Exploring Futarchy: The Innovative Governance Model Revolutionizing DAOs on Solana

In a recent episode of the Validated podcast, host Anatoly Yakovenko sat down with Colin Platt, co-founder of MetaDAO, to discuss the innovative governance model known as Futarchy. This conversation sheds light on a potentially revolutionary approach to decision-making in decentralized autonomous organizations (DAOs) and blockchain ecosystems, with a particular focus on its implementation on the Solana blockchain.

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What is Futarchy?

Futarchy is a novel governance model that leverages decision markets instead of traditional voting systems. At its core, Futarchy asks participants to evaluate the potential impact of a decision rather than simply voting yes or no on a proposal. This approach aims to harness the wisdom of markets to make more informed and effective decisions in governance systems.

Colin Platt explains the fundamental difference between Futarchy and other governance models:

"Futarchy is using decision markets in place of voting. So it's different in the fact that you're asking somebody to say, what would this impact be if it were to occur versus a prediction market that says, will this occur? And instead of voting, yes or no, what we use in decision markets is whatever the higher impact would be is the decision that's made."

This distinction is crucial, as it shifts the focus from mere preference to potential outcomes, potentially leading to more thoughtful and consequential decision-making processes.

The Theoretical Underpinnings of Market-Based Governance

The concept of Futarchy is rooted in market theory and the behavior of markets. It operates on the principle that sophisticated participants will trade based on their information, creating an incentive structure where better information leads to potential profit. This system aims to drive attention and participation through inherent incentives rather than relying on costly campaigns to encourage voter turnout.

Platt argues that this market-driven approach can be more effective than traditional voting systems:

"I think the market drives parties that can surface information that you may not know or have access to. So a wisdom of the crowd doesn't, you know, like experts and specialists don't look at crowds unless the crowds are better than the experts, the specialists."

This perspective suggests that Futarchy could potentially lead to more informed decisions by leveraging specialized knowledge and expertise within a market-based framework.

Addressing Potential Pitfalls

While discussing the potential benefits of Futarchy, the conversation also touched on possible drawbacks and concerns. One key issue raised was the possibility of market crashes or bubbles in a governance context. Platt acknowledged that market perturbations could occur in Futarchy systems, much like they do in traditional markets and governance structures.

However, he argues that the inherent risk associated with trading in these markets could serve as a natural check against manipulation:

"The fact is, is that trading in a market, you have to put capital at risk. So you may exhaust yourself as a participant because how long, you know, do you trade poorly until you have no more capital to trade, right?"

This risk factor could potentially discourage bad actors from attempting to manipulate the system repeatedly, as they would eventually run out of capital to influence decisions.

Implementing Futarchy in Practice

The conversation then shifted to the practical implementation of Futarchy, particularly in the context of MetaDAO on the Solana blockchain. Platt explained that their current system uses a base token (in this case, META) and USDC as the quote token. They create conditional tokens for each proposal, representing "pass" and "fail" outcomes.

Participants can trade these conditional tokens, effectively speculating on the potential impact of a proposal passing or failing. Platt elaborates:

"What we do is we create a canonical fork of the tokens to participate in these markets, uh, for in this case right now in this version, we have pass and fail. Okay. So you have, uh, you deposit a meta token and then, uh, you mint conditional tokens, which is pass and fail meta."

This system allows for a more nuanced approach to governance, where participants can express their views on the potential outcomes of a proposal rather than simply voting yes or no.

Real-World Examples from MetaDAO

To illustrate how Futarchy works in practice, Platt shared several examples from MetaDAO's experience. One notable case involved a proposal to burn tokens from the treasury:

"Burn tokens was, was an interesting one that passed, right? So we, we took there. There was like, Hey, they have DV looks too high, even though these aren't in circulation. So I want to burn all the tokens."

This example demonstrates how Futarchy can lead to decisions that might not have been reached through traditional voting methods. The market determined that burning tokens was the right course of action, even if not everyone agreed with the decision initially.

Another interesting case involved proposals for rewarding tokens at below-market prices. These proposals generated high activity and contentious debates within the community, showcasing how Futarchy can surface and resolve complex issues.

The Potential for Futarchy in Technical Decision-Making

The discussion also explored the potential for using Futarchy in making technical decisions for blockchain networks. While the current implementation might not be directly applicable to decisions like adjusting Solana's CE limit, Platt suggested that Futarchy could be used to determine who should be responsible for making such technical decisions:

"What you could do is you could afford to say who should the team be. Right. So like, like, who should be core contributors to the network? Yeah. And say like, you know, and you could have all different kinds of constraints with that."

This approach could potentially lead to more effective delegation of technical decision-making power within blockchain ecosystems.

Safeguarding Against Social Sentiment Capture

One of the critical questions raised during the conversation was how to prevent Futarchy systems from being captured by social sentiment or populist movements. Platt referenced the work of Robin Hanson, the original proposer of Futarchy, suggesting that additional economic constructs could be created to counterbalance potentially harmful decisions:

"Effectively, you could have people trading those markets that would then counterbalance in some mechanism or design for profit so that you could revert decision making, right? So if this passes a certain threshold of price, then the decisions reverted."

This approach aims to create a system of checks and balances within the Futarchy framework, potentially mitigating the risks associated with extreme or harmful decisions.

The Current State of Futarchy Tooling on Solana

MetaDAO has made significant progress in developing tooling for Futarchy on the Solana blockchain. In March, they launched a proposal to build out "Futarchy as a service," creating a platform that allows multiple DAOs to use Futarchy governance as tenants on a smart contract.

Platt explains:

"So that was launched in the 21st of May. So we completed that in little under eight, eight weeks. And, uh, now any dow can go and, you know, contact us. We've got a little, we've got gated front end for right now because we, we don't necessarily want anybody just creating 10 drift dowels."

This development represents a significant step forward in making Futarchy accessible to a wider range of projects and DAOs within the Solana ecosystem.

Potential Applications and Future Outlook

As Futarchy continues to evolve, its potential applications are expanding. Platt believes that as users become more familiar with the system, it could become the standard for effective decision-making in decentralized organizations. He notes particular interest from DAOs looking to run their grants programs using Futarchy.

Looking to the future, Platt envisions Futarchy playing a role in high-level decisions about protocol development and team composition:

"What you could do is you could afford to say who should the team be. Right. So like, like, who should be core contributors to the network? Yeah. And say like, you know, and you could have all different kinds of constraints with that. But I think that that's where you could probably start to say that that will move the price in some one way or another."

This suggests that Futarchy could potentially influence not just individual decisions but the overall direction and composition of blockchain projects and DAOs.

Challenges and Considerations

While the potential benefits of Futarchy are significant, the conversation also highlighted several challenges and considerations. One key issue is the learning curve associated with participating in these markets. Unlike traditional voting, where participants simply choose yes or no, Futarchy requires a more nuanced understanding of market dynamics and potential outcomes.

Platt acknowledges this challenge:

"This is not when people come in and they have this preconceived notion of participation being voting, right? And then they're like, well, I have these tokens. How do I trade them to express my vote? And you're like, are you a good trader? No, I don't. Well, then don't don't participate. This is not not your place to play."

This barrier to entry could potentially limit participation in Futarchy systems, at least initially. However, as users become more familiar with the concept and tools improve, this challenge may diminish over time.

The Role of Experts in Futarchy

One of the intriguing aspects of Futarchy discussed in the podcast is the potential for leveraging expert knowledge more effectively than in traditional voting systems. Platt argues that in Futarchy, experts are likely to be the ones crafting proposals and actively participating in the markets:

"Absolutely the way that in theory this evolves is that the experts are the ones that are building the proposals themselves, right? Interesting. Okay. So, they're the ones that say, 'Hey, we believe that lead should be this level because they're the experts in that space.' And they're the ones crafting the proposals and then the markets trade based on that information."

This approach could potentially lead to more informed and effective decision-making, as those with the most relevant knowledge and expertise have a direct impact on the outcome through their market participation.

Comparing Futarchy to Traditional Governance Models

Throughout the conversation, comparisons were drawn between Futarchy and more traditional governance models, including representative democracy and direct democracy. While acknowledging that no governance system is perfect, Platt argues that Futarchy offers unique advantages, particularly in the context of blockchain and decentralized systems.

One key difference highlighted is the lack of a clear analogy to citizenship in blockchain systems:

"We don't have an analogy to a citizen, right? Without forcing everyone to go through KYC, which defeats a part of the purpose of many of these permissionless decentralized networks."

Futarchy potentially offers a way to make collective decisions without relying on concepts like citizenship or enforcing strict identity verification, which could be particularly valuable in decentralized, global networks.

The Economics of Participation in Futarchy

A crucial aspect of Futarchy is the economic model that underpins participation. Unlike traditional voting systems where participants typically don't risk anything by voting, Futarchy requires participants to put capital at risk when expressing their views on potential outcomes.

Platt explains the mechanics:

"So you have your like underlying base token right now. And then you have, uh, USDC is the quote token. Yeah. And what we do is we create a canonical fork of the tokens to participate in these markets, uh, for in this case right now in this version, we have pass and fail."

Participants can then trade these conditional tokens, effectively speculating on the outcomes of proposals. This economic model creates incentives for informed participation and potentially discourages frivolous or uninformed decision-making.

Addressing Concerns About Market Manipulation

One of the concerns raised during the discussion was the potential for market manipulation in Futarchy systems. Platt acknowledged this risk but argued that the economic incentives built into the system could help mitigate it:

"Rich people like to stay rich. Yeah. And they're rich for a reason. So the, you know, like you, you can only buy so many because your capital is at risk each time. Right. So effectively you buying as, as you selling."

This perspective suggests that while manipulation attempts might occur, the inherent risks and costs associated with such attempts could serve as a natural deterrent.

The Importance of Metrics in Futarchy

A recurring theme throughout the conversation was the importance of defining appropriate metrics for evaluating the impact of decisions in Futarchy systems. While the current implementation on Solana uses token price as the primary metric, Platt acknowledges that more sophisticated metrics could be developed for different types of decisions.

He explains:

"If we sat there and we said, okay, uh, we want to measure attendance and we want to measure a new founders that are now inspired. We want to measure a new Asian founders or new Asian developers that have come online to Solana. I think that if you set those as the criteria and you said, okay, now let's trade and evaluate this, then suddenly you have a measurable thing."

This flexibility in defining metrics could allow Futarchy to be applied to a wide range of decision-making scenarios beyond simple token price impacts.

The Potential for Futarchy in Grant Programs

One specific application of Futarchy that generated particular interest was its potential use in managing grant programs for DAOs. Platt noted that several DAOs have expressed interest in using Futarchy for this purpose:

"We've seen the interest of dowels that want to run their, their grants program with it. And I think that that is certainly something that, that has an effective."

This application could potentially lead to more efficient and effective allocation of resources within DAOs, leveraging market mechanisms to identify and support the most promising projects and initiatives.

Futarchy and Technical Decision-Making

While the current implementation of Futarchy might not be directly applicable to low-level technical decisions like adjusting blockchain parameters, the discussion explored how it could be used to inform higher-level technical governance. Platt suggested that Futarchy could be used to determine who should have decision-making power for technical matters:

"What you could do is you could afford to say who should the team be. Right. So like, like, who should be core contributors to the network? Yeah. And say like, you know, and you could have all different kinds of constraints with that."

This approach could potentially lead to more effective delegation of technical decision-making authority within blockchain ecosystems, ensuring that those with the most relevant expertise are empowered to make critical decisions.

The Evolution of Futarchy on Solana

The podcast provided insights into the current state of Futarchy implementation on the Solana blockchain, particularly through the work of MetaDAO. Platt shared that they have successfully launched a "Futarchy as a service" platform, allowing multiple DAOs to leverage Futarchy governance:

"So that was launched in the 21st of May. So we completed that in little under eight, eight weeks. And, uh, now any dow can go and, you know, contact us. We've got a little, we've got gated front end for right now because we, we don't necessarily want anybody just creating 10 drift dowels."

This development represents a significant step forward in making Futarchy accessible to a wider range of projects within the Solana ecosystem, potentially paving the way for broader adoption of this innovative governance model.

Balancing Expertise and Participation in Futarchy

One of the nuanced aspects of Futarchy discussed in the podcast is the balance between leveraging expert knowledge and ensuring broad participation. While Futarchy aims to surface the best information and expertise, there's also a recognition that broad participation can be valuable in certain contexts.

Platt notes:

"So I don't think that there's this evolution where you want everybody voting per se. You just want to surface the best information because this is outcome driven."

This perspective suggests that Futarchy could potentially lead to more informed decision-making by prioritizing expertise and relevant information over sheer numbers of participants.

The Role of Social Consensus in Futarchy Systems

Despite the focus on market mechanisms, the discussion also highlighted the ongoing importance of social consensus in Futarchy-based governance systems. Platt mentioned that even in their fully on-chain implementation, there's still a reliance on social agreement to follow through on market outcomes:

"We still issue memo prop, you know, memo instructions that inform people that this is the action that you're supposed to take. And that's how we structured the Marshall Islands Dow. It's actually governed by memo instructions on the Solana blockchain."

This insight underscores the fact that while Futarchy provides a new mechanism for decision-making, it still operates within a broader social and organizational context.

Looking to the Future of Blockchain Governance

As the conversation concluded, both Platt and the host reflected on the potential long-term impact of Futarchy on blockchain governance and beyond. While acknowledging the challenges and potential pitfalls, there was a sense of optimism about the potential for this model to address some of the fundamental issues in current governance systems.

Platt expressed his belief in the future potential of Futarchy:

"I think, you know, as users become familiar with this, I think that this will be the SES quote. That's just what I believe with it. I think it, it allows you to make effective decisions."

This optimistic outlook suggests that as the blockchain ecosystem continues to evolve, innovative governance models like Futarchy could play an increasingly important role in shaping the future of decentralized decision-making.

In conclusion, the discussion between Colin Platt and Anat

oly Yakovenko provides a comprehensive exploration of Futarchy as an innovative governance model. From its theoretical underpinnings to practical implementations on the Solana blockchain, the conversation highlights both the potential benefits and challenges of this approach. As blockchain ecosystems continue to evolve, Futarchy represents an intriguing possibility for more effective, informed, and market-driven decision-making in decentralized organizations.

Facts + Figures

• Futarchy is a governance model that uses decision markets instead of traditional voting systems.
• MetaDAO has implemented Futarchy on the Solana blockchain, using META tokens and USDC as base currencies.
• The system creates conditional "pass" and "fail" tokens for each proposal, which participants can trade.
• MetaDAO has traded 19 proposals using their Futarchy system as of the podcast recording.
• In March, MetaDAO proposed and subsequently built a "Futarchy as a service" platform, completing it in under 8 weeks.
• The platform was launched on May 21st, allowing multiple DAOs to use Futarchy governance as tenants on a smart contract.
• One notable proposal that passed through the Futarchy system was to burn tokens from the treasury.
• Betting markets for presidential elections have outperformed traditional pollsters with as few as 400-1,400 traders.
• MetaDAO's implementation of Futarchy on Solana is fully on-chain, with memo instructions used to inform actions.
• The Marshall Islands DAO is governed by memo instructions on the Solana blockchain, showcasing a real-world application of this governance model.

Questions Answered

What is Futarchy?

Futarchy is a governance model that uses decision markets instead of traditional voting systems. It asks participants to evaluate the potential impact of a decision rather than simply voting yes or no on a proposal. This approach aims to leverage market mechanisms to make more informed and effective decisions in governance systems.

How does Futarchy differ from prediction markets?

Futarchy differs from prediction markets in that it focuses on the potential impact of a decision rather than predicting whether an event will occur. In Futarchy, participants trade on the expected outcomes of different decisions, and the option with the highest expected positive impact is chosen. This allows for a more nuanced evaluation of potential decisions compared to simple yes/no predictions.

How does MetaDAO implement Futarchy on Solana?

MetaDAO implements Futarchy on Solana by creating conditional tokens for each proposal, representing "pass" and "fail" outcomes. Participants can trade these tokens using META (the base token) and USDC. The system is fully on-chain, with memo instructions used to inform actions based on market outcomes. This implementation allows for a market-driven approach to decision-making within the Solana ecosystem.

What are some potential applications of Futarchy in blockchain governance?

Futarchy could potentially be used for various aspects of blockchain governance, including managing grant programs, determining core contributors to a network, and making high-level decisions about protocol development. It may be particularly useful for decisions where specialized knowledge or expertise is crucial, as it allows those with relevant information to have a more significant impact on outcomes through market participation.

How does Futarchy address concerns about market manipulation?

Futarchy addresses concerns about market manipulation through its inherent economic incentives. Participants must put capital at risk when trading, which can discourage frivolous or manipulative behavior. Additionally, the system is designed so that repeatedly making poor trades will eventually exhaust a participant's capital, limiting their ability to influence future decisions. This creates a natural check against long-term manipulation attempts.

What are the main challenges in implementing Futarchy?

Some of the main challenges in implementing Futarchy include the learning curve for participants, as it requires a more nuanced understanding of market dynamics compared to simple voting. Defining appropriate metrics for evaluating decision outcomes can also be challenging, especially for complex or multi-faceted decisions. Additionally, there's a need to balance expert participation with broader community involvement to ensure the system remains inclusive and representative.

How might Futarchy evolve in the future of blockchain governance?

As users become more familiar with Futarchy and tooling improves, it could potentially become a standard for effective decision-making in decentralized organizations. Future developments may include more sophisticated metrics for evaluating outcomes, integration with other governance models, and applications to a wider range of decision types. As blockchain ecosystems mature, Futarchy could play an increasingly important role in shaping the future of decentralized governance.