Alignment & Institutions, The Future of Crypto Governance, & Futarchy As A Zero-To-One Solution - Enter Meta-DAO
Alignment & Institutions, The Future of Crypto Governance, & Futarchy As A Zero-To-One Solution - Enter Meta-DAO
A step forward in crypto governance, institutions and incentives
Content outline:
Abstract
Context
Why Use A Futarchy For Governance?
Participants In A Futarchy
Types Of Proposals In A Futarchy
The Potential Of Meta-DAO’s Futarchy
Conclusion
Abstract:
Institutions, and how they are governed, create different incentive structures for citizens of nations. Comparing countries such as North/South Korea reveal how the right institutions create vastly different outcomes for similar populations, and this is no different in crypto. When institutions such as FTX/Alameda did not have a structure of transparency and honesty, we ended up with customer funds being used, huge amounts of fraud and theft from users.
While the majority of crypto participants use the asset class for speculation and investment due to its lucrative financial upside, ultimately, code (and the blockchain) will be adopted by human societies in various forms, due to how it allows one to check the legitimacy of ownership, provenance, proof of funds, and more.
And with Meta-DAO’s execution of an onchain futarchy, governance in crypto might have taken a giant leap forward with code being used to create a new incentive structure for market participants, allowing the forces of predictive markets and an open price to trade to help the DAO develop from a simple idea, into a benevolent organisation that can empower the sovereign individual of the 21st century.
This essay will explain in-depth how a futarchy functions, how Meta-DAO has enabled it for crypto participants with smart contract technology, and how one can begin participating in Meta-DAO’s futarchy, as well as $META’s speculative upside.
Context:
In order to understand human behaviour, it’s crucial to understand how institutions and incentive guide societies. If one lives in a low-trust, high-violence society where bribery, corruption and theft are the best means to acquiring wealth - the smartest individuals will trend towards that behaviour. If one lives in a high-trust, low-violence society where capitalism and innovation are rewarded, and building valuable businesses/assets are the best means to wealth - that too will influence that society to behave in that manner.
In the context of the blockchain, the incentive structures/institutional issues within it can be seen in a multitude of examples, such as:
A new layer-one chain deploys, and with new market participants bridging to it to buy any new tokens on it (memes, protocols, pool2-farms), anonymous developers can easily deploy tokens where they control large amounts of the supply, and sell those tokens on the open market with the exit liquidity of eager buyers
A DAO has its decisions governed by token stakers, and the token supply is accumulated by several entities who wish to redeem the DAO’s treasury, or give themselves huge financial bonuses without delivering promises to token holders. Due to the institutional structure of that DAO being controlled by who owns the most supply, decisions that enrich top holders, as opposed to the project/protocol long-term, are much more likely than not.
A new token/protocol launches with low float, with venture capitalists (VCs) and private investors owning much of the supply at a much lower valuation than current market price. As the VC/private investor tokens unlock, the monetary incentive leads to these parties to cash out their returns against public buyers, who end up bagholding at a loss.
However, Meta-DAO’s creation of a futarchy alongside the usage of smart contracts creates an entirely new governance structure that circumvents the issues seen in the examples above, and instead, is a groundbreaking step towards humans beginning to trust code for governance, as per GCR’s prediction:
What Is A Futarchy, & Why Use It For Governance?
A futarchy is an governance structure where prediction markets are used to determine decisions on policy, and where members of that structure vote on values, and bet on beliefs. First popularized by Vitalik in 2014, Meta-DAO is the first DAO to properly implement this structure on the blockchain on Solana’s Virtual Machine.
Let’s look at how Meta-DAO’s futarchy functions:
Participants in a futarchy can raise proposals for market participants to vote upon through the usage of prediction markets. Instead of decisions made via token or stakers, decisions are directly influenced by participants betting on the impact a proposal has on the $META token, and whether it will have a positive/negative impact.
Here’s what a basic futarchy proposal/decision might look like:
And in the case of Meta-DAO, the endgame of its futarchy would be it going from helping develop projects under the Meta-DAO banner, to eventually institutions, even nations working together with the DAO as it continues to grow in participants and value provided through its governance structure.
Considering that the 5 FAANG companies are known for their innovations in institutional structures, and that they have provided over 7 trillion USD worth of shareholder value, while Meta-DAO is still an early stage project, it helps frame the potential of using a futarchy for governance, and how its new structure could lay the groundwork for a more prosperous society.
Meta’s futarchy functions through the usage of the “autocrat”, a smart contract that allows proposals to be submitted to the DAO, and it creates 2 separate pass/fail token markets, which then allow market participants to speculate on the proposal, and to predict the effects it will have on Meta’s token price, $META.
The autocrat program regulates and checks the price of the pass/fail market tokens, and then either executes/disregards the proposal based on the market’s decision. The market that wins the pass/fail decision is finalized, while the losing market is reverted.
The autocrat reverts markets via the conditional_vault program, which allows users to deposit underlying tokens (either $META or $USDC currently) into a pass/fail vault (the token market), and redeem the tokens after the proposal has been decided upon. This ensures the vault will never have more liabilities than assets, and that users will always be able to redeem what they’ve placed into the proposal.
And as the structure of proposals in this futarchy allows participants to predict the proposal’s impact on $META price, this brings in the power of predictive markets and speculation to provide better governance decisions than other traditional structures. Predictive markets have been shown to predict political elections better than traditional bookmakers, forecast weather and movements in the prices of commodities, and a futarchy taps into this speculative power that would not be used in a democratic or autocratic structure.
Participants in a Futarchy:
There are 3 main roles inside a futarchy, although participants can be a composite of multiple ones:
Analysts/traders
These are market participants who speculate on token prices and market trends, contributing their speculation and predictive agency to various proposals, and to help govern a futarchy from detrimental decisions.
Entrepreneurs
These are individuals inside the futarchy that wish to build and develop projects in the interest of the futarchy. Be it someone in Meta-DAO who wishes to create a creative studio and is requesting a grant in order to hire artists and coders, or someone requesting a business development role for the DAO, entrepreneurs are crucial for helping drive innovation and creation on the base layer for a futarchy.
Cyber-agents
These are the coders and developers that help the futarchy enact proposals, and build out assets for its benefit. While the entrepreneurs guide the vision of the futarchy, and the analysts/traders help predict the outcomes of various proposals, cyber-agents are the integral engineers that keep the futarchy running, and help it function on the blockchain.
The Types of Proposals in a Futarchy:
While anyone can submit proposals to Meta-DAO, it’s recommended by Meta-DAO leader Proph3t to use one of the four formats below:
Business project
Business direct action
Operations project
Operations direct action
And anyone can view the templates for these proposals at the link here: https://blog.themetadao.org/a-futards-guide-to-the-meta-dao-7a6b8d66443a
These proposal templates help consolidate the desires of the proposer to the DAO, and ensure that the proposals are explained in enough detail for the DAO to make a balanced decision on them.
And that’s the bare bones of what a futarchy is, and how it functions!
Hopefully through this breakdown of the futarchy, the roles within it and how proposals function alongside the autocrat’s smart contracts, you can start to see the potential of this new governance model.
Now, how does the futarchy work in real life?
The Case Study of Proposal #3
After the Meta-DAO treasury grew from $10,000 to $30,000 several months after launching in November 2023, Rar3 created a proposal for Meta_DAO to raise an additional $75,000, $35,000 of those funds to be used to provide META/USDC liquidity on an AMM. The proposal passed with a pass price of $24.2, and a fail price of $18.9 - proposal link here: https://app.themetadao.org/proposal?id=3
However, Proph3t, creator of Meta-DAO, wanted the proposal to fail, and analyzed the various ways he could cause the proposal to fail, and how the futarchy’s structure prevented him from doing so as a possible bad actor.
When the proposal was live, the pass META (pMETA) was valued at $24.5, while the fail META (fMETA) was valued at $11. He considered this a huge mispricing from the market, and thus started buying the fMETA market, and selling the pMETA market. In the middle of the proposal deadline, Proph3t was sitting on 191 fMETA, and 82 pMETA, and wanted the proposal to fail so he could redeem the fMETA for normal META.
How could he possibly manipulate the markets to his favour? Well, he could actively buy the fail market, and sell the pass market, but if he was unable to change the trends in the markets, he would be stuck buying META above fair value in the fail market, and selling it in the below fair value in the pass market. On top of that, other traders might spot the price dislocation, and push it back to where prices were at the beginning.
When the Hunt brothers attempted to corner the silver market in 1979, despite the short-term spike in its price, people responded by smelting down their silver to profit from the manipulated price, bringing the market back to equilibrium. And plenty of arbitrage firms exist in traditional markets, preventing the manipulation of asset prices in more mature markets.
Or Proph3t could do a smear campaign on the proposal, but while the proposal might fail, it would damage his reputation to the futarchy in the long term, and have real financial consequences to him as someone working for the DAO.
Finally, he could do a hostage-style negotiation with the DAO, but it wouldn’t be in the interests of Meta-DAO long term to allow the passing/failing of proposals solely because of such tactics.
From this example, you can see how the futarchy works IRL, and not just on paper:
Price incentives in the pass/fail META markets for traders to speculate and predict the impact of a proposal
The financial impact of lying about the proposal’s impact on futarchy participants help prevent selfish actions
A group of individuals unified by shared values and goals under the futarchy, thus incentivising participants to act best for the DAO’s long-term future
And the immutability of the autocrat smart contracts to help determine the passing/failure of a proposal
Can you begin to grasp the revolution of this form of governance?
You get the power of prediction markets helping to correct and direct decisions, the direct incentive structure preventing bad actors, and code becoming a vital part of governance to further remove the chances of human error/manipulation in decision making.
The Potential of Meta-DAO’s Futarchy
The price of $META has gone from $25 to $1,000 over the past few months, with a circulating market cap of around 13-14 million as of February 28th 2024, showcasing the market beginning to realize the potential of the project, and what it represents - an evolution of governance structure inside the crypto space that can be used to incentivise a flywheel of positive behaviour for futarchy participants and $META holders.
Here’s a simple breakdown of this potential flywheel:
$META price is driven upward by speculators who believe in the potential upside of the token
$META price increases the monetary value of submitting quality proposals to the DAO, and building value for the futarchy
Proposals created by entrepreneurs, analysts, and futarchy participants lead to increased adoption and speculation on the $META token, with the price prediction mechanism allowing the market to participate in Meta-DAO’s governance
$META price is driven upwards by the speculation, and the reflexive cycle repeats itself
Conclusion: How much is an entirely new structure of governance and innovation worth in this asset class?
Considering the speculation we’ve seen so far this cycle on new token standards such as $ORDI and $PANDORA, as well as the growth of new protocols such as $PEAS, I have little doubt that the innovation and possibilities that $META presents as both a token and DAO have yet to be fully seen. Especially as majors continue to trend towards new all time highs, bringing new institutional as well as retail participants into crypto.
There will be a multitude of billion-dollar DAOs and protocols that will be created this cycle - and Meta-DAO has the potential to be a standout performer this cycle.
I hope you enjoyed this deep dive into what a futarchy is, what Meta-DAO’s futarchy is, how it functions, and its potential to be a groundbreaking shift forward in crypto governance. I’m personally very bullish for what $META represents, and what it can accomplish this bull market in our asset class.