Gambling Wins — How Futarchy Changes the Odds of Success for The Meta-DAO
The Problem
Democracy does not work. This is something that is often said and somewhat commonly known, and yet, so much of the world operates as if it does. In many developed nations, you vote for who governs, but how much choice do you really have? What you often don’t see are all the strings in the background that decide who you get to vote for. The reality in many nations is the classic Simpsons joke: Vote for a third-party candidate? “Go ahead, throw your vote away!”.
You’re basically choosing between a cheeseburger and fries and a hamburger and fries. If you want something that really changes the norm, have fun wasting your vote. Furthermore, the above Simpsons joke is from 1996 which means that Western Democracy has been a joke for almost 30 years now at the very least. This leads to a lot of apathy around voting, making the dream of democracy even less realistic.
The Solution
How can we solve these issues? Many ways have been proposed but one of the most interesting (and most relevant for Web3 participants) is Futarchy. The Meta-DAO is the first organization in human history to be governed by a market and I highly recommend that you research them further. More information on their DAO (Decentralized Autonomous Organization) will be posted below, but first, let’s find out why their method of governance is so revolutionary…
You’re likely wondering: “What is Futarchy?”. You wouldn’t be alone; I hadn’t heard of it either. However, as soon as I began to look into it, I realized the genius behind the idea: gambling is fun.
When done carefully and with an understanding of one’s limits, it really is one of the most fun experiences around. Look at Vegas, sports betting or a million other examples to see just how enjoyable the world’s populations find the process of educated guessing for potential financial gain.
So where am I going with this? Well, what if voting was fun and potentially lucrative… don’t you think you would care more? Futarchy takes things a key step further as well by promising more useful and functional results, too (more on that later).
How Futarchy Works
So, Futarchy is like democracy but it’s more fun, it works better and you can earn money as a citizen under this kind of system. How could you say no? Let’s look at how it works:
Wikipedia says, “Futarchy is a form of government proposed by economist Robin Hanson, in which elected officials define measures of national wellbeing, and prediction markets are used to determine which policies will have the most positive effect”. The simplest summary of the system comes from Hanson himself who said, “vote on values, bet on beliefs”. Let’s unpack that: values are what should happen and beliefs are strategies that individuals think could create the desired results. So, elected officials and voters would decide what needs to happen to make things better for a given organization and then market participants would bet on which strategies are most likely to lead to successfully achieving the chosen goals.
An example will make this easier to understand. Imagine that a DAO wants to increase their followers by 10k. Under Futarchy, elected leaders would define three things: what is being measured, what value this thing should become to achieve their goal, and what timeframe defines success or failure. In this case, current followers could be X, the desired amount could be X+10k, and the timeframe could be three months.
Instead of simply making decisions, strategies would be suggested. To keep it simple, let’s say only two strategies were suggested: this goal will be achieved either by spending 2% of the treasury tokens on a paid advertising push, or, by spending 2% of the treasury tokens on an airdrop campaign.
Then, each of these strategies, let’s call them A and B respectively, would basically function as crypto tokens or stocks for a set period of time. People could buy, sell and potentially even long or short the strategies like someone might treat Solana or NVIDIA. Whichever of the two has a higher market cap when the markets close is considered the winner and that strategy would be implemented. Then, at the end of the time-frame decided upon, if the goal has been met, those who owned coins or shares of that strategy would be rewarded financially.
Why Futarchy Works
This method provides three distinct benefits over Democracy, as mentioned above: it’s more fun, more financially lucrative and more functional. Let’s quickly review how Futarchy achieves these three benefits.
More Fun: this one is simple. Ask anyone what’s more fun, going to Vegas or voting in an election? I’m sure that 99.99% of people will say the former. It just is fun to think about how something might happen in the future and then place bets on your educated guesses which could yield profits for you to enjoy later.
More Financially Lucrative: When was the last time you got paid to vote for a specific person or policy? If your answer is anything other than “never”, you’re probably a criminal or a US Senator (or, perhaps, both!). Again, this is a simple thing to think through because if the average person knew they could get paid for voting there would almost assuredly be a major uptick in active voters for any given election.
More Functional: As the CIA themselves put it, “The bulk of evidence on prediction markets demonstrate that they are reliable aggregators of disparate and dispersed information and can result in forecasts that are more accurate than those of experts”. Their study on the FutureMAP program that they claim was shut down too early and for foolishly reactionary reasons lists a few examples of this in practice:
- “Since 1988, traders in the Iowa Electronic Markets have been betting with remarkable accuracy on the likely winner of the US presidential elections.”
- “Eli Lilly, a major pharmaceutical company, found that prediction markets outdid conventional methods in forecasting outcomes of drug research and development efforts.”
- “…the explosion of the NASA space shuttle Challenger in 1986. Within minutes of that explosion, Wall Street traders seemed to identify who would be held responsible for the crash while a presidential commission took nearly four months to conclusively pinpoint the cause of the tragedy.”
There is lots of science behind why this is the case, feel free to dig into this study linked below, but I think there are self-evident explanations as well. The functionality in this type of governance is basically derived from the above two benefits. As in, by being more fun and more financially lucrative than the classic democratic process, market participants are incentivized both to participate at all and to do their best to really understand the issues and what needs to happen to improve their organization, city or nation.
Again, if you’re enjoying the process and potentially making money from it, you’re more likely to participate. Furthermore, if your chances of earning money from your participation hinge on whether or not you pick the correct strategy, you’re more likely to research the goal, time frame and strategies and become knowledgeable about the issues so as to increase your odds of receiving a pay out.
For example: if I asked you what I might eat for lunch tomorrow, you would probably make an off-hand guess if you even cared to respond at all. However, if I asked the same question in a gamified way that promised $100.00 for each person who got the right answer, you’d be much more likely to deeply consider my favorite foods, what I tend to eat for lunch and so on to arrive at a genuinely intelligent and educated guess that could potentially net you those sweet, sweet financial gains.
The Meta-DAO
Now that we understand what we’re talking about, let’s bring it back to The Meta-DAO. How many DAO proposals have you seen where some huge whale, potentially even a corporation or VC, just swoops in and decides what’s best for everyone by utilizing their massive holdings of the governance coin in question? Examples of this abound, unfortunately, easily displaying how traditional DAO governance that is based on classic democracy retains many of the same issues.
Sometimes this can work out for everyone as not every whale acts solely in search of profit, but sometimes, people with huge stakes in the DAO can blatantly act in their own self interest instead. One quote I found while researching DAO controversy that really explains the issue in a clear and concise way is this:
“A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury.”
The Meta-DAO wants to focus on what is best for the DAO using the concepts described above, not what is best for some individual whale. Please see their docs for many in-depth explanations, examples and even informative video content, however, the simplified version is this:
- A proposal is created with a clearly defined goal and a strategy to achieve this goal along with a time period in which the decision of pass or fail will be made.
- Conditional Vaults are created and users can trade “real” tokens, in this case META and USDC, for “conditional” tokens. These conditional tokens come in two forms: “on-pass” and “on-fail”, as in, ones that are redeemable for underlying tokens if the proposal passes and ones that are redeemable for underlying tokens if the proposal fails.
- After the time period has elapsed, Meta-DAO’s Autocrat Program checks if the time-weighted average price (TWAP) of the pass market is higher than the TWAP of the fail market. If so, the proposal succeeds, if not, it fails.
- The Conditional Tokens mentioned above can then be redeemed in the proper way based on the decision. For example, “if someone mints conditional-on-pass META and trades it for conditional-on-pass USDC, either the proposal will pass and they can redeem conditional-on-pass USDC for USDC or the proposal will fail and they can redeem their conditional-on-fail META for their original META”.
- More simply put, if you made the right call, you profit, if not, you don’t.
Please do remember that the underlying technology here is a little more complicated than the above explanation. Anyone who wants to understand this process at a deeper level should delve into the wonderful educational material provided by the DAO. Besides, as with many things, the best way to learn is to participate! Invest a small amount of money that you can afford to play with and learn by doing.
As we have seen, Futarchy is a very fascinating and promising method of governance that has not, until now, really had an opportunity to shine. If you’re interested, The Meta-DAO wants your best predictions and market participation as they work towards shining a light on a better way to govern!
The Meta-DAO’s Website: https://themetadao.org/
The Meta-DAO’s Twitter: https://twitter.com/MetaDAOProject
The Meta-DAO’s Github: https://github.com/metaDAOproject
Further reading and educational material: https://blog.themetadao.org/
