Everything Blockchain

Futarchy and DAO Governance

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There is a solution for everything which is wrong with our democracies, it is called futarchy.

In a futarchy the users/people vote on what they want, like in a normal democracy. E.g. they want more employment or in the case of crypto-communities like Ethereum, Eos, Tron and Steem, they want more active users.

How prediction markets make committees and politicians obsolete

For the implementation, no politician is needed. Each user who thinks he/she knows best, can make a proposal. But he/she should better do their homework, for each proposal you have to make a deposit. In the case your proposal gets elected and shows to be bad, the money is gone.

The voting on proposals is based on an initial influence token (similar to SP), everyone starts with the same amount. For each proposal, there is a market for “what happens if the proposal gets elected” and for “what happens if the proposal gets not elected”. In principle you have two options you can go long. The price of the option decides if the proposal is accepted or rejected.

In the end, after a fixed amount of time, the outcome is checked against the bets of the users. The closer a bet/prediction comes to reality, the more it gets rewarded. In the case you are are wrong, you lose your money. With a system like this, there is evolutionary pressure on the set of voters. Only voters who vote on proposals which are beneficial will gain influence. Plus a real careful research of the proposals is incentivized. (Merkle et al. 2016)

Why Steem is the perfect platform for futarchy

Vitalik Buterin 2017 wrote an article about Futarchy and DAOs and how he would like to see those systems implemented on top of Ethereum. The problem with Ethereum is, that each transaction costs a relatively high transaction fee, so that the voting becomes a zero-sum game. In the long run, you are better of doing nothing at all… because obviously with weak non-ergodicity and fees like in stock markets most people will lose anyways so that the best strategy would be simply holding.

With Steem we, of course, have the non-ergodic nature of future bets but we have no fees and since management problems are not as complex as predicting prices (which is impossible), there would be still a possible gain from trying. The only limitation is how much you research and model the effects of the proposal. The average guy is not as intelligent or motivated to make money? Ok, then he better keeps his legs still. The result will be that not the most popular shit gets elected but the proposal whichs EFFECT matches the wishes of the people/users.

Futarchy was already proposed back in 2000 by the economist Robin Hanson (updated version. Hanson 2013), now with ultra-low fee blockchains like Steem, it’s first that it’s possible to test these new economic governance models. It does not matter whether we get the point of a real DAO or some other community, it will come anyways.

There is detailed information out there. The 2017 Paper by Ralph Merkle peer-reviewed by Vitalik Buterin and Charles Hoskinson gives a good introduction.

Sources

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