Futarchy for Both Ends of the Curve
It is time to do something radical —
Unpack a complex concept in a simple manner.
You see, as I was writing a 3-pager essay on the design & implementation of Futarchic governance, I had a lightbulb moment; what if I don’t try to appear smart online *audience gasps in shock* .. and instead opt to be smart- by ruthlessly deconstructing the concept in an arguably new way.
We are not about doing this (at least not at this stage):
What we are about, is listening to these timeless words of wisdom:
“Everything should be made as simple as possible, but not simpler” — Einstein
Well here’s my attempt. You’ll see how we humbly manage to distill Futarchy to its most basic fundamental idea. If that sounds exciting, allow me 5 minutes of your time.
Futarchy is a pure market-based governance system. That means, in essence, that decisions are made according to what the market anticipates will make the organization more valuable.
How does it do that? Why does it do that? Let’s roll back for a second.
Traditional Stakeholder Voting
Tokenholders and (especially) shareholders have long had a voice in making decisions. Tokens normally give voting rights on Snapshot. Shares traditionally give voting rights in shareholder meetings.
The commonality and logic here are clear — stakeholders have the right to steer the organization in directions they believe will make it most valuable. Stakeholders have real skin in the game, and are therefore qualified to make these decisions — they have significant incentive to vote for the highest +ev decisions.
So market participants (those with money on the line) get to steer governance. What’s wrong with that?
Well .. nothing! Voting rights attached to a freely-tradable instrument is an amazing addition to capitalist markets. The idea was introduced to corporations in the 17th century by The Dutch East India, and if my memory serves me right — introduced to crypto by Dash and Decred, later popularized by Ethereum defi protocols.
Now you might ask:
OK Arad, but we’re here to talk about Futarchy. Surely there’s something missing with the above, otherwise we wouldn’t be gathered here to discuss it?
And you’d be right — there is something missing.
How Can We Do Better?
Traditional stakeholder voting takes into account market participants that are currently stakeholders. That’s important input.
But there’s a group missing; market participants without a financial stake.
Huh? Why would we let actors WITHOUT a stake in the org vote on its direction?
Hear me out.
We think traditional voting allows market participants to dictate decisions that lead to the highest value of the tokens/shares, but we’re ignoring a whole class of participants that also determine value — participants without an active stake in the org, i.e. outsiders.
Here’s how these outsiders affect the market:
- Outsiders actively choose not to buy tokens. That’s an implicit stance.
- Outsiders may choose to buy tokens if a specific decision is made in the organization. (This being the other side of the same coin of [1]).
That right here, as I see it, is the key fundamental insight of Futarchy.
That is; without including the implicit participants, or the potential future participants — our dear dear outsiders — the organization is not making fully-market-based decisions, and therefore it does not truly unveil what are the highest EV (expected value) choices for the org during its decision making process.
If this part went over your head — read it again. It is very much the fundamental bedrock reason for Futarchy, the way I see it. It’ll all come together in a bit as we explain what Futarchy actually is.
Futarchy: From Insight To Mechanism
We distilled the key insight that leads to Futarchy. Now let’s review the key mechanism that solves for it.
How can we allow outsiders to participate in the decision making process while forcing them to have skin-in-the-game?
Not by a weighted vote, or any vote for that matter, but by literal markets.
To avoid abstract hand-waving, let’s demonstrate the mechanism with a real scenario example.
Classic governance proposal for a corporation:
PROPOSAL: Replace CEO 'Mary' with new CEO 'Adam'
DESCRIPTION: <<Info about both persons, past performance metrics of Mary>>
MOTIVATION: <<extensive reasoning for the proposal>>
ACTION REQUESTED: Fire Mary effective immediately, hire AdamOr a classic governance proposal for an onchain org:
PROPOSAL: Add protocol-owned liquidity to AMM
DESCRIPTION: Withdraw 1,000 tokens from the treasury, sell 500 into USDC through a dutch auction, pair up the two to add a full-curve LP position on X AMM protocol
ACTION REQUESTED: Execute the following SVM instructions;
ProgramID:4NVydDnx7MfyhJRPujFAg1ZisTnZ5g5MicDUBWdZ1JDi,Accounts:[{pubkey:5eyt5meUfVH8Vqmjzp4LJj6hkH5gJ8qZzD3Z3TbMNk3U,signer:true,writable:true},{pubkey:8xVxPqAGzfQxq4wKzH4ZpDqMJz7QuNByEmeJizQjb2Xn,signer:falseLet’s roll with this one for an example.
Under Futarchy, once the proposal has been made, two parallel universes are temporarily formed.
You see, our hypothetical proposal `Add protocol-owned liquidity to AMM` can either pass or fail. A parallel universe was spawned for each option. each universe has its own orderbook and a virtual price for the governance token.
For the duration of the proposal — market participants are free to trade tokens on one, both or neither of these parallel universes. What happens in one universe (e.g. in the ‘pass’ orderbook) has no influence whatsoever on what happens in the other.
It’s a tricky point so let’s make sure it sticks. You can think of these universes as timelines.
A Futarchy proposal quite literally opens up a portal to two different timelines. The token is traded in both of those timelines for a few days as if that timeline is the correct one.
In the ‘pass’ timeline — the token is traded as if the proposal has passed.
in the ‘fail’ timeline — the token is traded as if the proposal has failed.
Eventually, one timeline, (with all its trade history) gets completely discarded and one timeline settles to become the reality. The one real timeline.
The winner is determined by the virtual price. Higher price implies a higher expected value to the organization.
Notice the TWAP price at the top of each window; denoting the time-weighted average price in that universe. The option that ends with a higher TWAP when the proposal duration ends ultimately wins. In the representative UI screenshot above, the ‘pass’ universe is in the lead.
As with traditional voting — token holders can signal what they believe to be the highest EV option. They can do so by:
- selling some/all of their governance tokens in both, one or neither of the universes
- using USDC to buy up more governance tokens in one of the universes or in both to varying degrees
But to grasp the real significance of what’s going on here, think back to our key insight laid out earlier. Outsiders are just as important to determine true EV, and here they can indeed participate too. Outsiders may deposit USDC and buy up tokens according to their view.
Again — the option that wins from that moment is considered the real universe — and its orderbook settles for real.
The orderbook of the losing option, and all trades made in that universe, are discarded forever and will not be finalized.
Indeed, members can express their will to increase their stake in the org if X happens.
Even more importantly — complete outsiders can express the same thing!
And that, dear reader, is the beauty of Futarchic governance.
Final Words
1) It’s hard to imagine anything better than Futarchy for Crypto, nor anything better than Crypto for Futarchy.
It’s a match made in heaven; an open + programmable + global financial layer, able to support a market-based governance mechanism straight out of the box. Served on a silver platter.
I’m never voting on Snapshots again. Let the market speak.
2) There are endless ways to implement Futarchy, and I have chosen to ignore details, features and implications in the demonstration.
Our purpose was not to know everything about the practice of Futarchy. Our purpose was to acquire a foundational insight into the Why of Futarchy. And then just gently bite into the How.
3) Twitter post is here *cough cough*.
Signed,
Arad
Appendix
Further reading:
- Shall We Vote On Values, But Bet On Beliefs? Robin Hanson, 2000
- An Introduction to Futarchy, Vitalik Buterin, 2014
- Proph3t’s Blog Posts
- Twitter space: Futarchy in crypto with Robin Hanson and Proph3t
This post is for informational purposes only and does not constitute investment advice. While attempts have been made to verify the accuracy of the information provided we cannot make any guarantees. Investors should be aware that investing in digital assets involves a high level of risk and should be undertaken only by individuals prepared to endure such risks. Any forward-looking statements made are based on certain assumptions and analyses of historical trends, current conditions, and expected future developments, as well as other factors deemed appropriate under the circumstances. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict. Past performance is not necessarily indicative of future results.
