Futarchy

"Vote on values, but bet on beliefs"

• Robin Hanson

Futarchy is a mode of governance defined by R. Hanson in Shall We Vote on Values, But Bet on Beliefs?¹. An organization governed by futarchy (nation, city, corporation, DAO, etc.) selects its values (how is welfare measured?) using some form of a democratic vote, but uses prediction markets in which informants bet on their beliefs to aggregate information on which policies will improve the organization's welfare and which policies won't.

Introduction to Futarchy

In futarchy, decisions about policy are delegated to prediction markets. In these markets, the efficacy of the policies is estimated in terms of a pre-defined welfare measure, a scalar measure of how well things are going for the organization. Depending on the measurements made using the prediction markets, the policy is either adopted or not. By proceeding in this fashion, organizations governed by futarchy rely on the Wisdom of the Crowd instead of the "public relations teams, organized interest groups, news media, conversation forums, think tanks, universities, journals, elite committees, and state agencies"². Decisions are based purely on merit (improving the welfare measure) and those who promote bad or corrupt policy are economically punished, even if they succeed in the short term.

Futarchy also represents an alternative to the typical approaches to on-chain governance. As on-chain identities do not necessarily correspond one-to-one to off-chain identities, "One man, one vote" democracy is infeasible in the blockchain context. Previous endeavours to finding a good replacement (Polkadot democracy, token holder votes, token curated registries) have mostly led down the same road: token-based voting.³ This essentially puts the decisions into the hands of the powerful few. Futarchy walks a different path. Once the welfare measure is set, policy decision become matter of fact and are decided upon not by vote, but by bet.

Futarchy by Example

It's easiest to illustrate this new concept through the use of an example. Suppose that a group wants to make large-scale decisions using futarchy. This is done by first selecting the welfare measure In case of a publicly traded company, this could be the stock price of the company.

When a yay/nay decision needs to be made (for example: "Should we fire our CEO?" for a public company), two scalar markets are created:

• $M_0$: What's the stock price next year if the CEO is fired?
• $M_1$: What's the stock price next year if the CEO is not fired?

These markets will run for some time and provide a prediction for which decision is better: The difference $s_0 - s_1$ between the results of $M_0$ and $M_1$ approximates the effect of firing the CEO on the stock price. If the estimate of $M_0$ is larger than the estimate of $M_1$, then the stock price is expected to increase. This means that the CEO actually gets fired and the trades of $M_1$ are cancelled (this is done as we have no way of ever knowing what the stock price would have been if the CEO had remained in place). If, on the other hand, the estimate of $M_1$ is larger than that of $M_0$, then the CEO keeps their job and the trades of $M_0$ are cancelled.

The traders in favor of firing the CEO can buy exposure to both markers by acquiring LONG shares of $M_0$ and SHORT shares of $M_1$. Similarly, traders in favor of keeping the CEO in place can buy SHORT of $M_0$ and LONG of $M_1$. Therefore, both parties have skin in the game regardless of what decision is eventually made. If the decision turns out to be good (stock price is as predicted or higher), then the traders will on average profit from participating in the market. If the decision turns out to be bad (stock price is lower than predicted), then most traders will suffer losses.

Other scenarios can be approached using this pattern. If a political party wishes to select a candidate in order to maximize their change of winning, they might select their share of the popular vote as the welfare measure and open a scalar market for each candidate $i$:

• $M^i_0$: What will our share of the popular vote be if we choose $i$ as candidate?
• $M^i_1$: What will our share of the popular vote be if we don't choose $i$ as candidate?

Of course, these are only toy examples of applications of futarchy. The processes above can be embellished in a multitude of ways. For example, maybe the motion to fire the CEO should only be put into action if there is a clear difference between the stock prices $s_0$ and $s_1$ (say, 5 percent). We encourage you to take a look at section IX. A Reference Proposal of Shall We Vote on Values, But Bet on Beliefs? for a deeper dive into the topic.

Selecting the Welfare Measure

Under a new form of governance, we could formally defer to betting markets on matters of fact, while retaining representative democracy on matters of value. That is, we could vote on values but bet on beliefs. ³

As the examples above show, the selection the welfare measure has wide-ranging consequences. For example, by setting the welfare measure as the party's share of the popular vote, the party's candidate is now selected purely on their merit in winning the election, but is the candidate actually a competent politician and leader? Maybe firing the CEO will result in a one year rally, but will will the improvement last, or is their strategy not sustainable?

The welfare measure encapsulates the values of the organization, and must be numerically measurable to allow its use in a scalar prediction market, but in the absence of a way of estimating the quality of values, the welfare measure itself is decided by vote instead of speculation. The goal of later running the prediction markets is only to decide if a certain policy will increase or decrease the welfare measure.

In off-chain organizations like nations, cities, etc. which are typically governed by representative democracy, the already available instruments can be used to facilitate this vote. The futarchy will also rely on the present structures to properly monitor the measurement of the welfare measure to prevent corruption. On-chain organizations may rely on token holder votes to decide the welfare measure.

By virtue of this process, Futarchy separates the decision on the intangible values of the organization (measured using the welfare measure, which is decided upon by vote) from the matter-of-fact decision of how to attain or maintain these values (decided by estimating the effect of policy on the welfare measure using prediction markets). This is the meaning of the mantra Vote on Values, Bet on Beliefs.

On-Chain Policy Enforcement

Off-chain futarchy relies on courts to enforce the application of policy. In the on-chain context, this is not required. Instead, code is law. Policy consists primarily of the execution of code. Will applying this update or signing that extrinsic improve the welfare measure? Once the decision is made, the code is automatically executed or discarded. The laborious interpretation and enforcement of ambiguous policy is no longer required.

Futarchy on Zeitgeist

The futarchy pallet zrml-futarchy is introduced in v0.6.0 of Zeitgeist and allows the Zeitgeist chain to govern itself using prediction markets. A governance proposal can be submitted to zrml-futarchy using the submit_proposal extrinsic. The only origin that is allowed to call this extrinsic at the moment is root. Therefore, one must first submit a governance proposal suggesting a call into zrml-futarchy's submit_proposal to pallet-democracy first and let the token holders decide before going forward with the proposal in zrml-futarchy. This ensures that the markets involved in the proposal are properly configured and the pool is deep enough to ensure a sane market.

Suppose that $X$ is the call that a user wishes to make. To do so, they first create two markets:

• $M_0$: Will $X$ be enacted?
• $M_1$: What's the welfare measure at time $T$?

Then they create a combinatorial pool from these two markets. The outcomes in the combinatorial pool will be:

• $L_+$: Welfare measure long if $X$ enacted
• $L_-$: Welfare measure long if $X$ not enacted
• $S_+$: Welfare measure short if $X$ enacted
• $S_-$: Welfare measure short if $X$ not enacted

The outcomes $L_{\bullet}$ can be used to measure the predicted success or failure of the proposal: If the price of $L_+$ is greater than that of $L_-$, the proposal is expected to be successful. We call these the positive and negative outcomes. When calling the submit_proposal extrinsic, this data is specified as the oracle parameter, whose fields are pool_id, positive_outcome and negative_outcome.

Further Reading and Viewing

• What is Futarchy? - Trading on The Future - Friederike Ernst #TOA18

• ethereum foundation blog - An Introduction to Futarchy

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1. Shall We Vote on Values, But Bet on Beliefs?, The Journal of Political Philosophy, 21(2), pp. 151–178 (2013).↩
2. ibid. p. 151↩
3. See What is Futarchy? - Trading on The Future - Friederike Ernst #TOA18↩