A Deep Dive into Futarchy: What National Governments and Private Organisations can learn from a Blockchain Governance Model (Part 1)

Derek Lim
Derek Lim
Jun 23 · 9 min read
Robin Hanson, The Father of Futarchy. Source: https://www.mixcloud.com/

Foreword

Throughout my life, I have always only concerned myself with the social side of things: of how societies function, of why people behave the way they do, of the roles of social institutions and governments, and of concepts of inequality, inequity and power imbalances.

At some point however, I began to feel really empty.

There was so much wrong in this world, and yet I felt so powerless to do anything. Sure, writing about it can necessarily raise awareness, but nothing else with regard to substantive actions.

At some point, all these actions began to feel like an empty notion, important only to assuage my guilt that I was not truly doing anything about it.

Now that I have dipped my toes into this wonderful blockchain world, however, I have come to better understand the cause of my emptiness.

The field of technology should never be seen as a separate silo from the social world; technology is the very conduit that enables a far greater understanding of social conditions, and constitutes a tool in which one can wield to foster greater inclusivity across a whole spectrum of social situations, governance and politics included.

There are so many ways that blockchain technology can help with, and in, any given social relational context. There is also so much to learn from blockchain technology as a discipline that we can apply to the real-world, too.

Today, I will be discussing one such take-away in order to theorize a better future with regard to political and governance models in nations and private organisations respectively.

The Problem with Democracy

More than 60% of countries today are democratic.

Even though there are many different forms of democracy in theory, the only ones that are really practiced today are Direct Democracy, Representative Democracy, or a hybrid of the two.

In a direct democracy, citizens are given full control, accountability and equality, and they are directly involved in the decision making of the state.

A representative democracy, which incidentally, is the most widely used form of democracy around the globe, usually involves citizens handing over their direct voting right to representatives (whom said citizens vote in through processes like national elections) who act on the citizens’ behalf as a proxy for making decisions with regard to national issues.

Democracy as a political system isn’t without its flaws though. In fact, it has plenty.

For the sake of this article’s content, I will whittle them down to only 3 main ones:

  1. Accountability
  2. A ‘Tranny’ of the Minority
  3. Politicking

Accountability

Source: https://cartoonmovement.com/

Political representatives are only very loosely held accountable — if at all — for their actions after they get voted into office. In most countries, there are usually little to no mechanisms put in place to ensure that the politicians’ promises that were made during the election period are fulfilled. Said promises then become (usually) nothing more than empty promises to pull in voters.

This will unfortunately result in what is known as “election cycle politics”, where elected representatives try to convince voters before an upcoming election of one’s competence and ‘votability’ either by either introducing populist proposals that are substantively unfeasible in practice, or by handing out expensive “Wahl Geschenke” (pre-election goodies).

‘Tyranny’ of the Minority

Next, as the only ‘say’ that the masses have is in the choosing of political representatives, this means that representative democracies ultimately do not take into account the masses’ knowledge, expertise and opinions when it comes to decision-making at the highest levels.

This will result in a situation where the wisdom of the crowd is not utilised to its full potential, if at all. Information will also not be sufficiently aggregated across the board. Concomitantly, national policies may end up not being representative of the populace’s values and beliefs at all, rendering them ill-informed and possibly even (eventually) ineffectual.

Moreover, simplifying an individual’s preferences into a single vote tends to result in centralization of power as the reduced resolution places elected officials in charge of decisions outside their space of expertise.

Source: https://wiredpen.com/

Politicking

Amongst the political representatives — subject specialists are also sidelined during the policy-making process as soft skills and, to a certain extent, breadth of knowledge is key to obtaining influence over policy decisions. Depth of knowledge plays second fiddle to appearances and networks, or what we have come to know as politicking.

Elected officials will also have the tendency (intentionality notwithstanding) to surround themselves with subject experts who pander to them, resulting in the elevation of social networking over unbiased expert opinion, and very entrenched echo chambers within the system.

All the above may ultimately eventuate in ‘dumb’ policies being adopted by the system.

Therefore, in order for Democracy as a political system to be ‘fixed’, 3 main points must be addressed:

  1. Increased accountability for policy decisions
  2. More power to the masses, and increased voting resolution on the topics which individuals care about
  3. Elimination of the policy making echo chambers

On all these, I propose Futarchy as a solution.

Futarchy, and its role in Blockchain Technology

Before I delve into that however, there is a need to first understand how Futarchy even came to be, and the role it plays in the blockchain space.

Robin Hanson. Source: https://www.fhi.ox.ac.uk/

The concept of Futarchy was initially proposed by economist Robin Hanson as a futuristic form of governance model where members of this system would vote on values, but would bet on beliefs (more on this later). Hanson’s conception of Futarchy was grounded purely upon economic models and political ideals, and had nothing to do with blockchain technology at all.

However, because Futarchy is a yet untried form of government in the real-world, the blockchain space is a very good (and only) starting point for us to look from, in order to understand how it can possibly help fix the issues we currently face in democratic political systems around the world.

To start, it was Vitalik Buterin who first brought this idea of Futarchy into the blockchain fold and popularized it within the space in 2014, when he suggested that Futarchy would constitute a very effective governance model for Decentralized Autonomous Organisations (DAOs) on the Ethereum blockchain.

As DAOs are — as the name suggests — fully autonomous in their functioning, they are inherently disintermediated with no central hub of power or influence.

On this basis, however, several problems arise: how will DAOs be governed? Who will suggest changes? Whose suggestions will be chosen, and who will eventually implement them?

It thus became clear that in order for DAOs to work, there was a need for a governance model that was compatible with their decentralized qualities. In other words, all DAOs require a tool to ensure that the aforementioned questions could all be satisfactorily answered without a central entity.

Enter Futarchy.

What exactly is a Futarchy?

In a Futarchy, a traditional-democratic model would still be used to define what we want, but betting markets would now say how to get it.

That is, elected representatives would still formally define and manage an after-the-fact measurement of national welfare via traditional-democratic processes, but now — market speculators and participants will get to decide on the policies that should be put in place to get the nation to those chosen ends.

Hence, vote on values, but bet on beliefs.

I know that this is a pretty complex concept to understand at a glance, so let me break this down further.

Hanson’s intent was to address the shortcomings of traditional democracy by utilising betting markets to determine policy implementation. This is because he found that betting — or prediction — markets always seemed to outperform experts (even institutions) and polls, and consistently at that. More on that later.

Measurable end-goals, or ‘values’ (“x to be y by z”: where x is a measure — either monetary or otherwise, y is the desired result amount, and z is a time threshold), would still be voted on in traditional-democratic ways, whilst “beliefs” or policy that’s enacted in order to reach that end-goal would then be left to market speculators.

If a prediction market favors implementation, the policy would be implemented and assessed at the z threshold specified in the value. In other words, enacted policies determined through prediction markets (beliefs) are used to achieve the desired end-goals (values) that were democratically voted on beforehand.

Let us look at how this whole process will go.

First, Futarchy begins with a voting phase. Although the system is heavily dependent on prediction markets determining the path toward a particular end-goal, said end-goal itself must still be determined democratically. However in this case, rather than simply vote on a means to an end as we traditionally do, we’re voting on what that ‘end’ is.

For example, an end-goal could be something like “unemployment rate in Singapore to be reduced to 2% by 2025,” (see: x to be y, by z) where a threshold (2%), a duration (3.5 years from the time of writing), and a sector (unemployment rate in Singapore) are all chosen.

Let’s say that this end-goal has been selected as the end goal to work towards through a traditional-democratic voting process. Predictions markets will now take over to determine the actual policies that will be implemented to achieve it.

Staying with the same example, the metric for success (end-goal) is a 2% unemployment rate by 2025. The next step would then be for a policy proposal (to achieve said end-goal) to be published and markets to be opened on choices.

Source: https://blog.ethereum.org/

For the sake of this little thought experiment, let us use policy “x” as someone’s proposed means of reaching the above end-goal, where markets y¹ and y² represent the pricing of the options determining the fate of the policy.

If y¹ represents the price of “yes,” and exceeds that of y² representing the price of “no” by the time the market closes, the policy will be implemented, and all trades on the “no” market are reverted.

After the success of the proposal is tested over time, and if it truly makes an impact toward the success of the initial value (2% unemployment) by or before the allotted deadline (2025), then those that were on the winning side will receive rewards based on their holdings on the winning side (“yes”) of the policy.

Ultimately, the actual rewards and losses garnered will still all depend on the implementation. It is still possible for one to lose money even if he/she made the right choice of policy, if said policy eventually isn’t effective in implementation, and fails to achieve the chosen end-goal.

Source: https://blog.ethereum.org/

The nature of the end-goal notwithstanding, the above thought-experiment renders Futarchy a very suitable governance model for DAOs on Ethereum’s blockchain network.

If you want to take a deeper dive into why that is the case, I suggest you read Buterin’s brilliant proposal here.

As a very quick summation of that piece, however, the Futarchy model benefits DAOs in 2 main ways:

  1. It makes it harder for executives managing the funds to cheat both the organization and society for their short-term interest (the DAO protocol can now be trusted to fund itself)
  2. It allows for governance to be a radically open and transparent process (the DAO protocol can now be trusted to govern itself)

In essence, the Futarchy mode of governance allows for DAOs to function effectively without compromising a very key principle that they were built upon in the first place — decentralization — because it allows for accountability, openness, and transparency.

So now we know that Futarchy does have some substantive value; in this case, within the blockchain space for DAOs.

Extrapolated to real-world governing and political structures, can Futarchy actually be the model to solve the problems with democracy?

Coinmonks

Coinmonks is a non-profit Crypto educational publication.

Coinmonks

Coinmonks is a non-profit Crypto educational publication. Follow us on Twitter @coinmonks Our other project — https://coincodecap.com

Derek Lim

Written by

Derek Lim

A full-time educator, but even fuller-time Cryptocurrency and Blockchain nerd — Certified Blockchain Practitioner — Certified Bitcoin Professional

Coinmonks

Coinmonks is a non-profit Crypto educational publication. Follow us on Twitter @coinmonks Our other project — https://coincodecap.com