Futarchy
Basics
First paper on it got released in 2000.
How it works
"Futarchy covers multiple use cases but we will consider only a specific kind of futarchy here, which we call asset futarchy. Under asset futarchy, people own shares in a valuable asset (such as a company), and the fate of that asset is subject to decision markets. Decision markets are a mechanism whereby participants bet on the value of the asset conditional on whether a given proposal passes or fails. This is the kind of futarchy implemented by the MetaDAO. Futarchy is not merely a governance system built on prediction markets. When used to control valuable assets, it is a foundational new primitive that enables joint ownership without requiring trust between owners or third parties. This understanding of futarchy has several consequences, but in particular it undermines justifications for coin voting DAO governance as a stopgap measure until something better comes along.
Implementations
Amoveo; claiming it uses Futarch-is-law.
Drift; will use it for grants
MakerDAO said MKR infulences DAI in a Futarch-like model
Limitations
- From Umbra Research (10-2024):
"Settlement price calculation
So far we treated the settlement price—the price that decides whether the proposal passes—as a given. However it is not trivial to calculate a fair settlement price. The current TWAP implementation used by the MetaDAO is a work in progress. Its current form demands a lot of active participation and monitoring from traders. For example, a trader who does not monitor a MetaDAO decision market until the final day of trading may find that they disagree strongly with the TWAP value but cannot do anything about it because the market has diverged from the TWAP.
Custodial relationships and economic security
Futarchy is not sufficient for cases where a DAO has control over an asset but is not supposed to be the owner of that asset. For example, consider an upgradeable borrow-lend protocol with a fair market cap of $10m and total deposits of $100m. Futarchy alone would not be enough to reject a proposal to steal all the deposits—in such a scenario the attacker would be rational in buying DAO tokens above their “fair” value.
Regulatory and legal questions
For regular companies, decision markets would want to have some legal weight—if the losing side could just sue to overturn a decision market outcome, that would make them much less useful.
Insider trading laws could also create difficulties. There may be proposals where insiders do not possess non-public information material to the proposal, but restrictions around how and when they may trade in company shares effectively preclude them from participating in decision markets.
Soft rug pulls
Futarchy cannot prevent a founder from promising to work on something, raising funds and then running off with the money. For example, the Parrot DAO incident saw the DAO's assets distributed among token holders on a pro-rata basis in a way that might appear fair at first glance. The catch here was that the team held most of the tokens because they minted themselves those tokens for free, so this represented the founders pocketing at least $47m of investor funds after doing almost no work.
Futarchy would not have prevented this, as the original sin of the Parrot Protocol was giving funds to a team with no mechanism to stop them from running away with the money. The one and only Parrot DAO proposal would likely still have passed under futarchy, because at that point it was better than doing nothing."
