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# System prepended metadata

title: 'Futarchy: making decisions or preventing mistakes'

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# Futarchy: making decisions or preventing mistakes

[MetaDAO](https://themetadao.org) has been making waves on Solana recently by being the first implementation of [futarchy](https://en.wikipedia.org/wiki/Futarchy) on-chain as a way to govern a DAO. This experiment is at the frontier of digital governance and it's not yet clear how it will all unfold for the DAO and its token, META. To better understand how futarchy and MetaDAO works, you can watch this [video](https://www.youtube.com/watch?v=AbhzbPy-nJc) or read the [docs](https://themetadao.org/) and the rest of the write-up assumes you're familiar with it.

The first part exposes how open markets turn futarchies into  exit mechanisms, the second part explains flaws of timelocks, the most popular DAO exit mechanism. The third section explores the details of how futarchies act as exit mechanisms and the last part imagines ways for MetaDAO to evolve by embracing this exit mechanism paradigm.

Note that this are personal ideas and do not reflect the opinion of the MetaDAO or its members.

## Futarchy and arbitrages

At the time of writing, there are no public market for META but there inevitably will. Why wouldn't a trader arbitrage conditional markets against the public one, especially when the proposal is almost ready to be finalized? There is no reason for the prices of both conditional markets to be far from the actual price, as that would mean that people are paying for their preference to be enacted. 

This contradicts the promise of futarchy to make good governance profitable: benevolent participants expressing their interest need to pay to impose a market price while neutral and malicious participants can just arb the price back to its actual market value. Even for a good proposals that will certainly have a quantifiable positive effect on the DAO, governance participants have nothing to gain from increasing the conditional-on-pass market price when they can just bid on the open market.

However, futarchy really shines to prevent bad proposals from passing because the proposer would need to maintain a high bid on the conditional-on-pass market to ensure the proposal passes. This would provide the necessary liquidity for other participants to exit their position without affecting the market: if the proposal passes, they sold their tokens at roughly market price, if it doesn't they get to keep their position at current prices.

If the futarchy component is good to prevent malicious proposals from passing but passing good proposals introduces inefficiencies in the form of arbitrages, it raises a question: is futarchy a decision-making mechanism or a way to secure an exit for governance participants?


## Timelock as exit mechanisms

DAOs have been known have so far been known more for the drama they generate (e.g. [The DAO](https://en.wikipedia.org/wiki/The_DAO) or [ConstitutionDAO](https://www.constitutiondao.com/)) than any product or service they produce. Making decisions has always been a tough problem in human history, but decentralized and somewhat autonomous organizations are not exempt.

To mitigate the impact bad decisions can have on honest participants, DAOs have developed tools. A timelock is classic DAO component that adds a delay between the time a proposal is approved by governance and the time it can actually be executed. Timelocks have been extensively used in blockchains because they provide an opportunity for members who do not approve a proposal to leave by selling their stake before the proposal is executed.

The problem of timelocks is that they do not prevent the proposal from passing, they just delay it. Timelocks assume that a proposal that went through governance is approved: if majority token holders decide something, the rest has to follow. However, there has been several value-destructive proposals that members just had to helplessly watch pass as their money burns (e.g. Parrot.fi).

## Futarchy: Timelocks 2.0

Exiting during a timelock is not easy because it's limited by available liquidity, while the value at stake can be much larger (e.g. treasury assets). The futarchy component introduced by MetaDAO fixes that: malicious attackers have to bid on the conditiona-on-pass market enough for anyone to exit, which should require resources proportional to the what the attacker stands to gain (or what the DAO stands to lose), nullifying the benefit for the attacker.

Using futarchy this way changes the how users are expected to interact with conditional markets: instead of actively trying to trade to what they expect to be the fair price, they only need to step in when they disagree by putting an ask at the price that reflects the value of the DAO if the proposal passes. This might require adapting the current mechanism to pass proposals by default and block only those where the fail price is above some factor of the current pass price.

Moreover, this opens interactions from participants outside the DAO that can use the quote token (e.g. USDC) to bid, meaning that incorporating futarchy in a governance process enables the whole ecosystem to participate. Benevolent outsiders can bid on the fail market if the proposal is negative for them, gaining a larger stake in case it fails.

## A future for MetaDAO

This write-up has been presenting futarchy in DAOs as a mechanism to enable secure and fair exit for current governance participants, rather than a mechanism for explicitly governing the MetaDAO. If MetaDAO goes in this direction what happens?

By reducing the scope to which it is applied, futarchy would need to integrate with the rest of the DAO ecosystem. A rational first step would be to integrate with [Realms](https://app.realms.today/realms) as it would make usable by the largest number of DAOs.

As for MetaDAO itself, new areas of focus would arise:
- Continuing the work to make the mechanism as light, simple and easy to use.
- Work closely with Realms to offer a plug-and-play experience for DAOs choosing to protect their governance with market dynamics.
- Consulting and advising projects on their transition and their use of futarchy.
- Running market making strategies in partnership with DAOs using futarchy.

These tasks could position MetaDAO as a sort of [Gauntlet](https://www.gauntlet.xyz/) for Solana DAOs, by offer quantitative tools, simulation, strategies and automation to help organization operate.