One of the more interesting long-term practical benefits of the technology and concept behinddecentralized autonomous organizations is that DAOs allow us to very quickly prototype and experiment with an aspect of our social interactions that is so far arguably falling behind our rapid advancements in information and social technology elsewhere: organizational governance. Although our modern communications technology is drastically augmenting individuals’ naturally limited ability to both interact and gather and process information, the governance processes we have today are still dependent on what may now be seen as centralized crutches and arbitrary distinctions such as “member”, “employee”, “customer” and “investor” – features that were arguably originally necessary because of the inherent difficulties of managing large numbers of people up to this point, but perhaps no longer. Now, it may be possible to create systems that are more fluid and generalized that take advantage of the full power law curve of people’s ability and desire to contribute. There are a number of new governance models that try to take advantage of our new tools to improve transparency and efficiency, including liquid democracy and holacracy; the one that I will discuss and dissect today is futarchy.

一个更有趣的技术和概念去中心化的自治组织长期的实际的益处是，DAO允许我们非常快速地原型和实验我们社会相互作用的一个方面，迄今为止可以说是落后于我们迅速发展的信息和社会技术的方方面面：组织管理。尽管我们现代的通信技术大大提高了个人的自然能力的限制，包括交换和聚合 以及处理 信息，但是当今社会的管理流程，依然依赖于有缺憾的和武断区分的中心化方式，比如“成员”，“员工”，“客户”和“投资人” － 起初来讲，这些特性是需要的，因为要管理如此多的人是有天然的困难的，但是或许不应该长久。现在，可能建立一种系统，更具有灵活性和普遍性，更能充分利用人们的能力和贡献意愿的规律曲线。有许多新的管理模型来试图利用我们的新工具来改进透明度和功效，包括 流动民主和 holacracy；今天我会论述和剖析futarchy。

The idea behind futarchy was originally proposed by economist Robin Hanson as a futuristic form of government, following the slogan: vote values, but bet beliefs. Under this system, individuals would vote not on whether or not to implement particular policies, but rather on a metric to determine how well their country (or charity or company) is doing, and then prediction markets would be used to pick the policies that best optimize the metric. Given a proposal to approve or reject, two prediction markets would be created each containing one asset, one market corresponding to acceptance of the measure and one to rejection. If the proposal is accepted, then all trades on the rejection market would be reverted, but on the acceptance market after some time everyone would be paid some amount per token based on the futarchy’s chosen success metric, and vice versa if the proposal is rejected. The market is allowed to run for some time, and then at the end the policy with the higher average token price is chosen.

futarchy背后的理念是由经济学家Robin Hanson最早提出 ，作为一种非常超前的管理方式，口号是：投资价值，对赌理念。在这个系统之下，个人不再是投票是否实现某个特定的政策，而是对一个度量标准投票，来决定他们的国家（组织或者公司）来如何做，然后预测市场 来选择最优化度量的政策。一个政策是执行还是驳回，两个预测市场会建立，每个各包含一种资产，一个市场根据采纳政策来调整，一个根据驳回来调整。如果政策被接受，所有在“反对市场”的交易将会返还，但是“接受市场”经过一段时间后，根据futarchy选择的成功度量标准，每个人会为单位代币支付一定费用，如果政策被驳回，反之亦然。市场被允许运行一段时间，然后在最后有更高token价格的政策会被选中。

Our interest in futarchy, as explained above, is in a slightly different form and use case of futarchy, governing decentralized autonomous organizations and cryptographic protocols; however, I am presenting the use of futarchy in a national government first because it is a more familiar context. So to see how futarchy works, let’s go through an example.

我们对futarchy的兴趣，如之前介绍，是在一种略微不同的形式和情况下使用它，管理去中心化的自治化组织和密码学协议；尽管如此，我首先展示futarchy在国家管理上的用例，因为它是更熟悉的内容。为了了解futarchy如何工作，让我们来看一个例子。

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 bailed 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.

假定成功的度量标准是万亿美金的GDP，且在10年以后。有这样一个提议政策“拯救银行”。两种资产会发行，都承诺10年后会为每1$的token，每1万亿美金GDP支付1美金。市场允许运行两周，在此期间“yes” token达到了平均价格24.94$（意味着市场认为10年后的GDP会达到24.94万亿美金），同时“no” token达到了平均价格26.20$。银行将不会被拯救。所有在“yes”市场的交易将会恢复，在10年之后每一个拥有“no”市场的资产的人将会获得每个token $26.20。

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一般来讲，在futarchy里的资产是一个零供应资产，类似于Ripple IOUs 或 BitAssets。这意味着token产生的唯一方式，只有通过衍生品市场；个人可以下单来买卖token，如果两个订单价格匹配，token会从卖家转移到买家并换取美元。即使你没有token，你同样可以出售它们；如果那样，卖家值需要存入一些抵押品来支付最终的负奖励。零供应资产的一个重要结果是，因为正和负的数量，所以奖励互相抵消，除了通信和共识的费用以外，市场实际上是免费的运行。

The Argument For
Futarchy has become a controversial subject since the idea was originally proposed. The theoretical benefits are numerous. First of all, futarchy fixes the “voter apathy” and “rational irrationality” problem in democracy, where individuals do not have enough incentive to even learn about potentially harmful policies because the probability that their vote will have an effect is insignificant (estimated at 1 in 10 million for a US government national election); in futarchy, if you have or obtain information that others do not have, you can personally substantially profit from it, and if you are wrong you lose money. Essentially, you are literally putting your money where your mouth is.

论点

自从这个理念被提出后，Futarch就变成了一个非常争议的话题。这个理论的益处是很多的。首先，futarchy解决了民主中的“投票沉默”和“合理的非理性”问题，个人甚至没有足够的激励去学习潜在的有害的政策，因为可能他们的投票的对结果的影响非常微弱（对美国政府的全国选举估计在1/100,00,000 )；在futarchy，如果你掌握了其他人没有的信息，你可以从中获得相当的利润，如果你错了就会损失金钱。本质上讲，这简直就是不要空口无凭，用钱来实践。

Second, over time the market has an evolutionary pressure to get better; the individuals who are bad at predicting the outcome of policies will lose money, and so their influence on the market will decrease, whereas the individuals who are good at predicting the outcome of policies will see their money and influence on the market increase. Note that this is essentially the exact same mechanic through which economists argue that traditional capitalism works at optimizing the production ofprivate goods, except in this case it also applies to common and public goods.

其次，随着时间的发展市场会有进化压力而变得越来越好；政策结果预测不准的个体会赔钱，他们在市场上的影响会减弱，但是擅长预测政策结果的人会获得收益，并且他们在市场上的影响力会变大。注意，这在本质上和经济学家认为的传统资本主义在私人商品上生产最优化，是相同的机制和原理，另外它也适用于普通和公有资产的情形。

Third, one could argue that futarchy reduces potentially irrational social influences to the governance process. It is a well-known fact that, at least in the 20th century, the taller presidential candidate has been much more likely to win the election (interestingly, the opposite bias existed pre-1920; a possible hypothesis is that the switchover was caused by the contemporaneous rise of television), and there is the well-known story about voters picking George Bush because he was the president “they would rather have a beer with“. In futarchy, the participatory governance process will perhaps encourage focusing more purely on proposals rather than personalities, and the primary activity is the most introverted and unsocial affair imaginable: poring over models, statistical analyses and trading charts.

另外，可以说futarchy减少了在管理过程中的潜在的非理性社会因素。有一个有名的事实，至少在20世纪，身高比较高的总统候选人更容易在选举获胜（，有趣的是在1920年之前，却是相反的偏见；一个潜在的假说是，这种转化是和电视机的增长同时发生的），有一个有名的故事是，投票者选择 George Bush是因为他作为总统“他们更喜欢和这样的人喝啤酒”。在futarchy中，参与政府管理的流程会鼓励人更多的关注到提议本身，而不是个性，最主要的活动是和无关社交的：研究模型，统计学分析和交易图。

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这个系统也非常精妙，它结合了公共的参与者和专业的分析人士。很多人反对民主，因为群众的平庸和易煽动性，他们更喜欢让专业的技术专家来做决定。Futarchy，如果它有效的话，允许个人专家甚至分析公司来做单独的调查和分析，通过在市场上购买或者卖出，将他们的发现融入市场，通过他们和公众对信息的不同来获利 － 有点像信息理论的水利发电站或者基于渗透的发电厂。但是完全不像刻板的组织官僚的技术专家，很大的不同的在于它有没有固定的成员，futarchy允许任何人参与进来，成立他们自己的分析公司，如果他们的分析准确的话，他们最终会胜出 － 我们寻找的正是这种广义性和流动性。

The system also elegantly combines public participation and professional analysis. Many people decry democracy as a descent to mediocrity and demagoguery, and prefer decisions to be made by skilled technocratic experts. Futarchy, if it works, allows individual experts and even entire analysis firms to make individual investigations and analyses, incorporate their findings into the decision by buying and selling on the market, and make a profit from the differential in information between themselves and the public – sort of like an information-theoretic hydroelectric dam or osmosis-based power plant. But unlike more rigidly organized and bureaucratic technocracies with a sharp distinction between member and non-member, futarchies allow anyone to participate, set up their own analysis firm, and if their analyses are successful eventually rise to the top – exactly the kind of generalization and fluidity we are looking for.

反对的观点

反对futarchy的观点在最概括的是有两篇文章，一篇是Mencius Moldbug的，另外一篇是Paul Hewitt的。这两篇文章都很长，有几千个字，但是反对的观点总结下来可以分为以下几类：

1. 一个强有力的实体或者联合政府如果想要看到一个预期结果，可以通过不断的买“yes”tokens，然后在卖空“no”token，为了将价格打压到他想要的价格。

The Argument Against
The opposition to futarchy is most well-summarized in two posts, one by Mencius Moldbug and theother by Paul Hewitt. Both posts are long, taking up thousands of words, but the general categories of opposition can be summarized as follows:
A single powerful entity or coalition wishing to see a particular result can continue buying “yes” tokens on the market and short-selling “no” tokens in order to push the token prices in its favor.

2. 市场一般来讲会被认为有波动性，这可能会有很大的波动范围，因为它是“自指示的” － 也就是说，它是由大量的人购买组成的，因为他们看到其他人在买，他们又不擅长收集实际的信息。这个影响会特别有害，因为它可能会被市场操作者利用。

Markets in general are known to be volatile, and this happens to a large extent because markets are “self-referential” – ie. they consist largely of people buying because they see others buying, and so they are not good aggregators of actual information. This effect is particularly dangerous because it can be exploited by market manipulation.

3. 单个政策的估算影响，它的衡量标准相对于外界不稳定的“噪音”很小，最终的衡量结果可能受政策是否执行影响不大，尤其是长期政策时。这意味着，预测市场的结果可能跟单独政策最后的执行关联很小。

The estimated effect of a single policy on a global metric is much smaller than the “noise” of uncertainty in what the value of the metric is going to be regardless of the policy being implemented, especially in the long term. This means that the prediction market’s results may prove to be wildly uncorrellated to the actual delta that the individual policies will end up having.

4. 人的价值是复杂的，很难压缩成用数值衡量的；事实上，在衡量标准也会产生很多分歧，就像在是否同意某些政策那样。另外，恶意的实体在这种民主下，不是去游说某个不好的政策，取而代之，可以通过游说提高衡量标准的方式来做作弊，众说周知它和政策本身关联很大。

Human values are complex, and it is hard to compress them into one numerical metric; in fact, there may be just as many disagreements about what the metric should be as there are disagreements about policy now. Additionally, a malicious entity that in current democracy would try to lobby through a harmful policy might instead be able to cheat the futarchy by lobbying in an addition to the metric that is known to very highly correlate with the policy.

5.预测市场是零和的；因此，因为参与者必须保证非零的通讯费用，这对于参与者是不合理的。因此，参与者最终会很少，所以没有足够的市场深度，专家和分析公司通过收集信息也没有足够的利润可图。

A prediction market is zero-sum; hence, because participation has guaranteed nonzero communication costs, it is irrational to participate. Thus, participation will end up quite low, so there will not be enough market depth to allow experts and analysis firms to sufficiently profit from the process of gathering information.

针对第一个观点，Robin Hanson 和 Mencius Moldbug的辩论视频，后面David Friedman 的插话（Milton的儿子）或许是最好的资源了。Hanson 和 Friedman的观点是，存在这样的组织通过这样的攻击方式使“yes”和“no”的市场价格不会反应真实的市场最佳知识，此时会有大量的利益收益机会在人们面前，使人们做和攻击者相反的事情，因此价格会慢慢回到正确的平衡点。为了反应真实的市场最佳知识，使价格可议用来决定是否执行政策，需要取某段时间的均值，而不是即时的值。只要市场能使人们从中获利，通过抵消操纵者对市场的操纵，诚实的参与者总会胜出，并从操纵者哪里获取资金。根本上讲，对于Hanson 和 Friedman，恶意的破坏futarchy需要51%以上的攻击。

On the first argument, this video debate between Robin Hanson and Mencius Moldbug, with David Friedman (Milton’s son) later chiming in, is perhaps the best resource. The argument made by Hanson and Friedman is that the presence of an organization doing such a thing successfully would lead to a market where the prices for the “yes” and “no” tokens do not actually reflect the market’s best knowledge, presenting a massive profit-earning opportunity for people to put themselves on the opposite side of the attempted manipulation and thereby move the price back closer to the correct equilibrium. In order to give time for this to happen, the price used in determining which policy to take is taken as an average over some period of time, not at one instant. As long as the market power of people willing to earn a profit by counteracting manipulation exceeds the market power of the manipulator, the honest participants will win and extract a large quantity of funds from the manipulator in the process. Essentially, for Hanson and Friedman, sabotaging a futarchy requires a 51% attack.

最能反击这个观点的例子，是Hewitt生动的表达了，就是这个市场的“自指示性”。如果“如果拯救银行，未来十年美国GDP的万亿美元”的价格，开始是24.94，“不拯救银行，未来十年美国GDP的万亿美元”价格是26.20，然后有一天，两个价格“yes”的是27.3，“no”的是25.1，人们实际上指的价格已经偏离，就开始在市场交易来做补偿，或者他们会采用新的价格来正确的反应市场意志，甚至会加强它，正如人们经常认为的投机泡沫那样。

The most common rebuttal to this argument, made more eloquently by Hewitt, is the “self-referential” property of markets mentioned above. If the price for “trillions of US GDP in ten years if we bail out the banks” starts off $24.94, and the price for “trillions of US GDP in ten years if we don’t bail out the banks” starts off $26.20, but then one day the two cross over to $27.3 for yes and $25.1 for no, would people actually know that the values are off and start making trades to compensate, or would they simply take the new prices as an indicator of what the market thinks and accept or even reinforce them, as is often theorized to happen in speculative bubbles?

自我参照

至少有一点是乐观的。传统的市场可能常常是自我参照的，加密货币市场尤其更是，因为它们没有内在的价值（也就是说它们的价值来源于它们的价格），但是自我参照发生是因为不同的原因，而不是投资者互相跟随对方投资。机制如下。假设一个公司想要通过发行股票的方式来筹集资金，现在有100万股票，每股400美元，所以市值为4亿美金；它想要扩容10%来稀释持有者的股票。那样它需要筹集4000万美金。公司的市值应该以总共股息（公司可以支付的）为目标，同时包含未来股息的适当折扣含利率；这样，如果价格是稳定的，它意味着市场预期公司最终发行了等价于4亿美金的总股利，在当前价格下。

There is actually one reason to be optimistic here. Traditional markets may perhaps be often self-referential, and cryptocurrency markets especially so because they have no intrinsic value (ie. the only source of their value is their value), but the self-reference happens in part for a different reason than simply investors following each other like lemmings. The mechanism is as follows. Suppose that a company is interested in raising funds through share issuance, and currently has a million shares valued at $400, so a market cap of $400 million; it is willing to dilute its holders with a 10% expansion. Thus, it can raise $40 million. The market cap of the company is supposed to target the total amount of dividends that the company will ever pay out, with future dividends appropriately discounted by some interest rate; hence, if the price is stable, it means that the market expects the company to eventually release the equivalent of $400 million in total dividends in present value.

现在，假设公司股票的价格因为某种原因翻倍了。公司现在可以筹集8000万美金，允许它做两倍的事情。通常资本是回报递减的，但是并不总是这样，有可能额外的4000万美金公司市值，可以赚取更多的利润，所以新的股价也是完美的符合的 － 尽管市场价格涨到8亿美金会是因为操纵或者其他随机噪音影响（外因）。比特币有同样的效果在更加显著的方式上；当价格上涨，所有的比特币用户变的富有，容许他们进行更多的商业，表明这是一个高的价格水平。比特币的缺少内在价值，意味着自我参照的影响是唯一的影响，可以影响价格。

Now, suppose the company’s share price doubles for some reason. The company can now raise $80 million, allowing it to do twice as much. Usually, capital expenditure has diminishing returns, but not always; it may happen that with the extra $40 million capital the company will be able to earn twice as much profit, so the new share price will be perfectly justified – even though the cause of the jump from $400 to $800 may have been manipulation or random noise. Bitcoin has this effect in an especially pronounced way; when the price goes up, all Bitcoin users get richer, allowing them to build more businesses, justifying the higher price level. The lack of intrinsic value for Bitcoin means that the self-referential effect is the only effect having influence on the price.

预测市场完全没有这样的属性。除了预测市场本身之外，没有任何合理的机制使得“yes”代币的价格会对美国未来十年的GDP有任何影响。那样，唯一的自我参照的影响是，“每个人遵循个人的判断”。尽管如此，这个影响的度依然具有争议；或许因为相当的识别影响是存在的，现在有一种被认可的文化，逆向投资，政治就是一个每个人都可以保持非正统观点的领域。另外，在futarchy中，相关的并不是单独的价格多高，而是那一个相对更高；如果你认为拯救是糟糕的，但是你看到赞成拯救的价格因为某种原因是高出2.2美元，你知道肯定哪里出问题了，理论上，你可以从中获得可靠的收益。

Prediction markets do not have this property at all. Aside from the prediction market itself, there is no plausible mechanism by which the price of the “yes” token on a prediction market will have any impact on the GDP of the US in ten years. Hence, the only effect by which self-reference can happen is the “everyone follows everyone else’s judgement” effect. However, the extent of this effect is debatable; perhaps because of the very recognition that the effect exists, there is now an established culture of smart contrarianism in investment, and politics is certainly an area where people are willing to keep tounorthodox views. Additionally, in a futarchy, the relevant thing is not how high individual prices are, but which one of the two is higher; if you are certain that bailouts are bad, but you see the yes-bailout price is now $2.2 higher for some reason, you know that something is wrong so, in theory, you might be able to pretty reliably profit from that.

Absolutes and differentials
This is where we get to the crux of the real problem: it’s not clear how you can. Consider a more extreme case than the yes/no bailouts decision: a company using a futarchy to determine how much to pay their CEO. There have been studies suggesting that ultra-high-salary CEOs actually do not improve company performance – in fact, much the opposite. In order to fix this problem, why not use the power of futarchy and the market decide how much value the CEO really provides? Have a prediction market for the company’s performance if the CEO stays on, and if the CEO jumps off, and take the CEO’s salary as a standard percentage of the difference. We can do the same even for lower-ranking executives and if futarchy ends up being magically perfect even the lowliest employee.
Now, suppose that you, as an analyst, predict that a company using such a scheme will have a share price of

​2.50 (ie. you’re 95% sure the price will be between

​9.70). You also predict that the CEO’s benefit to the share price is

​0.03 to

​7.70 if the CEO stays on and $7.40 if they leave; in short, the market thinks the CEO is a rockstar, but you disagree. But how do you benefit from this?
The initial instinct is to buy “no” shares and short-sell “yes” shares. But how many of each? You might think “the same number of each, to balance things out”, but the problem is that the chance the CEO will remain on the job is much higher than 50%. Hence, the “no” trades will probably all be reverted and the “yes” trades will not, so alongside shorting the CEO what you are also doing is taking a much larger risk shorting the company. If you knew the percentage change, then you could balance out the short and long purchases such that on net your exposure to unrelated volatility is zero; however, because you don’t, the risk-to-reward ratio is very high (and even if you did, you would still be exposed to the variance of the company’s global volatility; you just would not be biased in any particular direction).
From this, what we can surmise is that futarchy is likely to work well for large-scale decisions, but much less well for finer-grained tasks. Hence, a hybrid system may work better, where a futarchy decides on a political party every few months and that political party makes decisions. This sounds like giving total control to one party, but it’s not; note that if the market is afraid of one-party control then parties could voluntarily structure themselves to be composed of multiple groups with competing ideologies and the market would prefer such combinations; in fact, we could have a system where politicians sign up as individuals and anyone from the public can submit a combination of politicians to elect into parliament and the market would make a decision over all combinations (although this would have the weakness that it is once again more personality-driven).
Futarchy and Protocols and DAOs
All of the above was discussing futarchy primarily as a political system for managing government, and to a lesser extent corporations and nonprofits. In government, if we apply futarchy to individual laws, especially ones with relatively small effect like “reduce the duration of patents from 20 years to 18 years”, we run into many of the issues that we described above. Additionally, the fourth argument against futarchy mentioned above, the complexity of values, is a particular sore point, since as described above a substantial portion of political disagreement is precisely in terms of the question of what the correct values are. Between these concerns, and political slowness in general, it seems unlikely that futarchy will be implemented on a national scale any time soon. Indeed, it has not even really been tried for corporations. Now, however, there is an entirely new class of entities for which futarchy might be much better suited, and where it may finally shine: DAOs.
To see how futarchy for DAOs might work, let us simply describe how a possible protocol would run on top of Ethereum:

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Every round, T
new DAO-tokens are issued. At the start of a round, anyone has the ability to make a proposal for how those coins should be distributed. We can simplify and say that a “proposal” simply consists of “send money to this address”; the actual plan for how that money would be spent would be communicated on some higher-level channel like a forum, and trust-free proposals could be made by sending to a contract. Suppose that n
such proposals, P[1]
… P[n]
, are made.

The DAO generates n
pairs of assets, R[i]
and S[i]
, and randomly distributes theT
units of each type of token in some fashion (eg. to miners, to DAO token holders, according to a formula itself determined through prior futarchy, etc). The DAO also providesn
markets, where market M[i]
allows trade between R[i]
and S[i]
.

The DAO watches the average price of S[i]
denominated in R[i]
for all markets, and lets the markets run for b
blocks (eg. 2 weeks). At the end of the period, if market M[k]
has the highest average price, then policy P[k]
is chosen, and the next period begins.

At that point, tokens R[j]
and S[j]
for j != k
become worthless. Token R[k]
is worth m
units of some external reference asset (eg. ETH for a futarchy on top of Ethereum), and token S[k]
is worth z
DAO tokens, where a good value for z
might be 0.1 and m
self-adjusts to keep expenditures reasonable. Note that for this to work the DAO would need to also sell its own tokens for the external reference asset, requiring another allocation; perhaps m
should be targeted so the token expenditure to purchase the required ether is zT
.

Essentially, what this protocol is doing is implementing a futarchy which is trying to optimize for the token’s price. Now, let’s look at some of the differences between this kind of futarchy and futarchy-for-government.
First, the futarchy here is making only a very limited kind of decision: to whom to assign the T
tokens that are generated in each round. This alone makes the futarchy here much “safer”. A futarchy-as-government, especially if unrestrained, has the potential to run into serious unexpected issues when combined with the fragility-of-value problem: suppose that we agree that GDP per capita, perhaps even with some offsets for health and environment, is the best value function to have. In that case, a policy that kills off the 99.9% of the population that are not super-rich would win. If we pick plain GDP, then a policy might win that extremely heavily subsidizes individuals and businesses from outside relocating themselves to be inside the country, perhaps using a 99% one-time capital tax to pay for a subsidy. Of course, in reality, futarchies would patch the value function and make a new bill to reverse the original bill before implementing any such obvious egregious cases, but if such reversions become too commonplace then the futarchy essentially degrades into being a traditional democracy. Here, the worst that could happen is for all the N tokens in a particular round to go to someone who will squander them.
Second, note the different mechanism for how the markets work. In traditional futarchy, we have a zero-total-supply asset that is traded into existence on a derivatives market, and trades on the losing market are reverted. Here, we issue positive-supply assets, and the way that trades are reverted is that the entire issuance process is essentially reverted; both assets on all losing markets become worth zero.
The biggest difference here is the question of whether or not people will participate. Let us go back to the earlier criticism of futarchy, that it is irrational to participate because it is a zero-sum game. This is somewhat of a paradox. If you have some inside information, then you might think that it is rational to participate, because you know something that other people don’t and thus your expectation of the eventual settlement price of the assets is different from the market’s; hence, you should be able to profit from the difference. On the other hand, if everyone thinks this way, then even some people with inside information will lose out; hence, the correct criterion for participating is something like “you should participate if you think you have better inside information than everyone else participating”. But if everyone thinks this way then the equilibrium will be that no one participates.
Here, things work differently. People participate by default, and it’s harder to say what not participating is. You could cash out your R[i]
and S[i]
coins in exchange for DAO tokens, but then if there’s a desire to do that then R[i]
and S[i]
would be undervalued and there would be an incentive to buy both of them. Holding only R[i]
is also not non-participating; it’s actually an expression of being bearish on the merits of policy P[i]
; same with holding only S[i]
. In fact, the closest thing to a “default” strategy is holding whatever R[i]
and S[i]
you get; we can model this prediction market as a zero-supply market plus this extra initial allocation, so in that sense the “just hold” approach is a default. However, we can argue that the barrier to participation is much lower, so participation will increase.
Also note that the optimization objective is simpler; the futarchy is not trying to mediate the rules of an entire government, it is simply trying to maximize the value of its own token by allocating a spending budget. Figuring out more interesting optimization objectives, perhaps ones that penalize common harmful acts done by existing corporate entities, is an unsolved challenge but a very important one; at that point, the measurement and metric manipulation issues might once again become more important. Finally, the actual day-to-day governance of the futarchy actually does follow a hybrid model; the disbursements are made once per epoch, but the management of the funds within that time can be left to individuals, centralized organizations, blockchain-based organizations or potentially other DAOs. Thus, we can expect the differences in expected token value between the proposals to be large, so the futarchy actually will be fairly effective – or at least more effective than the current preferred approach of “five developers decide”.
Why?
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 blog 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 consequence that you end up trusting unknown individuals”). As far as social consequences go, this simple version of futarchy is far from utopia, as it is still fairly similar to a profit-maximizing corporation; however, the two important improvements that it does make are (1) making it harder for executives managing the funds to cheat both the organization and society for their short-term interest, and (2) making governance radically open and transparent.
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. Token sales, including our own Ethereum ether sale, have been a controversial topic, to a large extent because they introduce this blemish of centralization into what is otherwise a pure and decentralized cryptosystem; however, if a new protocol starts off issuing itself as a futarchy from day one, then that protocol can achieve incentivization without centralization – one of the key breakthroughs in economics that make the cryptocurrency space in general worth watching.
Some may argue that inflationary token systems are undesirable and that dilution is bad; however, an important point is that, if futarchy works, this scheme is guaranteed to be at least as effective as a fixed-supply currency, and in the presence of a nonzero quantity of potentially satisfiable public goods it will be strictly superior. The argument is simple: it is always possible to come up with a proposal that sends the funds to an unspendable address, so any proposal that wins would have to win against that baseline as well.
So what are the first protocols that we will see using futarchy? Theoretically, any of the higher-level protocols that have their own coin (eg. SWARM, StorJ, Maidsafe), but without their own blockchain, could benefit from futarchy on top of Ethereum. All that they would need to do is implement the futarchy in code (something which I have started to do already), add a pretty user interface for the markets, and set it going. Although technically every single futarchy that starts off will be exactly the same, futarchy is Schelling-point-dependent; if you create a website around one particular futarchy, label it “decentralized insurance”, and gather a community around that idea, then it will be more likely that that particular futarchy succeeds if it actually follows through on the promise of decentralized insurance, and so the market will favor proposals that actually have something to do with that particular line of development.
If you are building a protocol that will have a blockchain but does not yet, then you can use futarchy to manage a “protoshare” that will eventually be converted over; and if you are building a protocol with a blockchain from the start you can always include futarchy right into the core blockchain code itself; the only change will be that you will need to find something to replace the use of a “reference asset” (eg. 264 hashes may work as a trust-free economic unit of account). Of course, even in this form futarchy cannot be guaranteed to work; it is only an experiment, and may well prove inferior to other mechanisms like liquid democracy – or hybrid solutions may be best. But experiments are what cryptocurrency is all about.