Understanding futarchy on Solana

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DAO governance has long struggled with plutocratic voting, insider problems and voter apathy, among many other problems.

Over the years, several teams in crypto have explored the idea of using futarchy to solve these problems. The MetaDAO team on Solana is at the forefront of this effort.

To date, MetaDAO has onboarded at least a dozen teams creating active proposals, including Drift, Sanctum, Marinade and more.

Futarchy is simply a decision market. Think Polymarket, but rather than betting on an outcome, you’re betting on consequences, or what should happen.

Why would a trader with no stake or relationship to the DAO be incentivized to bet wisely? Simply because they are putting their own money at stake.

Here’s a simplified example of how your average MetaDAO decision market works.

A hypothetical InflationDAO pays out tens of millions in weekly liquidity mining rewards that helped juice the protocol’s early growth but is now unsustainable and draining the treasury. 

In a one-token-one-vote DAO, there’s little hope to slash emissions. Economically illiterate token holders don’t give a shit, or entrenched interest groups playing the short-term game don’t want to see their yield rewards disappear.

In a MetaDAO decision market, however, a contributor can take action with a futarchy proposal: “Cut rewards by 70%; Pass threshold: 3%.”

MetaDAO proceeds by opening two conditional markets with two tokens “PASS” and “FAIL.” Traders deposit an underlying asset like USDC and receive both PASS and FAIL tokens. The vote commences. 

As the vote goes on, traders who believe InflationDAO’s emissions should stop can express that view by buying PASS tokens, pushing PASS token price up, or selling FAIL tokens, creating sell pressure for FAIL. Same goes for the reverse.

After the vote ends, if the time-weighted average price (TWAP) of the PASS or FAIL token is at least 3% above the other, the vote concludes and only the winning side is able to redeem their tokens for USDC.

Here’s the key point. The pass threshold is simply a “finish line” that traders need to keep the average above.

If spreads are already ~3% on spot, buying more PASS only makes sense if you want to lift the TWAP above 3% (and maintain a buffer that will persist until the market closes); otherwise you’re just subsidizing the outcome with little expected profit.

Unlike prediction markets, decision markets are not zero-sum. Traders are not merely concerned with the directional outcome of the vote, but also with the basic question “Did you own the correctly priced token at an attractive entry price by the time the outcome finalizes?”

Futarchy aligns the wisdom of crowds with governance. It makes it possible for a well-informed minority to steer governance decisions toward socially good outcomes that may be deeply unpopular with the majority.

But whether or not the outcome is “socially good” depends on the objective that the market is encoded for.

Rather than a 3% TWAP spread, the market could use a pass threshold like token price as a rough proxy for company “welfare.”

The design space around decision markets are varied. Yet, futarchy seems to be only useful for significant  governance decisions that would move the spread on the market price of the reference assets.

“Should InflationDAO change its mascot from Uncle Sam to Lee Kuan Yew?” is not a variable that traders will expect to influence the price of the underlying reference asset.

What decision markets harness on is the universal profit motive to drive sound decision-making. And if you believe in that theoretical promise, just imagine how it can change the face of ICOs.

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