Futarchy: governing through markets
Governing effectively is a challenging endeavor. It requires not only recognizing good ideas and having the means to implement them but also preventing the personal interests of participants from prevailing at the expense of the organization.
Democracy, by involving a large number of participants in decision-making, helps to prevent the concentration of these personal interests. The downside is that this broad involvement takes time and can sometimes prove to be inefficient. A frequently used solution to this lack of speed is the introduction of representative committees, but this reintroduces the risk of corruption that broad participation was supposed to eliminate.
Once it is accepted that the vices affecting governance are an integral part of human nature, one of the first questions an optimist might ask is: is there a mode of governance that, instead of trying to fight greed and cupidity, uses them as a driving force for fairer decision-making? This is what the “futards,” members of MetaDAO, the first futarchy on Solana, believe. Let’s take a closer look at what this strange mix of words means, starting with organizations on blockchains, what futarchy is, and finally, this mysterious MetaDAO.
DAOs
Blockchains are technologies that can facilitate trust on a global scale while eliminating centralized points of fragility. Naturally, organizations began to establish their governance systems directly on blockchains, hoping to benefit from their properties. Solana, being fast and affordable, has naturally become the home to a growing number of these organizations. Such an organization is generally called a DAO, or Decentralized Autonomous Organization.
However, simply placing one’s governance system on a trusted platform like a blockchain does not guarantee that everything will go well! Many systems have obvious weaknesses, such as the plutocratic “1 token-1 vote,” where the token is often either concentrated by a small number of sometimes unreliable participants or widely distributed but people care little about actively governing, making it impossible to reach quorums. Some DAOs have already suffered from this, like ParrotFi, whose majority holders (largely consisting of a few insiders) decided, in a heist worthy of a major film, to empty the treasury of nearly 70 million dollars. This decision was final for the smallholders, who hurried to sell their tokens with little liquidity available, often realizing huge losses.
Futarchy
Faced with the problems afflicting governance, economist Robin Hanson proposes a mechanism he calls futarchy. In this system, decisions are not made when a sufficiently large number of participants have voted for it, but when the participants value the execution of the decision over inaction. And to express their perception of this added value difference, futarchy turns to markets.
Participants in futarchy are real traders and must seek to maximize their profits for each outcome of the decision. Thus, a perceptive participant may anticipate that the implementation of a given decision has a positive impact on the price of the DAO’s token that the market has not yet integrated. Consequently, he buys more tokens in the case where the decision is made than in the case of inaction, which leads to a relative price increase, and futarchy will then validate this decision.
One of the problems with 1 token-1 vote governance is that some, especially smaller holders, have no interest in voting since their vote weighs little in the ballot. Futarchy solves this problem by introducing markets, allowing the more astute to make money when they correctly anticipate the added value perception of a proposal.
Conversely, futarchy protects smallholders by providing them with a favorable and liquid exit in case of a decision that would be detrimental to them. Based on the example of ParrotFi, futarchy would have forced insiders to value the decision to empty the treasury more than doing nothing, allowing holders in disagreement to sell at this inflated valuation. Insiders must maintain this valuation as long as holders are selling, at the risk of seeing the decision refused. Instead, ParrotFi holders saw the PRT token price collapse, powerless against the majority held by insiders and the remaining low liquidity.
Futarchy has similarities with predictive markets such as PolyMarket, since in both cases participants bet on an outcome. The difference is that predictive markets, although based on easily verifiable truths, rely in practice on external oracles, which often implies some form of committee. Futarchy, on the other hand, integrates all the elements it needs for each proposal, making it all the more relevant on a blockchain, where lots of DeFi primitives are available to enable efficient and accessible markets.
The MetaDAO
Although attempts to implement futarchy have already taken place (such as here, here, or here), none of them has come to fruition. It is only recently on Solana that the situation has changed: MetaDAO, originally created by the intriguing Proph3t, has shown that it is not only capable of developing autonomously, it has also demonstrated its ability to resist “external attacks.”
From the start of the project in autumn 2023, the idea of futarchy fascinated and attracted personalities from Solana, such as DurdenWannabe (Lifinity), Bigz (Drift), or Dean (Deanslist). Immediately, an incredible buzz was born on MetaDAO’s Discord, where drafts of proposals, memes, and suggestions flew in all directions. The community even ended up finding a name for itself: the futards, born from the composition of futarchy and “retard,” evoking the members’ obstinacy in placing their fate in the hands of the market. Even today, the discussions taking place within the organization are of rare quality in the crypto ecosystem.
The current operation of MetaDAO is as follows: once a proposal seems ready, anyone can submit it to the markets, which will decide its fate. Participants can then deposit their META (the DAO’s native token) or their USDC in the proposal’s “conditional vault,” and in return receive tokens specifically usable on the markets linked to the proposal. Thus, for 1 USDC, one obtains an “fUSDC” and a “pUSDC,” the tokens to be used respectively on the markets in the case where the proposal fails and the case where the proposal is accepted.
To express, for example, a favorable opinion on a proposal, a participant may decide to buy pMETA with pUSDC, and sell fMETA in exchange for fUSDC. If the proposal is validated, then the participant now holds more META than before. If the proposal fails, the participant has been able to sell their META at an advantageous price.
This is scenario has happened during Proposition 6, where a wealthy investor attempted to acquire a large number of META at a low price. Participants, whether members of MetaDAO or not, collectively decided to buy a large amount of fMETA, causing the rejection of the proposal. However, the possibility for anyone to participate in governance is a double-edged sword, as while it allowed outsiders to come and defend the interests of the DAO by aligning with it, it also allowed the sudden arrival of large investors weighing in heavily on the discussions.
Conclusion
Information technologies have the power to transform the way humans organize themselves. Blockchains like Solana are an example, providing platforms for trust computing, accessible, transparent, fast, and affordable. Building our governance systems on these platforms can improve their quality but does not solve all problems. Futarchy attempts to solve part of them, especially the lack of interest for smaller participants and the problem of the absence of consequences for actors who have contributed to the establishment of bad policies. MetaDAO is the latest experiment in the field, and its recent adventures are extremely promising.
You are invited to contribute to this experiment first by following the collective’s progress on Twitter, Warpcast, and Discord, but also by interacting directly with the various ongoing proposals (there are currently 3 at the time of writing these lines).
This article was written for the Solana Scribes contest, for which I would like to thank the organizers, including Laloutre and Superteam.
Originally published at https://dodecahedr0x.medium.com on February 21, 2024.
