So what is Futarchy and why we should pay attention [77]

An introduction to Futarchy and its implications for governance

Back in October, I tweeted that "I've recently become obsessed with Futarchy." At the time, in my research, for a good book to use for my (BOP-Approved) class for crypto here in FCI Beaumont, I found Melanie Swan's O'Reilly book on Blockchain.

In the section on on-chain governance, she mentioned "Futarchy," and defined it as a "two-level process by which individuals vote first on general outcomes and then on specific policies and tactics." When I originally wrote my first draft of this editorial in October, I described in detail how I saw the originators of the idea of Futarchy could see their vision implemented with the current set of tools we see at play in the DeFi ecosystem.

It was upon further reflection this week as I examined my notes and read some of the e-news briefings my editor and son have put together for me about recent advancements in artificial intelligence much like anthropomorphic, Turing-Passed AI, futarchy is already here and working.

In case you haven't noticed, you soon will: AI has made a quantum leap forward in the last six months. OpenAI's various projects have long since crossed the Rubicon of its ability to pass a Turing test (the test developed by Alan Turing to determine the sentience of a machine). ChatGPT and Midjourney are two algorithms that fulfill the Hollywood promise of AI with text and imagery respectively.

But What is Futarchy, Exactly?

If we dig deeper into the concept alongside Vitalik Buterin and Robin Hanson, we find ourselves digging deeply into intensely capitalistic processes.

From Vitalik's post on Futarchy:

"Suppose that the success metric chosen is GDP in trillions of dollars, with a time delay of ten years, and there exists a proposed policy: "bail out the banks." Two assets are released, each of which promises to pay $1 per token per trillion dollars of GDP after ten years. The markets might be allowed to run for two weeks, during which the "yes" token fetches an average price of $24.94 (meaning that the market thinks that the GDP after ten years will be $24.94 trillion) and the "no" token fetches an average price of $26.20. The banks are not mailed out. All trades on the "yes" market are reverted, and after ten years everyone holding the asset on the "no" market gets $26.20 apiece."

It's an interesting concept, not without its flaws. Vitalik spends a lot of time in his paper discussing the pros and cons in this 2014-era piece on the topic. Since then, though, it has become clear that the dominant tool stack for futarchy is DAO tooling coupled with DeFi smart contracts. Rather than requiring the creation of yes/no tokens, as Vitalik talks about, capital is pooled, ownership fractionalized, and long and short derivatives function as the yes/no votes on the concept.

Still, there's something to be learned here from these old theoretical models as applied to DAOs:

Again, from Vitalik's piece on the topic:

"So what are the practical benefits of adopting such a scheme? What is wrong with simply having blockchain-based organizations that follow more traditional models of governance, or even more democratic ones?” Since most readers of this newsletter are already cryptocurrency advocates, we can simply say that the reason why this is the case is the same reason why we are interested in using cryptographic protocols instead of centrally managed systems — cryptographic protocols have a much lower need for trusting central authorities. If you are not inclined to distrust central authorities, the argument can be more accurately rephrased as "cryptographic protocols can more easily generalize to gain the efficiency, equity and informational benefits of being more participatory and inclusive without leading to the consequences that you end up trusting unknown individuals."

"However, up until now, one of the major sore points for a cryptographic protocol is how the protocol can fund and govern itself; the primary solution, a centralized organization with a one-time token issuance and presale, is basically a hack that generates initial funding and initial governance at the cost of initial centralization [...] however if a new protocol starts off issuing itself as a futarchy from day one, then that protocol can achieve incentivization without centralization."

Considering this as the key benefit of Futarchy, we're already living in this future. Most social impact DAOs fit this description already! I documented this phenomenon in my research report for the NCRI, a trend that fits this futarch-esque model.

The Stack

The stack and model I describe in that paper is":

1) There's a crisis or pressing social issue that arises.

2) A crowdfund is launched and promoted.

3) Fractionalization of an asset (NFT or a treasury) then occurs.

4) A series of increasingly specific proposals follow until the treasury is depleted, deployed or the goal is achieved.

The current preferred tool stack seems to be:

— an EVM layer one NFT, fractionalized via crowdfunding somehow,

— a social layer,

— Discord or Telegram,

— Twitter and spaces / podcasts and blogs,

— Discourse, a forum stack for proposal evolution,

— Snapshot(.org) for consensus and voting,

— Gnosis Safe for multisignature operations,

— Utopia Labs for Treasury and Payroll management.

There have arisen a number of issues with this approach. Some of these issues were fairly predictable — others were not. In the early moments of most social impact DAOs, those who entered into it for purely financially speculative reasons tried to exert the greatest influence... not for mission-related purposes but to simply extract value from the treasury or the governance token.

Typically, once those voices subside, the projects find themselves bereft of the momentum that created them, and voter apathy common to typical democratic processes sets in with the speculator class. As some might say, though, this is a feature, not a bug. There almost always exists processes to short and long any token in the DeFi ecosystem because of the swath of AMMs and decentralized lending tools that exist for fractionalized NFTs and ERC-20s. As is detailed in both the seminal pieces on Futarchy, "yes" and "no" votes (that is, "long" and "short") are ways to bet belief (as in: do I believe this belief is worth making sure is funded and solved).

Remember Melanie Swan's explanation? That's different from the US system because we tie intrinsically together both implementation with general outcomes (or, arguably we tie in theoretical concrete general outcomes with actual notorious liars in the forms of politicians and parties).

Health care reform, entitlement reform, and criminal justice reform are all very necessary major national initiatives that have been very famously stalled out due to being intrinsically tied in the public eye with piss-poor implementations. Futarchy (as implemented in the modern crop of Social Impact DAOs) has proven remarkably effective at moving the needle in their areas of focus.

Simply put (from a public policy perspective): it prevents the baby from being tossed out with the bathwater.

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Blockchain Bulletin

• Decentralized Twitter alternative Damus comes to Apple’s App Store. The Damus app, powered by Nostr, has come to the Apple App store making the debut of yet another Twitter alternative that uses peer-to-peer relays to distribute messages, reported CoinTelegraph.

• Addressable is building digital fingerprinting tech that can associate Web3 wallets with Twitter accounts. The startup Addressable has come up with a digital fingerprinting algorithm that it claims can match anonymous crypto wallets to social media accounts so marketers can more easily target wares, and it raised $7.5 million, reported TechCrunch.

Blockchain Behind the Scenes

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