Futarchy is an innovative approach to governance that combines prediction markets with traditional decision making processes. Futarchy, in a way, extends democracy and adds an additional “skin in the game” element for the members in the governance.
The term ‘futarchy’ is derived from two words: ‘future’ and the Greek word ‘arkhein’ or ‘archy’ which means to rule or govern. It was introduced by economist Robin Hanson, where members in this system would “vote on values, but would bet on beliefs”. But, what does that even mean?
Let’s consider an example where there is an Airline company that wants to expand its business and has options to partner with two different companies. One company focuses on shipping of goods while the other company focuses on daily retail customers. In a democratic process, the airline company’s leadership or board of directors or shareholders would express their values in terms of their own priority whether their objective is to increase market share, switch to goods shipping or expand on customer care. They would vote on their values and come up with a decision.
But in futarchy, the “voting process” is extended by having an extra step of “bet on beliefs”. In this case, the said leadership and people involved in making the decision would trade financial securities based on their beliefs about the potential outcomes of partnering with each of the two companies. For instance, if participants believe that partnering with the first company will increase revenue share, market growth etc., they would buy securities (or in simple words ‘stocks’) associated with that outcome and those who think partnership with the second company would be better, they would buy securities associated with that outcome.
At first, this may seem complex and a bit impractical, but hold on, we will go in depth of this and learn more about the entire procedure in a practical way. The above mentioned example was just a blueprint of how futarchy looks in theory.
How Futarchy Works
Let's have another example and think of a decentralized organization that has a stock or coin that builds mobile phones for customers at global scale. Let’s assume the organization’s name to be “The Mobile Organization” which has a coin named $PHONE. In the below phases, we will reference this organization in each step to learn how futarchy actually works.
1. Proposal Phase
In the proposal phase, anyone can make a proposal that they believe would benefit the organization. This is the “vote on values” phase of futarchy where members vote what is the best for the organization, thus the ‘end goal’ is decided collectively in a democratic way.
For instance, the end goal for the mobile manufacturer organization is decided to be “increase product awareness” and they received these two most vital proposals:
- Proposal A: Partnership with a Hollywood actor by paying $1,000,000.
- Proposal B: Partnership with a tier 2 country’s government by reducing mobile phone’s cost by 20% for them.
2. Market Creation
After the proposal phase, markets are created for each proposal. The organization’s stock is split into as many parts as there are finalized proposals for the end goal. Each stock represents the organization’s stock with the assumption that the proposal has been accepted by the organization. In simple terms, all proposals are considered to be accepted for each different splitted stock of the same organization. Each of the splitted stock is then traded by market participants by considering various factors.
Note that both of the splitted stocks will have the same price as the original stock.
For ‘The Mobile Organization’, let’s assume its $PHONE coin is worth $10 and two different coins are derived from the original coin based on the proposal. Let’s name these two coins as $PhoneA and $PhoneB where $PhoneA represents the price of the $PHONE coin if the first proposal is implemented and $PhoneB represents the price of the $PHONE coin if the second proposal is implemented.
3. Trading Period and Outcome Determination
During the market creation phase, a trading period is determined. Speculators trade the different splitted stocks during that time period, and after the trading period ends, the stock price is compared among the original stock and the derived (or splitted) stocks based on the proposals. The most outperformed stock price will determine which proposal will be accepted.
There is a chance that none of the proposals are good enough and all the splitted stocks underperform compared to the original stock. In that case, all proposals are rejected. For instance, the mobile organization’s splitted stock $PhoneB happens to be +20% after 30 days while $PhoneA happens to be +14% only. In this case, proposal B is better than proposal A.
4. Market Closure
The winning stock is appended to the original stock. This means, the proposal that outperformed the others becomes the new stock and the rest of the proposal stocks are deemed irrelevant. In most futarchy governances, the underperformed proposal stocks are canceled and all the trades are reverted back. That means, everyone who bought the splitted stock that didn’t win will get their money back.
For example, the trades of all $PhoneB coins will be considered true and $PhoneB appends with the original $PHONE coin whereas all the trades of $PhoneA will be reverted back as if it never happened.
Advantages of Futarchy Over Other forms of Governance
1. Skin in the game.
Members have added ‘skin in the game’ in the decision making process as it involves them having to trade their own beliefs. Futarchy is a practical application of “keep your money where your mouth is”. In democracy, people vote on proposals but most of the members don’t have the capability to take right decisions. Most of the time, members in democracy vote on a proposal for the sake of voting without even caring about the proposal itself. Futarchy fixes it by bringing money and market on the table.
2. Decentralized Governance.
Futarchy doesn’t revolve around just a few key leaders but the governance is dependent on the overall market. The market gets to decide what is best for an organization instead of a few individuals (autocracy) or group of people with no skin in the game or capability (democracy)
3. Incentivized Participation.
As the best proposal with the highest stock price is determined to be implemented, the participants are incentivized to make right decisions and trade the right proposal. The overall organization can have their own incentive mechanism that rewards members who traded the winning proposal. Other forms of governance don’t have any sort of incentive mechanism for participants other than “expecting” their decision being right in future.
4. Transparency and Accountability.
All procedures involved in a futarchy governance are transparent. There cannot be any individual bias behind the curtains. This promotes accountability and trust among the organization members. If the trades are executed on a public blockchain, one can even see what proposal each member is trading. This helps in knowing the overall sentiment and objective of individual members.
In democracy, the leaders are barely held accountable for their deeds after they hold the office. There is no mechanism to ensure whether the politician has fulfilled their promises which they made during election time. Once again, futarchy fixes it, by simply removing all these middlemen and giving the power in the hands of decentralized markets. There is no way to cheat in futarchy. To punish cheaters, strict futarchy organizations can opt not to reverse the trades of the canceled proposal.
How to participate in Futarchy
Currently, there are no nations that follow futarchy, as the technology required to decentralize and automate everything wasn’t there until now. Blockchain technology enables implementation of Futarchy in the best possible way.
Vitalik Buterin, founder of Ethereum blockchain, has discussed how futarchy can be an effective model for DAOs (Decentralized Autonomous Organizations) in 2014.
There have been many organizations and products as of now that are following the Futarchy model. Some of them are:
- Meta DAO: Meta DAO is leveraging prediction markets for governance decisions in their metaverse ecosystem of various applications. Meta DAO is built on the Solana blockchain and is the best and easiest way to get started with Futarchy governance.
- Zeitgeist: Zeitgeist is an innovative platform for predicting future events. One gets rewarded if the future prediction is accurate.
- Probo: Similar to Zeitgeist, Probo enables users to trade their opinions or beliefs.
As of now, Meta DAO is the only prominent blockchain-based DAO that uses Futarchy as the main governance model. Zeitgeist and Probo on the other hand are just prediction markets that use only a smart part of Futarchy’s concepts.
That’s it for this article! Thanks for reading this far.
