Futarchy — Using humanity’s collective intelligence in decision-making
A case study on the Meta-DAO
The world is confronted by a multitude of escalating challenges, including deteriorating infrastructures, rising poverty, and a shifting climate, to mention just a few. These challenges are increasingly linked to ineffective governance in a globalized society. Frequently inspired by the Chinese model, discussions are emerging about totalitarian solutions, such as dictatorial top-down control or social credit systems, as replacements for what is perceived as the inefficient democracies of the West. Ultimately, this threatens to undermine the core Western values of freedom and autonomy.
Nevertheless, there are alternatives arising. Like Bitcoin, which emerged to fix a broken financial system, decentralized autonomous organizations (DAOs) have emerged in web3 to fix broken governance structures. They are a promising tool for managing complex systems, such as decentralized physical infrastructure networks (DePINs) or community-driven regenerative finance (ReFi) initiatives. Nevertheless, after the introduction of DAOs in 2015 and the hype that followed, it seems we have entered a period of disillusionment with respect to building DAOs: In addition to pressure from regulators and investors to limit their potential, many are beginning to believe that DAOs are an inefficient way to organize communities and, by extension, the world.
This blog motivates why DAOs still remain the most meaningful tool to manage complex systems and illustrates how a significant improvement, in the form of Futarchy, has elevated their effectiveness. We will assess the Meta-DAO, the first Futarchy in action, and suggest a way forward on this promising path.
Let us begin.
Background
Our world is complex
Our world is best understood as a highly interconnected graph where the links between nodes, rather than the nodes themselves, shape the system’s behavior. This interconnectedness results in unintuitive phenomena, like the butterfly effect, where small changes on the one side of the world can lead to significant impacts on the other. As each day passes, the complexity experiences combinatorial growth, outpacing both the growth in amount of data storage and processing power.
Researchers warn that understanding individual components in such systems doesn’t guarantee insight into their collective behavior, because interconnections can result in new, emergent properties. These properties add layers of complexity and challenge the effectiveness of hierarchical/ top-down or computational solutions in tackling normative problems like setting goals or managing trade-offs.
Thus, in our complex world, no single entity, not even AI, can predict future states or outline steps for positive outcomes, which limits the effectiveness of our hierarchical institutions to address the emerging challenges in our world, as showcased in the introduction. In particular, this realization challenges traditional beliefs in centralized control and decision-making, pushing us to consider a broader range of tools to manage complexity.
Success mechanisms in complex systems
The bottom-up/ decentralized mechanisms of collective intelligence, digital democracy and self-organization can be utilized to manage complex systems effectively and were discussed in depth in a previous blog post.
The remainder of this section summarizes the most important concepts.
Collective intelligence is the emergent phenomenon which enables communities to sense the correct state of a system, i.e.,. the most likely future state; it enables them to discover what should be done within a system. It requires a) free access to information, b) privacy to reason, and c) freedom of expression, as illustrated in the image above.
In order to reach consensus on what should be done in a community/ organization/ society, collective intelligence is combined with digital democracy. This mechanism utilizes the various outputs from collective intelligence in a deliberation mechanism that distills proposals that are ultimately voted on. Various different deliberation and voting mechanisms exist having various properties (see for instance here). The three steps of digital democracy are: a) collective intelligence, b) deliberation, and c) voting.
Self-organization is the emergent phenomenon in complex systems which enables communities to implement the “what” in an efficient, scalable and resilient way. Thus it is the “how” a community can go about execution. It requires that actors be autonomous/ free to act whenever they see a need, and that those actors quickly receive feedback about their actions so that they may improve their behavior.
Managing complex systems with DAOs
Decentralized autonomous organizations can be defined as a) having no single source of authority [decentralized]; b) comprised of individuals not bound to a coercive, external force [autonomous]; and c) having a common vision towards which its members work in an organized way [organization]. In particular, DAOs are the organizational form that attempts to give structure to a diverse set of communities such that a common vision is reached.
Basically, a DAO is what happens when diverse actors start to collaborate and align towards a shared vision that satisfies their personal goals. In an ideal case, “a sense of community brings trust and wellbeing which enable better organisation. And effective organisation can enable value flows that sustain community.” [5]. In this way, communities and DAOs can form natural symbioses, resulting in powerful anti-fragile organizations capable of motivating individuals and communities to accomplish the extraordinary. An popular example of this in the current web3 zeitgeist is that of decentralized physical infrastructure networks (DePINs), which aim to achieve extraordinary feats of human coordination like setting up global and dense infrastructure networks. [6].
In a sentence, community and organization are the Yin and Yang of DAOs.
Mapping the definition of DAOs onto the three mechanisms illustrated in the previous section, the community is the decentralized aspect where the collective intelligence of a DAO emerges, and organization consists of the mechanisms with which DAOs reach community-wide consensus.
Self-organization is what happens at the intersection of the community with the organization when community members are empowered to self-organize by working autonomously towards the shared vision of the DAO.
Challenges in DAO design
Problems in DAOs arise when the DAO design does not clearly conceptualize, separate and consciously implement the three mechanisms of collective intelligence, digital democracy and self-organization.
Here we see an image popular on X (the original author could not be tracked, any hint is appreciated): A person identifies a hole in the boat, but instead of fixing it, the community in the boat attempts to find social consensus on what to do by arguing if the hole really is a problem.
The illustration has been taken as a prime example why DAOs are not working. However, although some DAOs are exhibiting such emergent behavior, the reason for its emergence is not a problem inherent to DAOs. Instead, it is due to a confusion/ mixture of the previously introduced mechanisms that, if implemented correctly, actually make DAOs into thriving and creative hubs where innovation and progress thrives (because it is the natural structure to facilitate all three mechanisms at the same time).
In particular, the problem in the above image arises, depending on the angle of the viewer, out of the following two reasons:
- Digital democracy perspective: both the deliberative process and the decision-making process within the community of the boat take too long to act meaningfully, and the information that the hole in the boat is a significant problem is not adequately considered in the deliberative process (though strongly held by the man close to the hole).
- Self-organization perspective: Collective intelligence (freedom of expression) and digital democracy (deliberation) are utilized in the image, but it is self-organization that should be applied: the man near the hole should be empowered to act autonomously, because he knows it is a problem for the overall community and is willing to fix it.
Let’s explore solutions for both perspectives and see how they can be integrated into a comprehensive tool by the concept of idea markets.
Futarchy: Decision-making with market principles improving digital democracy
Futarchy, a concept proposed by Robin Hanson in his 2007 paper “Shall We Vote on Values, But Bet on Beliefs?”, offers a unique approach to decision-making in organizations, especially in DAOs. It replaces traditional voting systems with prediction markets where participants bet on the outcomes of proposed actions. This is based on the assumption/ observation that markets are more efficient, when compared to traditional democratic processes, in taking into account all available information and weighting it proportionally. Complex systems theory provides a theoretical underpinning for this observation: futarchies link voting more directly to collective intelligence by incorporating the results of collective intelligence directly into the voting results, thus accelerating the deliberation phase in in democracies that implement them. Moreover, by letting people bet on beliefs, the available information is weighted according to perceived impact which improves collective intelligence in decision-making. [7,8]
The key ingredients of futarchy and its successful implementation according to Hanson can be summarized as follows:
- Futarchy should be used to determine how something should be implemented, but not necessarily what it is.
- A measure of welfare is required: Speculators in the prediction markets will bet on the impact of policies based on this measure of welfare.
- A futarchy should be introduced gradually and iteratively.
The Meta-DAO: A Futarchy in the making
The Meta-DAO is an experiment to create a functioning futarchy, following Robin Hanson’s suggestion to start small and gradually grow to an eventual legitimate companion to nation states.
The measure of welfare within the Meta-DAO is the Meta token.
Following the established process in DAOs to utilize improvement proposals to reach organization wide consensus, vote objects in the Meta-DAO are proposals.
Two Meta token markets are formed around a proposal to decide its passing or failing: A pass market representing the scenario where the proposal is accepted and a fail market representing the scenario where a proposal is rejected. Both markets are denominated in Meta/USDC (USDC can be considered equivalent to US dollars for the purposes of this article), so each of them has a theoretical dollar value of Meta.
The market which has a higher Meta token value at the end of the voting period is accepted and decides the passing or failing of the proposal. In order to participate in either of the two markets, speculators have to lock either Meta or USDC and receive two tokens in return: For instance, in case of locking Meta, a user receives a fMeta (fail Meta) and a pMeta (pass Meta). A fMeta may only be used in the fail market, and a pMeta may only be used in the pass market. At the end of the voting period, the losing markets’ tokens are destroyed and only the winning ones remain. In exchange for the winning tokens, the user receives the locked tokens back.
Some examples assuming the pass market wins (the proposal is accepted, as illustrated in the image above):
- Scenario 1: I lock 1 Meta token and receive 1 pMeta and 1 fMeta. I do nothing. At the end of the voting period, my fMeta token gets destroyed. I still own the pMeta token which I can use to receive the locked Meta back.
- Scenario 2: I lock 1 Meta token and receive 1 pMeta and 1 fMeta. I sell the pMeta on the pass market and receive 2 pUSDC. At the end of the voting period, my fMeta token gets destroyed (because the proposal passed according to theassumption above). I own 2 pUSDC from my trade which I can use to receive 2 USDC (which someone else had locked).
This is intended to create a perfect incentive alignment between market speculators and the DAO’s welfare measure (Meta token): Firstly, proposals are decided accordingly to their direct impact on the welfare measure — the token value — since the proposal will be accepted in the case that it increases the Meta token as compared to its value in the case that the proposal is rejected. Secondly, speculators are incentivized to correctly value the Meta token in both scenarios (pass/ fail) and to exploit arbitrage opportunities on both markets (according to their belief of the true Meta token value in each market). Thus complex scenarios can form, where one believes passing a proposal will increase token value more than rejecting the proposal, but still sells pMeta on the pass market (driving pMeta price down and thus the probability of accepting the proposal) because the current value of pMeta on that market is assessed to be too high, thereby gaining pUSDC due to the fact that Meta token price would eventually fall. In this way rational speculators are incentivized to determine the “true” Meta token value on both markets, independent of their wish to which proposal should be accepted, eventually creating an objective criteria if a proposal should be accepted or not.
Organizational mechanisms of the Meta-DAO
According to the above illustrated Yin and Yang model of DAOs, the Meta-DAO is utilizing different tools for its community and organizational sides.
- Discord for community management (collective intelligence, see Yin-Yang image)
- Futarchy-based proposal voting for the governance (digital democracy, see Yin-Yang image)
- Multisig wallets for governance of funds
- Twitter/ blog/ documentation for communication
Moreover, the Meta-DAO divides its members in three roles that can be self-selected: Entrepreneurs, Cyber-agents and Analysts, each fulfilling a role within the Meta-DAO: Entrepreneurs are the ones managing larger scale projects within the DAO, Cyber-agents support Entrepreneurs in implementation, and Analysts speculate in the decision-making of the DAO via the futarchy mechanism.
Four different types of proposals can be used by members for the futarchy mechanism. These are categorized by area (business and operations) and scope (projects and direct actions). Business projects transform financial capital into revenue-generating products, while business direct actions adjust these products for customer satisfaction and profitability. Operations proposals support these endeavors with necessary resources and personnel.
Initial Meta-DAO assessment
In order to increase the understanding of the Meta-DAO’s functioning, we analyze the organization based on the three complexity science mechanisms introduced earlier in this article.
By using discord without hidden channels and with the possibility of participating anonymously, the Meta-DAO is a prime example of a system where collective intelligence can be cultivated. Information flows are transparent, individuals have the necessary privacy and time to reason about issues and freely express their opinions. The barriers to entry into the core of the DAO are quite permeable. In particular it seems anyone can just join the discord and start participating in core activities. Nevertheless, the information on how to meaningfully contribute could be improved (e.g. by blog articles such as this one being better integrated in the tools).
When it comes to digital democracy, there is a differing accomplishment in both principles.
On the one hand, it is not quite clear if the Meta-DAO attempts to merge deliberation and decision-making (e.g. by removing deliberation and letting the market completely decide) or if social consensus or indication should first be reached in the associated proposal channels on Discord. An indication for the latter is the following post in the cyber-capitalist channel.
Nevertheless, if social consensus is desired, better deliberation tools than discussions in proposal channels could be utilized such as viewpoints.xyz or pol.is.
On the other end, decision making is where Meta-DAO shines due to its novel market-based decision-making that accounts for all available information and weights it according to one’s own beliefs. It can be argued whether this is the most effective decision-making tool for all vote contexts human society can think of (and hence maybe Robin Hanson saying: voting on values), but in the case of the Meta-DAO it most likely is: The goal of the DAO is to increase token value, those proposals are passed that increase the value and speculators are incentivized to find the exact token values by considering all available information. It is hard to think of a more efficient mechanism for increasing the national welfare measurement of the Meta-DAO that is measured with the Meta-token.
As for digital democracy, in the self-organization of the Meta-DAO we notice a mismatch in accomplishment between its two principles. There are no explicit mechanisms in place that enable people to act besides the improvement proposals. This is most likely due to the general trend in DAOs that tend to migrate towards proposal mechanisms for all aspects of an organization’s governance. Nevertheless, it takes time until a proposal has a meaningful chance to pass, considering the previous image regarding social consensus, but also in general considering the voting period of five days. Urgent issues such as a hole in the boat might not be fixable in such a way. Also, in general, it is questionable if all actions need DAO-wide consensus or if this ultimately restricts the scalability, creativity and resilience of the DAO.
On the other hand, self-determined and autonomous actions by DAO members in the name of the Meta-DAO are possible, as everyone is considered part of the Meta-DAO if one desires. Feedback on those actions are quite imminent due to potential impacts on token price which, due to the nature of the DAO, have a higher chance of reflecting the true state of the organization (when compared to other DAOs or web2 organizations). Also, feedback is promptly and often given and exchanged over Discord.
Also, retroactive funding schemes are being actively discussed, which further act as valid feedback mechanisms for DAO contributors on which actions are meaningful for the DAO.
In summary, the Meta-DAO successfully implements most of the principles of the three mechanisms, but still offers room for improvement when it comes to deliberation and empowering members to act.
Outlook: Improving self-organization in DAOs with idea markets
Even in a Futarchy neither all actions within the DAO require consensus nor reaching consensus on a decision guarantees implementation of the decision. In particular, making actions dependent on DAO-wide consensus can ultimately inhibit the autonomy of the individual, making the self-organization and eventually the DAO fail (because of the limitations of hierarchical execution mechanisms in complex systems).
Taking the above image of the boat, an alternative approach to that of reaching consensus quickly and then collectively acting should exist. In particular, the DAO should have mechanisms in place that empower the individual to act in the very moment where a need for action arises.
A mechanism to facilitate this is the idea market: On traditional crowdfunding platforms, the idea proposer also has to be the one who must act and execute. This introduces significant friction, as the one with an idea in a particular situation is not necessarily the one who has the means to act on it. The core idea of idea markets is to create a split between idea proposers and idea executors (and potentially idea evaluators), letting everyone crowdsource ideas, donate to these ideas, and take up these ideas, rewarding all participants fairly.
This would create a transparent database of actions that can be performed in context of the DAO. The DAO could then, in order to accelerate a particular action, support an action financially by deciding on a proposal that funds that activity. An executor who picks up a task knows transparently how much funding is currently associated with a particular task and can thus plan accordingly.
The idea market is complementary to the Futarchy mechanism. Futarchy is a mechanism that makes decision-making in DAOs more efficient (see “organization”), whereas the idea market is a mechanism that makes self-organization in DAOs more efficient (see Yin-Yang in the image above). In particular, we see how both mechanisms may be integrated into one tool, e.g. decision making within the idea market is determined by the market mechanism of the futarchy. For instance, an idea is decided to have been successfully implemented if a particular threshold on the pass-conditional market is reached. Besides using futarchy as a decision-making tool on improvement proposals, this would be an additional application scenario of this efficient voting mechanism.
Mapped to the roles in the Meta-DAO, Entrepreneurs are most likely those entering ideas to the market (potentially to support the implementation of their projects/ ventures), cyber-agents pick them up (for immediate payments) and analysts use the market-based voting to decide on successful execution.
“We now use democracy both to decide what we want, and to decide how to get what we want. We might instead still have democracy say what we want, but let speculative markets say how to get what we want.” — Robin Hanson
Overall, this approach could bring the Meta-DAO closer to its roots, with the most capable individuals crowdsourcing the hows (‘entrepreneurs’) and executing them (‘cyber agents’), all crowdfunded by the community and successful implementation decided on by market dynamics (‘Futarchy’).
We are bullish on the future of the idea market, because where would it be easier to implement such a market then in a DAO that is governed by market principles?
This blog post has been written as part of the Meta-DAO track in the Solana Scribes Content Hackathon. In the spirit of putting one’s money where one’s mouth is, and of improving the Meta-DAO: to kickstart the illustrated idea market, 50% of the prize money this article receives shall be awarded directly to the idea executor (“cyber-agent”) who implements the idea market (the first “donation” to the execution pool) — payout decided by the Meta-DAO’s futarchy mechanism on a corresponding proposal.
Let the markets decide.
Conclusion
The Meta-DAO is an exciting experiment that utilizes Futarchy to a) apply the collective intelligence of its community as direct as possible into its decision making and b) to consider all available information in decision making, and thus showcases a way forward on how we can effectively go about deciding on the hows addressing our societal challenges. By aligning the incentives between its goal (token value) and the voting mechanism (higher valued conditional market), the DAO most likely utilizes the most efficient decision making for its purpose and it would be interesting to explore it in other contexts.
In order to further leverage on this efficient voting mechanism, this article proposes a market-based mechanism to crowdfund activities within the DAO that rewards both idea proposers (“entrepreneurs”) and idea executors (“cyber-agents”). This increases the efficiency in implementing actions by a) removing the need for social consensus in executing (minor) tasks, b) decoupling the need for the idea proposer to also be its executor, and c) enabling anyone to crowdfund ideas. This idea market mechanism should leverage the Meta-DAOs futarchy mechanism to decide which idea proposers and executors are rewarded.
Overall, the article embeds all three — the Meta-DAO, Futarchy and DAOs — into the larger field of complex system science and opens the door for further collaboration and cross-fertilization between these domains. In particular, it highlights why futarchies might be a better form of governance because they directly map the collective intelligence of their communities to decision making, as compared to previously utilized governance/ voting mechanisms. Investigating and experimenting in such novel forms to solve our global challenges is deeply meaningful and justifies the existence of the Meta-DAO.
A big thank you to Uroš for his comprehensive feedback and the Meta-DAO and WiHi communities where such ideas can be worked out and implemented.
