The ultimate CLOUD utility: Futarchy Governance

$CLOUD
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Abstract

Governance nowadays represents the main utility of DeFi tokens, usually seen as a meme, it’s taken seriously by us - CLOUD holders - who see value in the protocol and speculate on it at a fully diluted valuation of more than 270 million of dollars.

Now what? Should we just implement governance on Realms and have the same boring DAO as every protocol back in 2022? Or should we take it as seriously as the investors, traders & community members who value $CLOUD at $0.275?

The problem

As a Solana DeFi enthusiast, I can testify that governance is broken:

  • Low participation: it’s hard to get people to vote.

  • Uninformed voters: even when you can get people to vote, they often very limited understanding of the decision at hand.

  • Whale and insider influence: insiders can have huge sway on the vote outcome. Crypto abounds with “governance theater.”

It’s long been said that people buy with their head but vote with their heart. What if we could flip that on its head and use market processes to make decisions? That is the central idea behind futarchy .

In a futarchy, decisions don’t go to votes: they get traded. Proposals pass when the market speculates that they’re good. Proposals fail when the market speculates that they’re bad.

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The solution

Futarchy was invented by economist Robin Hanson in 2000 but a rising project on Solana is facilitating its use for Solana DeFi projects: MetaDAO. It provides a platform to create, manage, and participate in futarchies, and is itself governed by a futarchy. This would allow Sanctum to create a way to vote on proposals through futarchy and give $CLOUD the ultimate utility: voting on what matters, with your head.

Drift Protocol has already integrated it within its DAO and people have recently voted on whether to fund a Superteam Earn grant. Traders thought it would not benefit the token price so the proposal failed.

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9 Likes
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A Rather interesting governance model…

Would you have past case studies of previous blockchains that are older that may have had utilised a Futarchy-focused governance model?

Interesting insight into Futarchy here by Derek Lim 3 years ago:

Several concerns I’ve found in this futarchy-based model is whether it can hold against:

1. Proposal Size Factor:
The effect of any given policy will be too small to counter all the other noise that affects the welfare function.

  • This is exacerbated by regionality or technicality of the issue: smaller WG policies will barely affect larger CWG functions if and when ASR is activated or whether we’ll have a Grants Council within the overall whole.
  • This might also be exacerbated by timing issues, if many policies are passed at the same time that may affect budget and man-power to coordinate. Unless @eggpanned or @Alkine have any more new CM roles to coordinate internally.
  • This might be fixable somewhat, and would not be as serious an issue with a hybrid form of governance, or with a multiplication of welfare functions. So it might actually be similar to the newly proposed JUP Microgrants here:
    Vote | Jupiter

2. Non-Zero Sum Game (Smart vs. Dumb):
Reasonable people (or people who are rationally trying to profit rather) need to risk, in sum, as much money as the net amount risked by DEGENs or people with external interests (where degens cancel each other out if they have opposing beliefs).

3. Insider Circle Issue:
We want to incorporate knowledge from “insiders” but we don’t want to have too much adverse selection from traders who know too much (especially if these are “insiders” who are just people who have seen a memo 24 hours early, who do not contribute that much actual useful information to the market).

  • This is potentially solvable with reasonable DAO rules, but these would take care and more research or consensus…

4. Specification issues:
It could produce greater errors (within the information aggregated by the market) under futarchy because there are more incentives to exploit vague or careless language, and any errors would have a greater impact because people would be more upset at any system malfunctions (markets that are cancelled, etc.).

Most importantly, the errors and manipulations could directly influence policy decisions. (Which does not happen so straightforwardly in regular prediction markets.)

  • This would get even worse because of measurement error, which is hard to avoid.
  • It’s possible that we can just get much better at specifying, or that we could develop a standardized framework that would eliminate most specification issues.

5. Internalised Information:
Widespread use of markets has the potential to create a dearth of other sources of public and accurate information (e.g. pollsters would be replaced with markets, which blend information more).

  • It’s likely that markets would incentivize new ways of producing this info (market makers would run polls).
  • But this would not be public, so possibly we would in fact lose knowledge or repeat work (a lot). And markets are not perfect.

6. Potential Flaw to Proposal Listing Process:
The policy proposal process is very flawed (and there are not obvious ways to fix it)

  • We don’t have infinite time/energy in e.g. the courts, so we need a discriminating proposal process.
  • But this gives a lot of power to the rich or the elite (especially Hanson’s method— auctioning off policy proposal time-slots).
  • This might be fixable, for instance by allowing people to gather signatures or additional pre-list votes to put a policy into consideration. The issue still seems worth listing here.

7. Shifting Problems:
The shift from small-scale prediction markets that are advisory to large-scale futarchy might also be a shift between rational or definable utility-maximization (e.g. maximizing profits) to a shift in values and identities (e.g. thinking whether the US is the kind of country that accepts immigrants), so the situation is qualitatively different and new issues would arise.

If we’re able to address these within the new Futarchy DAO that you propose, it could potentially create an even better one provided~

6 Likes
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what a new way of thinking, dig this

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These are some great points!

I’ll provide my thoughts on them line-by-line:

1. Proposal Size:

100%, when an individual decision doesn’t have a big impact on the welfare metric (e.g., whether adding metaSOL would boost the CLOUD token price), the market will be more noisy. One can argue that this is okay because those decisions are by definition less important, but a bunch of small-impact decisions can add up to a big impact.

The nice thing about futarchy is you can do it on any metric. For example, grants don’t generally affect token price, so what you can do is have the market speculate on a more specific metric (whether the grant will be completed or not).

2. Zero-sum games:

Prediction markets are zero-sum: every dollar you gain in one is a dollar that someone else loses.

The nice thing about decision markets / futarchy is they can be positive-sum: organizations like Sanctum get value from decision-making that they’re willing to pay for, as evidenced by the salaries that managers and grants committees are paid, and so you can redirect some of that to the participants in the market.

3. Insider Circle Issue:

100%. There’s a good story about this: once upon a time, there were prediction markets for the game show Survivor. Then the production crew found out about the markets and there were markets no more (they aggressively insider-traded).

On the other hand, it’s nice to be able to incorporate that information into the market price if we’re using the market price to make decisions.

AFAIK economists still debate whether insider trading should be legal for these reasons.

4. Specification Issue:

I’m optimistic that we can get much better at specifying :slight_smile:

5. Internalised Information:

The beauty of markets is that even if this information is private, it’s revealed through the market price.

And yeah, markets aren’t perfectly efficient. They may be better at aggregating information than the alternatives (e.g., voting, benevolent dictatorship, etc.) though

6. Potential Flaw to Proposal Listing Process:

One way to solve this is to have people bid in CLOUD for slots, which may provide additional utility to CLOUD

7. Shifting Problems

100%. This is a relatively untrodden area, and I imagine that new issues will arise. This is also a cool thing IMO: Sanctum has the opportunity to be one of the first settlers on the futarchic frontier.

The other nice thing is that even though futarchy is new, markets are old. And the markets we’re running don’t require an economics PhD to understand. So it’s not like there’s a huge fog of war.

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Thanks @defikingu for raising this post. I would echo what you said here:

Now what? Should we just implement governance on Realms and have the same boring DAO as every protocol back in 2022? Or should we take it as seriously as the investors, traders & community members who value $CLOUD at $0.275?

We know token-voting doesn’t work. Meanwhile, so far 4 organizations have run a collective 32 proposals through futarchy and noone has died yet :slight_smile:

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