steer the Meta-DAO's course; an entrepreneur, spearheading projects and rallying teams to bring ideas to life; or a cyber-agent, focused on designing, developing, and promoting the DAO's products. For those looking to get a comprehensive understanding of how to get involved, the Meta-DAO documentation is the perfect starting point. Additionally, there's a Dune dashboard available for accessing key information and metrics at a glance, and a Linktree that serves as a gateway to everything related to the Meta-DAO. There's the Twitter account that is a useful source of information on the Meta-DAO, and the Discord channel where you can participate in Futarchy today by discussing proposals or asking questions.

As an example, let's look at how to trade in the prediction markets for proposal 10, which is currently active as at the time of writing. Here is a post that describes proposal 10 and its goals. Creating a detailed document like this is a crucial step in creating a proposal within the Meta-DAO framework. While I have my own views on this proposal, which I'll share in a follow-up post, the beauty of Futarchy lies in its openness to diverse opinions. If you see things differently, you're invited to join in by placing trades that mirror your own analysis. This flexible and engaging system welcomes various insights and forecasts, helping to guide the Meta-DAO's path forward.

Proposal 10: Increase META Liquidity by Dutch Auction[36][37].

On the left side of the proposal page we can spend X amount USDC to mint X pUSDC and X fUSDC tokens and Y amount of META to mint Y pMETA and Y fMETA tokens. We then have the following options:

• Long pMETA with the pass market's buy option.
• Short pMETA with the pass market's sell option.
• Long fMETA with the fail market's buy option.
• Short pMETA with the fail market's sell option.

The left side of the proposal page displays the remaining time for the proposal. Once time runs out and all the trades in one market are reverted, we can exchange our conditional tokens back into the original tokens and realize a profit or loss based on the trades we made in the other before the closure.

What next? Proposal X and the EndGame

The Meta-DAO is an experiment to prove that Futarchy works. Its aim is to establish a model for a more prosperous society. The next step in bringing about that utopia is proposal X by 0xNallok, a draft proposal that aims to introduce the Meta-DAO and the concept of Futarchy to other DAOs on Solana. From my perspective, this isn't the last.

"The Meta-DAO is a new, alternative institution for a productive society" — MetaProph3t [38]

Endgame: The advent of the Futarchists.

And there we have it; we've just taken a deep dive into Futarchy, exploring how it leverages market trades to shape decisions in what might be the first-ever organization truly steered by market principles. The Meta-DAO is an insanely ambitious project. Should it succeed, it has the potential to change the mechanics of blockchain governance and organizational politics forever. Right now, the signs are very promising.

References

• https://vitalik.eth.limo/general/2021/08/16/voting3.html
• https://blog.ethereum.org/2014/05/06/daos-dacs-das-and-more-an-incomplete-terminology-guide
• https://blog.ethereum.org/2014/08/21/introduction-futarchy
• https://docs.themetadao.org
• https://blog.themetadao.org/
• https://github.com/metaDAOproject/
• http://mason.gmu.edu/~rhanson/futarchy.html
• https://ralphmerkle.com/papers/DAOdemocracyDraft.pdf
• https://docs.zeitgeist.pm/docs/learn/futarchy
• https://polkadot.polkassembly.io/post/2122
• https://www.coindesk.com/tech/2020/09/21/daos-will-never-govern-the-world-at-this-pace/
• https://forkast.news/why-dao-voting-is-problematic/
• https://cointelegraph.com/news/finding-answers-in-the-bitcoin-block-size-debate-using-prediction-markets
• The Hidden Shortcomings of (D)AOs – An Empirical Study of On-Chain Governance
• https://www.chainalysis.com/blog/web3-daos-2022/
• https://thedefiant.io/the-problem-with-voting-in-daos
• https://www.newyorker.com/magazine/2009/10/05/rational-irrationality
• The Governance of Decentralized Autonomous Organizations: A Study of Contributors’ Influence, Networks, and Shifts in Voting Power
• https://deepdao.io/organizations
• https://docs.gnosis.io/conditionaltokens/docs/introduction1
• https://archive.devcon.org/archive/watch/5/conditional-tokens-road-to-futarchy/?tab=YouTube