This is the first post in a series on the challenges and open research of futarchy and decision markets applied to governance.
Token price futarchy is the earliest and most well-known version of futarchy in the crypto landscape.
Examples mentioning this:
- Possible Futarchy Setups - Economics - Ethereum Research
- Governance mixing auctions and futarchy - Economics - Ethereum Research
We’ll categorize below some of the different kinds of limits:
breadth of confounding factors
As well understood, token price has a number of factors driving it. Futarchic decision markets, like Conditional Funding Markets, make use of comparison between \text{Yes} and \text{No} markets so as to neutralize some of these factors. For example, it appears such a comparison will do a good job at canceling out the effect of crypto market cycles, which would affect both \text{Yes} and \text{No} markets in the same way.
But specific factors like a short period of increased momentum on specific networks or technologies that directly relate to a proposal submitted to decision markets could heavily skew the \text{Yes} price up without impacting the \text{No} price, all the while being potentially a bad predictor of long-term value increase.
A key solution is to limit the scope of confounders by focusing on more precise metrics.
speculation
As in a Keynesian beauty contest, decision market traders will focus on whichever proposal will produce most positive trader sentiment, as sentiment swings affect both decision markets and token price.
This calls for usage of metrics rooted in fundamental value, resistant to such swings, and to measure price changes over timeframes long enough to account for real value creation.
there are better proxies for value creation
Metrics tracking fundamental network health and growth might do a better job at correlating with long-term success, e.g., TVL growth in a DeFi protocol or gas fees in an L2.
As mentioned by Bo Waggoner (see the link shared above):
From what I’ve seen on ethresearch, proposals for DAO futarchy often skip the “vote values” stage entirely and assume the metric is the price of the DAO’s token. But as I understand it, this severely limits the kinds of decisions that futarchy can make. For example, it seems hard for the DAO to decide via futarchy to allocate resources toward charity or something non-profitable.
the token price can be manipulated, especially when governance isn’t entirely futarchic
When governance isn’t relying entirely on futarchy as a mechanism to take decisions, but on a complementary governance mechanism like token voting, not only can whales influence token price via markets but actors with large governance power (either via large token holdings or other means, depending on the governance structure) can do so as well by passing proposals that, e.g., increase fees or reduce supplies (or the contrary).
Any level of control over future token price creates a confounding factor on decision markets. In particular, knowing that whales might forcibly decrease token price down the line if a proposal passes that they don’t like, decision market traders will try only to predict what whales might do rather than the correlation between the proposal itself and the token price.