Futarchy — Where Democracy Meets Markets | Posted by Fadai Mammadov | Coins | February 2024
Futarchy was proposed by Robin Hanson in 2000 as a futuristic form of government. It delegates decision-making on key issues, such as whether a particular policy will be approved or rejected, to the market. In this system, individuals do not vote for the policy itself, but rather bet on the metric that is closest to that policy. This is like a democracy based on the relative accuracy and objectivity of betting markets.
Betting markets are not perfect and extreme price deviations can occur, including bubbles followed by large drops, but absolute accuracy is not our concern. Instead, as Hanson correctly says, the important question should be how a particular institution performs compared to alternative institutions that do nearly the same job. Hanson cites several instances in which speculative markets, of which betting markets are a part, are better than others at forming and compiling predictions. For example, the orange juice futures market beat official weather forecasts. Likewise, horse racing market odds are better at predicting racetrack results than racetrack experts.
Once a policy is presented, two prediction markets are created where participants can bet on the policy outcome. They can bet on the approval or rejection of the policy (proposal) in question. At the end of the forecast period, a decision is made on maturity. If the price in the Accept (Yes/Pass/Confirm – the exact wording is not important) market is higher than the price in the Reject market, the proposal is considered to have passed. Otherwise it will be rejected.
Let me explain how futacrhy works with an example. Imagine a country called Futarlandia, ruled by futards who believe and practice futarchy. For example, let’s say a country votes to ban the import and production of cigarettes. The metric (or welfare assets). For this policy, two markets are created: “Yes” tokens and “No” tokens. “Yes” tokens trade at 79.3, which represents human years, while “No” tokens can be purchased at 77.4 at the end of the period. This means that market participants collectively think that if the tobacco ban is implemented, people’s average life expectancy will be 79.3 years. That’s almost two years longer than the market thinks people would have lived if cigarettes hadn’t been made illegal.
When you start thinking about this example, several arguments against futaki will come to mind. Perhaps most strikingly, the metric we choose—average human lifespan—may not be the closest thing to policy. Tobacco certainly has a negative impact on human lifespan. But smoking is just one of many factors that affect our lifespan.
Market manipulation cannot be ignored. Some groups, for example lobbyists for the tobacco industry, are interested in a specific outcome: “no.” These actors can actively purchase “no” tokens and/or “yes” tokens by shorting them. This can distort the information delivered by the market.
Now we understand what futarchy is and what its benefits are. We also saw that there were problems with putachi. Let’s take a closer look at the practical and theoretical shortcomings of futaki.
manipulation. Anyone interested in the “yes” tokens can buy them aggressively or sell the “no” tokens at the same time. However, this can be balanced out by individuals seeking to profit from mispricing. If market participants realize that the status quo does not reflect their best knowledge of the market, they will take opposing positions with the manipulators who will neutralize the market. Therefore, you need a lot of financial resources to dominate the market. The problem is no different from a 51% attack.
Likewise, we suggest the following: hedging, As speculated by several authors distort market prices It is not a strong objection. If a company wants to hedge against a policy that it expects to lose money if accepted, it will hedge its position in a prediction market. Skeptical claims about futurism lead to misrepresentation of aggregated information in the market. In our example, the cigarette manufacturer (i.e. the cigarette company) would buy “Yes” tokens in the market because if this scenario were to happen in the real world, things would be worse.
But this is actually what we want to see. Because I believe this will increase national welfare. Unless we benefit in some way from having a shorter lifespan, we assume that humans would rather live longer than submit to the limitations of death sooner. Moreover, hedgers thicken the market. In other words, it adds liquidity to the market, making decision-making markets better institutions for aggregating information.
The market is volatile. They are self-referential and reflective. What this means is that people tend to buy because other people are buying. Accepting this basic human behavior means that most traders’ decisions are unimportant and distorts the information contained in speculative markets.
To be honest, I’m not sure if my response to this argument will convince you, but here’s what I think. We believe that given a long enough trading period (e.g. 5 years), the market will correct itself. After all, bubbles don’t last for years! And the same argument about market manipulation may be valid here. When some traders begin to view market conditions differently from other traders, they end up selling markets that are trending up or buying markets that are consistently falling.
Human values are complex, it is difficult to summarize and express it in one number. Yes, but all major political issues are complex in some way, but we (or the lawmakers who represent us) vote on them. This argument cannot deny the benefits of delegating decision-making to prediction markets.
It may be the case that “causation is different from conditionality.” Suppose a futarchically run company is running a market in which it decides whether to fire or keep its current CEO. If the price of the token contingent on the CEO leaving the company is higher than the price of the token contingent on the CEO staying, the CEO will be fired. But in most cases, by the time a company decides whether or not to fire a CEO, something terrible has already happened to the company, such as poor performance. This allows traders to trade outgoing CEO stocks at low prices. This is not necessarily because we believe that the CEO’s capabilities directly affect the stock price, but because we expect the decision to fire the CEO to be tied to recent negative events within the company. This argument is not significant and should not be dismissed immediately, but we believe that setting up smarter markets can solve the problem.
Finally, I would like to point out that if it seems like I’m shedding more light on the arguments against Putazzi than on the arguments for it, it’s not because I think it’s a doomed idea. On the contrary, I sincerely believe that futurism, with its shortcomings, is still superior to other kinds of governance. And highlighting its shortcomings or the strongest arguments against it is merely an attempt to counter these arguments and emphasize the robustness of Putaki.
How Meta-DAO Works
Meta-DAO is the world’s first entity to implement Futarchy. A decentralized autonomous organization (DAO) is a governance structure that utilizes blockchain technology and smart contracts to decentralize decision-making and ownership among community members. All issues, voting, treasure management, etc. are managed by smart contracts and stored on the blockchain.
We understood what the concept of futarchy is and what DAO is. Let’s look at Meta-DAO specifically. At the core of Meta-DAO is a proposition. Proposals are the core of Meta-DAO. Anyone can make suggestions to Meta-DAO. Interact with the dictator program in the center of the image below to generate a proposal with several details such as proposal number, proposal description URL, and Solana Virtual Machine (SVM) executable. guideline. When an offer is generated, the dictator program creates two conditional markets for that offer: a pass-conditional market and a fail-conditional market.
After a preset time (10 days as of this writing), all participants will be able to finalize their proposals. How do you know which of the two markets “won”? This is what the TWAP (Time Weighted Average Pricing) program does. If on the expiration date the TWAP in the pass conditional market is trading higher than the TWAP in the fail conditional market, an SVM instruction is executed indicating that the offer is a “pass”. The pass market is confirmed, and the fail market is cancelled. The opposite situation occurs when the TWAP in a fail market is higher than the TWAP in a pass market. That is, the offer is considered “failed”, the SVM instruction closes the fail market, and the pass market reverts.
If the pass market wins on the expiration date, i.e. TWAP is higher than the TWAP of the fail market, the conditional pass token called pUSDC (pMETA) is converted to USDC (or META) and the conditional pass token is called on the fail. fUSDC (or fMETA) will be burned. If the failed market wins, fUSDC (or fMETA) tokens are converted to USDC (or META) tokens and pUSDC (or pMETA) tokens are burned.
To see how Meta-DAO works in practice, let’s look at the actual proposal, namely Proposition 5. Proposal 5 was triggered to raise funds and launch a liquidity pool in DeFi protocols built on top of Solana (Meteora). We can see that when the offer was confirmed, the TWAP in the passing market was higher than the TWAP in the failing market. So the proposal was marked as “pass” and the failed market went back to square one. Reverting means invalidating the transaction, which is as if the transaction had never been executed.
If, like me, you find the concept of Futarchy and its implementation by Meta-DAO amazing, and this article can convince you to get involved in the future of decentralized governance, I’d be really happy. Now you might be thinking, “This is all great in theory, but how do I get started with Meta-DAO?”
White papers and distribution channels like Discord and Twitter are helpful, but I think you need a real understanding of something to make it work. So next I will explain step by step what I did. Go to the active offer at https://app.themetadao.org/.
Enter the amount you wish to mint META or USDC. You will receive conditional tokens for every USDC or META deposit. For example, if you deposit 10 USDC, 10 pUSDC, 10 fUSDC tokens, they will be issued. As already mentioned, these are deployed to trade pass and fail markets respectively.
After receiving pUSDC and fUSDC tokens, I exchanged 10 pUSDC for 1 pMETA because I want this proposal to pass.
We now have 100 fUSDC and 1 conditional pass META, marked condMETA in the screenshot above. The end of every proposition is a binary event. In other words, you either pass or fail. If Proposal 10 passes, conditionally passed META tokens will be exchangeable for “real” META tokens. If you fail, you will get 10 USDC back.