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The Most Exciting Experiment In Crypto: Futarchy | Robin Hanson & Proph3t

By Lightspeed

Published on 2024-03-22

Discover how Futarchy, implemented by MetaDAO on Solana, could revolutionize DAO governance through prediction markets and decision-making algorithms.

The notes below are AI generated and may not be 100% accurate. Watch the video to be sure!

What is Futarchy?

Futarchy is a novel governance system that uses speculative markets as an information aggregation mechanism to address the failures of traditional democratic decision-making processes. Developed by economist Robin Hanson, Futarchy aims to create a market-driven approach to social governance. This innovative concept has now found its way into the world of cryptocurrency through MetaDAO, a project built on the Solana blockchain that is bringing Futarchy from theory into reality.

The Origins of Futarchy

Robin Hanson, an economist at George Mason University, first conceived the idea of Futarchy over 25 years ago. Hanson's journey began with his work in the philosophy of science, where he interacted with early pioneers of the web. Recognizing the potential for information aggregation through betting markets, Hanson started exploring how these markets could be used to create consensus on key issues.

Over the next decade, Hanson refined his ideas and realized that the most valuable applications of prediction markets would be when they were closest to decisions. This led to the development of what he calls "decision markets" - markets that predict outcomes conditional on specific decisions being made.

How Futarchy Works

The key idea behind Futarchy is for a governance community to agree on an outcome measure, such as stock price for a company or the number of attendees for an event. Policies are then proposed, and markets are created to predict the expected outcome if each policy is adopted. The community then adopts the policies that the markets expect to produce the best outcomes.

Hanson explains the process using a hypothetical example of a company deciding whether to keep or replace its CEO:

"We're going to make conditional markets where you make trade of stock for cash, but that trade is called off if the condition isn't met. And so we'll make the market where you trade stock for cash conditional and the CEO staying in office through the end of the quarter and conditional and the CEO not staying in office through the end of the quarter."

By comparing the prices in these two markets, the company can determine whether speculators believe the company would be worth more with or without the current CEO, and make their decision accordingly.

MetaDAO: Bringing Futarchy to Life on Solana

While Futarchy remained largely theoretical for many years, it has now found a practical implementation through MetaDAO, a project built on the Solana blockchain. Founded by Proph3t, MetaDAO aims to be the first real-world application of Futarchy in cryptocurrency governance.

Proph3t explains the motivation behind MetaDAO: "I used to work for Vetsu and then I worked for DeFi DAOs and with both of those was kind of just, yeah, disappointed with the way that the organizations worked and that there would often be decisions that were made, not in the interest of the overall organization, but in the interest of some policy within that organization."

The Technical Implementation of MetaDAO

MetaDAO's implementation of Futarchy on Solana involves a complex system of conditional tokens and markets. Every decision in MetaDAO starts with a proposal, which contains a Solana Virtual Machine instruction, typically involving the movement of funds.

When a proposal is published, two open book markets are created: a pass market and a fail market. Traders can then use conditional tokens to place bets on the outcome of the proposal. Proph3t explains:

"You have a pass market and a fail market. And in those markets, you trade conditional tokens. So like, yeah, say, and the markets are for the native meta token. And so say, in this proposal, I think that meta would be worth like $100, and I would be willing to buy, if it passed at $100."

The markets run for five days, during which a time-weighted average price is collected for both the pass and fail markets. At the end of the period, the on-chain program automatically executes the proposal based on which price is higher.

Advantages of Futarchy in DAO Governance

Futarchy offers several potential advantages over traditional DAO governance models:

  1. Information Aggregation: By leveraging prediction markets, Futarchy can efficiently aggregate information from many participants.

  2. Incentive Alignment: Traders are incentivized to make accurate predictions, as they stand to profit from correct bets.

  3. Reduced Political Influence: Decisions are based on market predictions rather than political maneuvering.

  4. Flexibility: The system can be applied to various types of decisions and organizations.

  5. Transparency: All trades and predictions are recorded on-chain, providing full transparency.

Challenges and Criticisms of Futarchy

Despite its potential, Futarchy faces several challenges and criticisms:

  1. Complexity: The system can be difficult for average users to understand and participate in.

  2. Liquidity Fragmentation: Running multiple proposals simultaneously can fragment liquidity across markets.

  3. Manipulation Concerns: There are concerns about wealthy participants manipulating markets.

  4. Time Constraints: Balancing the need for thorough consideration of proposals with the desire for quick decision-making can be challenging.

  5. Applicability: Some decisions may not have a clear, measurable impact on the chosen outcome metric.

Real-World Examples of Futarchy in Action

MetaDAO has already conducted several votes using its Futarchy system, providing valuable insights into how the system works in practice. One notable example was a proposal by Ben Hawkins, who works for the Solana Foundation:

"He created a similar proposal to buy $50,000 worth of meta from the treasury. And his, he spent, because like a lot of people when they hear first about feature of you, they're like, okay, this is just voting by rich people, right? Like rich people can obviously manipulate this. He spent, so his proposal was to buy 50K worth of meta. He spent $250,000 in the past markets trying to bid up the past price so that the market would pass so that the proposal would pass. And it failed."

This example demonstrated the system's resilience against manipulation attempts, as other traders were able to counteract Hawkins' efforts to artificially inflate the price.

The Future of Futarchy and MetaDAO

While MetaDAO is still in its early stages, both Hanson and Proph3t see great potential for Futarchy in the future of organizational governance. Proph3t envisions expanding MetaDAO's offerings to include "Futarchy as a Service," allowing other DAOs and organizations to implement Futarchy-based governance systems.

Hanson emphasizes the importance of learning from this real-world implementation: "The main thing I hope to see from this trial is hints about what the problems are. You know, most innovation is, you know, a simple, elegant idea is mixed with lots of messy details to make it work. And what we're missing is enough experience to work out those messy details."

Potential Applications Beyond Cryptocurrency

While MetaDAO is focused on implementing Futarchy in the context of cryptocurrency governance, the concept has potential applications far beyond this realm. Hanson suggests that Futarchy could be particularly valuable in areas where there's a strong perception that politics negatively impacts decision-making:

"This is going to be the most promising in areas where there's a strong perception that politics just messes stuff up. Like for decisions are difficult where they don't have good local metrics where politics and personality overwhelms things. If you could find those industries, those places where everybody sort of sees that's a big problem and then you introduce Futarchy there and then it has big wins."

The Role of Solana in Enabling Futarchy

The implementation of Futarchy through MetaDAO has been made possible by the Solana blockchain's unique capabilities. Solana's high throughput and low transaction costs allow for the creation and management of complex prediction markets in a way that would be prohibitively expensive on other blockchains.

Moreover, Solana's programmability through the Solana Virtual Machine (SVM) enables the creation of sophisticated on-chain governance mechanisms. This combination of speed, cost-effectiveness, and programmability makes Solana an ideal platform for experimenting with novel governance systems like Futarchy.

VOTA: A Vote Market on Solana

In addition to MetaDAO's core Futarchy implementation, the project is also developing VOTA, a vote market on Solana. Proph3t explains:

"VOTA is just a, I mean, it's kind of coincidental that it's related to governance. It's just in Ethereum, there are these platforms that allow you to trade your votes from on it. Vodium, hidden hands. There's a few others too that I can't remember else to talk to my head. And that's a pretty good business. I think Vodium did like $50 million in revenue in 2021. And so yeah, we're building that before Solana."

VOTA will initially focus on allowing users to trade their VE Saber votes for money. This development highlights another way in which MetaDAO is pushing the boundaries of governance innovation on Solana.

Addressing Liquidity Fragmentation

One of the challenges faced by Futarchy systems is the potential for liquidity fragmentation when multiple proposals are running simultaneously. Proph3t acknowledges this issue and hints at potential solutions:

"Yeah, so fragments liquidity, unfortunately, especially today. I don't want to get too much in technical nuance because yeah, I can talk all days about like micro optimisations we can make with future key. But essentially we have something coming down the pipeline that will help. Disfragment that liquidity, the ability to merge conditional tokens."

This ongoing work to optimize liquidity management demonstrates MetaDAO's commitment to refining and improving the Futarchy system as it gains real-world usage.

The Importance of Proposal Review Time

While discussing the optimal duration for proposal voting periods, Hanson emphasizes the importance of allowing sufficient time for proposal review:

"I mean, I would think the key thing is the period that people have to review and consider a proposal before they start trading on it. The trading period doesn't have to be very long as long as people coordinate to just show up then. The key thing is if you post a proposal and 15 minutes later have the vote on it, you're much more at risk of bad proposals slipping in because people not only need to read it themselves and think about it, they need to discuss it with people, etc."

This insight highlights the need to balance the desire for quick decision-making with the necessity of thorough proposal evaluation in Futarchy systems.

Scaling Futarchy Within Organizations

As MetaDAO continues to develop and refine its Futarchy implementation, questions arise about how to scale the system within larger organizations. Hanson suggests that different departments or divisions within an organization could have their own Futarchy markets with specific metrics:

"So then it makes more sense for, say, if you have a shipping department, decisions that you have a metric for the shipping department and you're estimating, you know, policies conditional on that metric, which is more targeted to that part of the organization, which then policies have a bigger impact on."

This approach could allow for more granular decision-making while still maintaining the overall benefits of the Futarchy system.

The Potential for AI in Futarchy

Looking to the future, Proph3t speculates on the potential role of artificial intelligence in Futarchy systems:

"I would eventually maybe like five years, like let's just say this is successful or future to general successful and there are pay eyes that are like there are people that use AI specifically to trade the target markets. You would expect those a eyes to be better traders than humans because they're like less biased and can aggregate more information or whatnot. And so if that's the case, you could even get proposals down to like 15 minutes or something, right?"

This integration of AI could potentially lead to even more efficient and rapid decision-making processes within Futarchy systems.

Measuring Success for Futarchy and MetaDAO

When asked about how he would define success for Futarchy and MetaDAO, Proph3t emphasizes both the spread of Futarchy as a concept and its practical effectiveness:

"What defines success for me is, yes, spreading Futarchy, Futarchy actually working. Like if we could run side by side trials, or maybe we can't do that, but if we could at least get a correlation, or like it shows that down is we adopt Futarchy perform better on X metric, Y metric and whatnot. I think that would be success for me."

This focus on measurable outcomes aligns with the core principles of Futarchy itself, emphasizing the importance of data-driven decision-making.

The Potential Impact on Traditional Governance

While the current focus of MetaDAO and Futarchy is on cryptocurrency governance, the potential implications for traditional forms of governance are significant. If Futarchy proves successful in the context of DAOs and other crypto organizations, it could potentially be adapted for use in corporate governance, non-profit management, or even aspects of governmental decision-making.

Hanson notes the historical significance of developing a new form of governance: "This is a real, credible shot at making history, right? It's not very often that a new form of governance came on. And that's not something you can say about many things and institutions."

The Role of Community in Futarchy's Success

For Futarchy to succeed, it requires active participation from a diverse community of traders and stakeholders. The system relies on the collective wisdom and information of its participants to make accurate predictions and informed decisions. As such, fostering an engaged and knowledgeable community around Futarchy projects like MetaDAO is crucial for their long-term success.

Challenges in Adoption and User Experience

One of the key challenges facing Futarchy and projects like MetaDAO is the complexity of the system from a user perspective. For Futarchy to gain widespread adoption, it will be necessary to develop user-friendly interfaces and educational resources that make it accessible to a broader audience.

Proph3t acknowledges this challenge: "I don't yet have like a solid rigorous mental model of how much liquidity is needed for a given market because that would be what would decide, what decides like how much you, how many proposals you can run or once. But hopefully we can figure that out with time."

The Interplay Between Futarchy and Traditional Governance

As Futarchy systems like MetaDAO continue to develop, it's likely that hybrid models combining elements of traditional governance with Futarchy will emerge. These hybrid systems could potentially leverage the strengths of both approaches, using Futarchy for certain types of decisions while retaining traditional voting or representative systems for others.

The Importance of Experimentation and Iteration

Both Hanson and Proph3t emphasize the importance of ongoing experimentation and iteration in the development of Futarchy systems. Hanson notes:

"I'm very conscious that you can kill things by trying to, you know, require too much complexity too soon. So if they can handle their simple approach for a while, they should probably keep things simple."

This approach of starting simple and gradually increasing complexity based on real-world feedback is crucial for the successful development and adoption of Futarchy.

The Potential for Futarchy in Grant Allocation

One specific area where Futarchy could have a significant impact is in the allocation of grants within the cryptocurrency ecosystem. Proph3t suggests:

"Well, one thing that we've talked about internally is like if a DAO doesn't want to adopt a full Futarchy, maybe it could set up grants, a grant style that's governed by Futarchy. That really is common on Solana, but on Ethereum, and Ethereum, do you find the way it works is like every project will allocate a bunch of money to grants that build to people who build stuff that make the DAO like more valuable."

This targeted application of Futarchy could provide a lower-risk way for organizations to experiment with the system while potentially improving the efficiency of grant allocation processes.

The Role of Volatility in Futarchy Markets

One challenge facing Futarchy systems in the cryptocurrency context is the high volatility of token prices. Proph3t notes that this volatility can impact the effectiveness of longer proposal periods:

"One thing I'll also add on the long proposal times is the longer the proposal, it decreases the incentive to liquidity. So like say you have a very volatile spot market and you have a five day proposal time, then I don't really, like, that, like, let's say a proposal would add a 5% of the value of the DAO, then a lot of people won't want to trade because they're like, okay, this 5% difference is going to be negligible relative to, like, the token doubling or having over the same period."

Addressing this issue may require innovative approaches to market design and proposal structuring.

The Potential for Futarchy in Solving DAO Governance Issues

The implementation of Futarchy through projects like MetaDAO comes at a crucial time for the cryptocurrency industry, particularly in the realm of DAO governance. Proph3t highlights some of the governance issues that have plagued DAOs:

"If you want to look for the stinkiest, stinkiest possible organizations and Steve Five DAOs, like literally parent finance, which some of the listeners will know about was this a lot of the deep five down where people invested in an initial point offering and they had $80 million. And then like a year later, they decided to shut down, but instead of returning the money to the investors, I think 90% of it went to the team and then they just left because they voted for that."

Futarchy could potentially address these issues by creating more transparent, market-driven decision-making processes that align incentives more effectively.

The Importance of Solana's Infrastructure

The implementation of complex governance systems like Futarchy relies heavily on the underlying blockchain infrastructure. Solana's high-throughput, low-cost transactions, and powerful virtual machine capabilities make it an ideal platform for these experiments. As Futarchy and other innovative governance models continue to develop, Solana's role in enabling these systems could become increasingly significant.

Conclusion: The Future of Governance on Solana

The development of Futarchy through projects like MetaDAO represents a significant step forward in the evolution of blockchain governance. By leveraging Solana's advanced capabilities, these projects are pushing the boundaries of what's possible in decentralized decision-making.

As Hanson notes, "If we get enough trials, we'll start to be able to see that this does help." The ongoing experiments with Futarchy on Solana are not just about improving cryptocurrency governance – they have the potential to revolutionize decision-making processes across a wide range of organizations and industries.

While challenges remain, the work being done by projects like MetaDAO on Solana is laying the groundwork for a future where governance can be more transparent, efficient, and aligned with the collective interests of stakeholders. As these systems continue to evolve and mature, they may well reshape our understanding of how decisions can and should be made in the digital age.

Facts + Figures

  • Futarchy was conceived by economist Robin Hanson over 25 years ago as a way to use prediction markets for governance decisions.

  • MetaDAO, built on Solana, is the first real-world implementation of Futarchy in cryptocurrency governance.

  • Futarchy uses conditional markets to predict outcomes based on specific policy decisions.

  • MetaDAO's voting periods currently last 5 days, with proposals decided based on time-weighted average prices in pass and fail markets.

  • In one example, a participant spent $250,000 trying to manipulate a vote, but the system proved resilient and the manipulation attempt failed.

  • VOTA, a vote market being developed by MetaDAO for Solana, is inspired by similar platforms on Ethereum that generated significant revenue (e.g., Vodium reportedly made $50 million in revenue in 2021).

  • Futarchy could potentially be applied to various aspects of organizational decision-making, from high-level governance to departmental decisions.

  • The implementation of Futarchy relies heavily on Solana's high-throughput and low-cost transaction capabilities.

  • Challenges for Futarchy include liquidity fragmentation, complexity for users, and balancing proposal review time with decision-making speed.

  • Success for Futarchy would involve demonstrating that organizations adopting it perform better on key metrics compared to those using traditional governance models.

Questions Answered

What is Futarchy?

Futarchy is a governance system that uses speculative markets to make decisions. It was developed by economist Robin Hanson as a way to address the failures of traditional democratic decision-making processes. In a Futarchy system, participants trade in prediction markets that estimate the outcomes of different policy decisions, and the policies predicted to produce the best outcomes are then implemented.

How does MetaDAO implement Futarchy on Solana?

MetaDAO implements Futarchy on Solana by creating conditional token markets for each proposal. When a proposal is made, two markets are created: a "pass" market and a "fail" market. Participants can trade tokens in these markets, effectively betting on whether the proposal will pass or fail. After a five-day period, the time-weighted average prices of both markets are compared, and the proposal is automatically executed based on which market has the higher price.

What are the potential advantages of Futarchy over traditional DAO governance?

Futarchy offers several potential advantages over traditional DAO governance models. It can efficiently aggregate information from many participants through market mechanisms, align incentives by rewarding accurate predictions, reduce political influence by basing decisions on market predictions rather than votes, provide flexibility in application to various types of decisions, and offer transparency through on-chain recording of all trades and predictions.

What challenges does Futarchy face in practical implementation?

Futarchy faces several challenges in practical implementation. These include the complexity of the system, which can be difficult for average users to understand and participate in, liquidity fragmentation when running multiple proposals simultaneously, concerns about market manipulation by wealthy participants, balancing the need for thorough proposal consideration with quick decision-making, and ensuring that decisions have a clear, measurable impact on the chosen outcome metric.

How does Solana's infrastructure enable the implementation of Futarchy?

Solana's infrastructure plays a crucial role in enabling the implementation of Futarchy. Its high-throughput and low-cost transactions allow for the creation and management of complex prediction markets in a way that would be prohibitively expensive on other blockchains. Additionally, Solana's programmability through the Solana Virtual Machine (SVM) enables the creation of sophisticated on-chain governance mechanisms necessary for Futarchy to function effectively.

What is VOTA and how does it relate to Futarchy?

VOTA is a vote market being developed by MetaDAO for the Solana ecosystem. While not directly part of the Futarchy system, VOTA allows users to trade their governance votes, similar to platforms like Vodium on Ethereum. This development complements MetaDAO's Futarchy implementation by providing additional tools for governance token holders to express their preferences and potentially increase overall engagement in governance processes.

How might AI be integrated into Futarchy systems in the future?

In the future, AI could potentially play a significant role in Futarchy systems. AI traders could participate in prediction markets, potentially making more accurate and unbiased predictions than human traders. This could lead to faster decision-making processes, with proposal periods potentially being reduced to as little as 15 minutes. However, this integration would need to be carefully managed to ensure fairness and prevent manipulation.

How does Futarchy address the issue of "rich people voting" in governance systems?

Futarchy addresses the issue of "rich people voting" by creating a system where simply having more money doesn't guarantee control over decisions. While wealthy participants can place larger bets in prediction markets, the system's success depends on accurate predictions rather than just the size of bets. As demonstrated in the Ben Hawkins example, even significant spending ($250,000 in that case) doesn't guarantee a desired outcome if other participants believe it's not in the best interest of the organization.

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