Futarchy Governance on Solana Explained

Introduction

We recently hosted a Twitter Space on a fascinating topic: futarchy, or governance driven by markets. We had the pleasure to talk to Proph3t from the MetaDAO who sat with our protocol specialist Othman and discussed the concept, practical applications, challenges and future possibilities of futarchy.

Futarchy is a governance framework in which people democratically vote on the things they value — for example, higher GDP — and then use predictive markets to evaluate how specific policies would achieve those values.

What Is Futarchy?

"Let's assume the goal is to increase the token price or to increase the value of a token. With futarchy, you let people speculate on whether a certain action would increase the token value. If people decide it would, then you do the thing. If they say the action would not raise the token price, you don't do it." — Proph3t

In this framework, participants are posed questions such as "Will implementing a certain policy improve GDP?" Participants can bet on yes and no, and whichever has the higher vote count (or token price in the context of crypto) gets put into action.

MetaDAO and Its Goals

MetaDAO is an economic organization, much like a corporation, and its goal is to increase the net present value of future cash flows. Regarding scaling futarchy to larger blockchain networks, Proph3t notes that the concept still needs to be proven at smaller scales first.

"Maybe we don't want Solana, for example, to be governed just based on what will make its token go up. Maybe we want to increase developer satisfaction — but then you can also use futarchy governance on developer satisfaction."

User Journey in a Futarchy System

Proph3t walks through a concrete example using Solana: Imagine a proposal to burn 90% of fees instead of the current 50%.

1. You lock USDC into a conditional vault. For 1,000 USDC, you receive 1,000 "pass-USDC" and 1,000 "fail-USDC".
2. You swap your "pass-USDC" for "pass-SOL" at a price you find favorable.
3. If the proposal passes, you redeem your "pass-SOL" for regular SOL. If it fails, you redeem your "fail-USDC" for USDC — as if the trade never happened.

Put simply, you have front-run the decision and pre-bought SOL if the proposal passes.

Risks and Manipulation

When asked about manipulation, Proph3t describes a scenario where someone tries to drive the price of "pass-META" higher to force a favorable proposal through. However, rational market participants move in the opposite direction — selling because they believe the proposal would not actually increase the token's value. Eventually the proposal fails.

"It's in a market participant's interest to trade against noise traders, and this is what they do."

Participation and Engagement

MetaDAO typically sees 20 to 60 people trading a few hundred thousand dollars per proposal. Proph3t notes that the goal of any governance mechanism is to make good decisions. With futarchy, you don't depend on broad participation — it increases the quality of engagement as people vote with their money.

Implementation and Integration

For DAOs or projects considering futarchy, Proph3t suggests two approaches:

1. Partial adoption: Allocate a part of your organization to a futarchy, see how it performs, and decide whether to expand.
2. Shadow markets: Run futarchy markets without binding the outcomes. This lets you observe how much you lose by not following the market's recommendation.

On network security, Proph3t explains that futarchy is simply an input onto social consensus — it can't do anything that brings down the network. However, if governance passes automatically, there could be security concerns, especially for smaller networks.

Barriers to Widespread Adoption

1. Insiders resisting change: Those who hold power often don't want to give up control. "It's pretty nice to have a monopoly over a given industry and to extract money from having power."
2. Engineering challenges: Solvable with continued development and education.
3. Keynesian beauty contest problem: Markets sometimes reflect speculation on where others will trade rather than underlying value.