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Traditional voting systems have long been considered the backbone of democratic decision-making, yet they consistently grapple with challenges like low participation rates, uninformed electorates, and undue influence from major stakeholders. Despite efforts, significant improvements to this process have remained out of reach. This research report examines these enduring issues and introduces futarchy (an innovative decision-making mechanism proposed by economist Robin Hanson in 2000) as a promising alternative. We explore how MetaDAO implements futarchy, allowing users to create, manage, and engage in market-driven governance structures. By detailing the practical steps to establish a futarchy-based Decentralised Autonomous Organisation, analysing the roles within MetaDAO, and outlining the compensation frameworks, this report aims to illuminate how leveraging predictive markets can address the shortcomings of traditional voting systems and enhance organisational governance.

The Problem with Voting

Voting in theory should be a rational process where individuals select the optimal option based on available information. However, in practice, the voting system faces significant challenges:

1. Low Participation: It is difficult to motivate people to vote.
2. Uninformed Voters: Many voters have a limited understanding of the issues at stake, even if they do participate.
3. Undue Influence: Insiders and major stakeholders can significantly sway voting outcomes, a phenomenon common in scenarios described as "governance theatre."

Despite numerous attempts to enhance the voting process, no solution has yielded significant improvements.

Futarchy: A New Approach

Futarchy, introduced by economist Robin Hanson in 2000, is an innovative decision-making mechanism that employs market predictions to guide organisational choices. While it may take time to fully comprehend, the fundamental concept is straightforward: decisions are based on speculative markets that forecast the impact of proposed actions on a key metric, such as a DAO's token value. When a proposal arises, participants speculate on whether implementing it would increase or decrease the token's worth. If the market predicts a positive effect, the proposal is approved; if a negative impact is anticipated, it is rejected. This system leverages decision markets, where people speculate on the outcomes of specific decisions like predicting a company's stock value if it replaces its CEO. In a futarchy, the organisation acts on the choices that the market indicates will enhance its value.

MetaDAO and the Implementation of Futarchy

Although futarchy was conceptualised by economist Robin Hanson in 2000, it wasn’t put into practice until the creation of MetaDAO. This platform allows users to create, manage, and engage in futarchies, and is itself governed by the principles of futarchy.

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Creating a DAO Using Futarchy

If you're keen to implement futarchy in your project, here's how you can get started. Establishing a futarchy involves defining several key parameters:

1. Proposal Duration: Proposals should have a defined active period before they can be deemed successful or unsuccessful. By default, this is three days, with time measured in Solana slots.
2. Pass Threshold: This is the percentage by which the 'pass' price must exceed the 'fail' price for a proposal to be approved.
3. Minimum Liquidity: To deter spam, proposers must secure Automated Market Maker (AMM) liquidity for their proposal markets. The required liquidity, in both USDC and the futarchy's token, varies according to each DAO's rules.
4. TWAP Sensitivity Parameters: The price factored into the Time-Weighted Average Price (TWAP) can only fluctuate by a specified dollar amount per minute. DAOs need to set this limit, typically recommended between 1-5% of the current spot price.

Currently, the service is available to a limited number of DAOs, but plans are in place to transition to a permissionless system in the future.

Introduction to Trading Proposals

In a futarchy-based DAO like MetaDAO, proposals are not just voted on in the traditional sense; they are actively traded in decision markets. This means that instead of casting votes, participants buy and sell tokens representing potential outcomes of proposals. The trading activity reflects the collective expectation of the proposal's impact on the DAO's key metrics, such as token value. By trading proposals, market participants directly influence decision-making based on their predictions and insights.

How Trading Proposals Work

1. Evaluating Proposals: Traders assess how proposed incentives might affect asset values, weighing potential dilution's impact on price.
2. Trading in Decision Markets: Each proposal has a "pass" and "fail" price. Traders speculate on asset values post-decision, buying if they predict profitable price movements.
3. Minting Conditional Tokens: Traders can mint conditional tokens using USDC, investing in either the pass or fail market, and convert them back to USDC if needed.
4. Executing Trades: After minting, traders can buy fail market tokens, adjusting the token price and securing profit if their predictions are correct.
5. Price Adjustment and Profit: The trading activity adjusts the prices in the markets. If the majority believes the proposal will have a positive effect, the price of "pass" tokens increases. Traders profit if their predictions align with the actual outcome.

Example

Suppose there is a proposal to invest in a new project expected to boost the DAO's token utility.

• Scenario: A trader believes that if the proposal passes, the token's value will increase significantly.
• Action: The trader mints $100 worth of tokens ($50 in "pass" and $50 in "fail") and then buys additional "pass" tokens, perhaps investing another $50.
• Market Reaction: As more traders buy "pass" tokens, the price rises, signalling strong market confidence in the proposal.
• Outcome: If the proposal passes and the token value increases, "pass" token holders profit based on the actual impact, while "fail" tokens become less valuable.

This mechanism ensures that proposals likely to enhance the DAO's value are more likely to pass, guided by informed market predictions.

Introduction to MetaDAO

MetaDAO represents a novel organisational model where decisions are driven by market forces rather than hierarchical structures. Though it diverges from traditional entities in its decision-making, many elements will still feel familiar. Instead of bosses or a strict hierarchy, MetaDAO appoints leaders for projects and provides compensation, albeit in unconventional forms. This document is intended as a comprehensive guide to help you navigate MetaDAO, which is still in its formative stages and will evolve based on efficacy and feedback.

Roles within MetaDAO

MetaDAO consists of diverse individuals known as futarchs, grouped into three primary roles based on their responsibilities and skills:

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Proposals: The Decision-Making Framework

Proposals are integral to MetaDAO’s operations, classified by area and scope. Here’s how they break down:

Entrepreneurs generally raise project proposals and are accountable for their execution, while any member can raise direct action proposals.

Compensation Structure

Compensation within MetaDAO is designed to incentivise productivity and alignment with the DAO's long-term objectives. The strategies include immediate payments for tactical roles and performance-based rewards for strategic roles:

While still developing a structure for compensating ongoing operations, MetaDAO recognises the importance of retroactively rewarding contributions that provide value.

Entering Futarchy

To engage with MetaDAO:

1. Participate in the Discord: The primary platform for discussions and community engagement.
2. Trade the Markets: Influence MetaDAO's direction by active trading.
3. Contribute to Projects: Direct involvement through project contributions in various forms is highly encouraged and compensated based on value added.

Value-Resolved Decision Markets in MetaDAO

MetaDAO's value-based decision-making program is versatile enough for various applications. Drawing from Hanson's concept, where values are voted on but beliefs are bet upon, this approach represents a progressive step towards integrating that methodology.

In certain instances, the core value might not be quantifiable in direct terms (such as contributing to business growth) but can be discreetly measured using a set framework, or even assessed collectively with other values.

Taking cues from Hanson's examples: GDP, health, leisure, happiness, and the environment, these metrics could all be influenced by implementing this system. While trading on health, for example, isn't practically feasible, these specialised contracts offer payouts based on future assessments relative to the established value.

To ensure these markets are resolved appropriately, MetaDAO suggests adopting a structure that aligns with existing governance models found in committees, boards, or members within DAOs. These individuals would oversee the measurement process, adhering to a detailed and stringent framework or rubric.

Advancements in oracles and on-chain data hint at a future where automated resolution might become practical. Nonetheless, the current system is designed to maintain flexibility and accommodate the existing operational norms.

Grants Program Implementation Guide

This following serves as a guide for using and implementing the grants program. It details the requirements expected of you should you decide to adopt the system.

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Prerequisites for Implementing MetaDAO's Grants Program

To effectively implement the grants program, MetaDAO requires the following:

1. Rubric: A detailed rubric is essential for evaluating the effectiveness of grants. Traders use this rubric to assess a grant's value and determine its eligibility. 

Example rubric from MetaDAO’s GitHub Using a Hypothetical Scenario

Context: ACME Corp, a developer of an innovative L1 blockchain written in FORTRAN, provides $100k grants to teams building applications to bootstrap its ecosystem.

Evaluation Criteria: ACME grades grants retroactively based on two main criteria: project completion and project adoption. Each criterion accounts for half of the grant's overall score.

Scoring Mechanism:

1. Completion:some text
   • 0 (0 points): The project ran off with the funding without releasing anything publicly.
   • 0.25 (0.25 points): The project did not launch but developed part of the product, leaving behind a usable codebase.
   • 0.5 (0.5 points): The project fully launched.
2. Adoption:some text
   • 0 (0 points): For consumer products, fewer than 50 people have used the product; for DeFi products, less than $50k in Total Value Locked (TVL).
   • 0.5 (0.5 points): For consumer products, fewer than 500 people have used the product; for DeFi products, less than $500k in TVL.
   • 1 (1 point): For consumer products, 2,500 or more users; for DeFi products, over $2.5M in TVL.

Methodology: Grants are evaluated by a committee consisting of five members: three from ACME and two from MetaDAO. The final score for each grant is the average of the scores assigned by these five committee members.

Timeline: Grants are assessed three months after they have been awarded. This allows enough time to evaluate both the completion and adoption aspects of the projects.

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2. Minimum Liquidity: MetaDAO specifies the minimum liquidity needed in a grant market, recommended to be between $2,000 and $20,000, with at least 20% of the grant's average expected size. Greater liquidity generally provides a stronger incentive to accurately price a market.
3. Grant Size: MetaDAO outlines the amounts that grantees can request, which may be a fixed amount or vary within a specified range.
4. Desired Threshold: MetaDAO sets a performance threshold that the market must meet or exceed for a grant to be awarded. For example, thresholds might be set at '50%' or '85%' based on specific criteria.
5. Trading Period: MetaDAO advises that the markets should run for a duration of three days.

In the MetaDAO system, grants progress through several distinct stages:

1. Ideation
   The process begins when an individual conceives an idea for a potential grant. Once committed to the idea, they draft a grant proposal. This proposal may adhere to an optional template provided by MetaDAO.
2. Decision Market
3. Spot Market
4. Resolution

Each stage is integral to the development and execution of grants within the MetaDAO framework. Below we will explore these stages in more detail.

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Once a potential grantee has drafted their grant proposal, MetaDAO assists them in creating a decision market.

In this decision market, traders speculate on the potential effectiveness score of the grant. Participants can wager on the grant's success by purchasing E-UP tokens or bet against it by acquiring E-DOWN tokens, akin to purchasing YES and NO tokens in prediction markets. The payout for E-UP tokens is proportional to the grant's effectiveness; for instance, if a grant is assessed at 78% effectiveness, E-UP tokens will pay out $0.78 each, while E-DOWN tokens will pay out $0.22 each.

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The trading price of E-UP tokens reflects the market's consensus on the likely effectiveness of the grant.

Following the trading period, the grant is either approved or rejected. If rejected, traders are refunded, and no funds are disbursed to the grantee. If approved, the funds are transferred via the preferred method, such as a Squads multisig wallet.

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If a grant is awarded, the E-UP and E-DOWN markets remain open. This arrangement enables traders to liquidate their positions once the market has reflected their expectations. It also permits continuous evaluation of the grantee’s performance.

Resolution

Once the designated period outlined in the rubric elapses, the grant is evaluated and scored. This score is then transmitted to an oracle, allowing traders to exchange their E-UP and E-DOWN tokens for cash. This marks the completion of the process and closes the markets.

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The chart highlights the proposal activity across four DAOs: FutureDAO, Dean's List, MetaDAO, and Drift. None of the DAOs currently have live proposals, reflecting no ongoing governance activities at the moment. In terms of past proposals, MetaDAO stands out significantly with 21 past proposals, indicating a much higher level of past activity compared to the others. FutureDAO and Drift both have 4 past proposals, while Dean's List has slightly fewer with 3. Overall, MetaDAO has been the most active in terms of past governance proposals, while the others show relatively similar, low levels of historical activity.

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Conclusion

In conclusion, the enduring issues of traditional voting systems namely low participation, uninformed voters, and undue influence underscore the necessity for innovative governance models. Futarchy emerges as a promising alternative, leveraging predictive markets to make decisions based on expected outcomes rather than individual preferences alone. Through the practical application of futarchy in platforms like MetaDAO, we witness a transformative approach to organisational decision-making that aligns incentives, enhances participation, and potentially mitigates the drawbacks of conventional voting. By redefining roles, establishing transparent compensation structures, and employing value-resolved decision markets, futarchy offers a nuanced mechanism that could revolutionise how organisations and communities make collective choices. As we continue to seek more effective and equitable governance systems, embracing such market-driven approaches may be key to overcoming the longstanding challenges associated with traditional voting.

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Sources and Links Included in the Report

https://github.com/Meta-DAO

https://docs.metadao.fi/using-the-platform/creating-proposals

https://docs.metadao.fi/using-the-platform/trading-proposals

https://docs.metadao.fi/using-the-platform/value-resolved-decision-markets

https://docs.metadao.fi/futarchy/eli5

https://docs.metadao.fi/futarchy/benefits

https://docs.metadao.fi/futarchy/drawbacks

https://docs.metadao.fi/using-the-platform/creating-a-dao

https://x.com/MetaDAOProject

https://discord.com/invite/metadao

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Disclaimer: This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.