There's a lot of noise surrounding the topic of DAO governance, and rightly so. Some think that a flat shareholder democracy is doomed for failure, some think it is the pinnacle of fair governance, some think we need liquid democracy, or delegative voting, or perhaps vote markets, quadratic voting, prediction markets, contracted hierarchy, etc. etc.
To help token holders brush up on their understanding of different DAO 2.0 solutions, I'm crowdsourcing a list of relevant readings on each. I give my thoughts below on one of these solutions, the lesser known Futarchy.
General Governance Considerations
Liquid/Delegative Democracy
Better Crowd Wisdom Using Liquid Democracy - Opaque Liquid Democracy, an open-source solution being developed by String Technology. Part 3 of a series that explorers DAO governance.
Liquid Democracy: True Democracy for the 21st Century - Dominik Schiener; an explanation of liquid democracy in relation to direct and representative democracy in the context of nation-state governance. Note that these governance solutions often overlap and can apply to very different organisations.
Futarchy
Quadratic Voting
Although I haven't seen any DAO 2.0 solutions that directly incorporate quadratic voting, the principles behind it carry over to/incorporate well with liquid democracy.
Range Voting
-
Range Voting - A look at the problems of majority voting and a potential solution, range voting.
Getting to Know Futarchy
These DAO 2.0 solutions can be thought of applying to two separate layers of cryptogovernance: voting and census (if you want an idea of how these fit into the larger picture of cryptogovernance and the cryptoeconomy, take a look at my previous article The DAO: A Venture in Cryptogovernance).
Liquid democracy, delegative democracy and quadratic voting all belong to the voting layer, because, as you would expect, they directly modify the rules of voting. On the other hand, Futarchy creates a secondary layer of betting for the purpose of aggregating information, or generating "census".
Today I will be explaining three broad applications of Futarchy for DAO governance. In regards to applying these solutions, GroupGnosis have stated that their latest ETHDEV grant will be used to create a range of Futarchy-esqe applications for DAO 2.0; they have also made a proposal to the DAO.
[Disclaimer: like most things crypto, Futarchy is rooted in some very complex maths, something I'm certainly not qualified in; refer to Vitalik's post for technical details.]
A Brief Introduction
Futarchy is a model of governance that puts prediction markets at the core of decision making. This is based on the underlying assumptions that:
- Democracies fail by not aggregating enough available information
- Speculative markets are the best known method of aggregating available information
When originator Robin Hanson first described Futarchy, he meant it as a means of nation-state governance, however the term has generally stuck to any use of prediction markets for governance purposes, especially in the field of cryptogovernance. Most people in the space are already familiar with the design and function of prediction markets (Augur, GroupGnosis); if not, prediction markets are simply any speculative market were people can bet on the outcome of an event and are rewarded/punished for their accuracy of prediction, ideally to, well, generate accurate predictions.
There are several ways in which prediction markets can be applied to cryptogovernance. Here I will cover three approaches that act as a foundation for understanding some of the DAO 2.0 proposals coming our way.
Prediction Markets for Aggregation of Information (detached)
Prediction markets can and will be used as aggregators of information, providing the DAO with a decentralized alternative to in-house, centralized analysts (e.g. due diligence teams). With the successful launch of Augur and GroupGnosis, token holders will be able to establish markets for any forecasting they require, the information serving purely as reference for decision making.
Prediction Markets for Delegation (optional)
Next we have prediction markets as an optional governance mechanism. Proposals can be made to defer a decision to the result of a prediction market. For instance, Slock.it could present three funding options in a single proposal - conservative, balanced and aggressive. When the proposal is approved by the DAO, the contract triggers the creation of three prediction markets (with an argument like: expected ROI within 36 months), the outcomes of which will trigger the best funding option.
Prediction Markets as Intelligence Selective Agents (intrinsic)
The issue with flat organisations is that all shareholders are punished for bad decisions, and all shareholders are rewarded for good decisions: if 5% of funds are invested on a 23% yes, 22% no vote, and that investment fails, 100% of investors lose 5% of their funds. This is of course unavoidable, as having 'skin in the game' is fundamental to intelligent operation in the first place. By itself, however, this leaves the organisation with only a single, very crude selective agent for intelligence. In a market were every organisation is flat, the selection for intelligence (aka performance) rests solely between organisations, such that organisations with smart investors profit, and organisations with dumb investors suffer loses.
Traditional organisations have a tried and tested model to get around this: a performance-based hierarchy. This adds a further selective agent between shareholders by establishing responsibility for decision making: a CEO doesn't just perform because he has stock options, but because he won't have a salary if he doesn't make the best decisions. This is of course not what we should want to do with the DAO, as we can achieve the same effect, if not greater, without inviting centralization or communication inefficiency. We have the opportunity to rewrite and bring a whole new range of efficiency to governance.
The way we do this is by using prediction markets as a secondary and intrinsic layer to decision making, one that rewards token holders based on the accuracy of their prediction. This would be done by automatically generating a prediction market for each and every proposal, running either in parallel to or as a consequence to the vote itself.
Going back to the 5% of funds lost to the bad investment, token holders who made the right prediction now have the ability to capitalize on their sound judgement. This not only incentives token holders to put more thought into their decisions, but can also contribute to the power of modified voting mechanisms like delegative democracy: token holders that consistently make correct predictions gather reputation and thus voting power through delegation.
Here we start to see a holy grail of governance emerge, where delegative voting, vote markets, prediction markets and reputation come together to draw the most wisdom from the crowd. It is even possible to circumvent the DAO itself! Instead of advanced prediction markets being built on top of the DAO and its voting mechanisms, we can build the voting mechanisms on top of the prediction market. This is arguably the inevitable end of the technology, if what we are looking for is freedom of capital and the best extraction of wisdom from the crowd.
To illustrate this, let's consider the Ledger proposal: 6,000 Ethereum Hardware Wallets, at a 25% ROI, for €120,000. The market could use this investment model:
- Ledger submits the proposal directly to a sophisticated prediction market.
- The market assesses its viability.
- The market confirms its viability (and to a degree).
- The payment contract is launched, capped to the amount asked for in the proposal, and Reward Tokens are generated.
- Done!
Not only have we simultaneously streamlined and decentralized investment on the blockchain (no more single-address DAOs to point at), but we've circumvented the problem of individuals accepting proposals they don't like for the sake of sticking around for proposals they do like.
Issues with Futarchy
There are many criticisms of Futarchy; I'll address the two most relevant.
It's a Zero-Sum Game
This argument is an interesting one: there is no strict financial object produced by prediction markets (one man's gains is another man's loses), and therefore no rational investor would engage in them. For instance, election polls are almost always paid for; if I were to lose money upon making a wrong prediction, I probably wouldn't participate.
This argument depends very much on when and how the markets are set up. If the markets are used to decide the outcome of a proposal, then DTH's have an intrinsic incentive to participate -- it's their investment that is being decided upon. If the markets are used in conjunction with a proposal, purely as an opportunity for DTH's to make gains on better decision-making, then yes, we run into a few incentive issues.
Solutions to the zero-sum game problem include allocating a small percentage of each proposal to rewarding market winners (a just sacrifice for more intelligent decision making), or by allocating reputation to winners such that they can bolster their influence (assuming delegative voting is activated).
Attack Vectors
This ties nicely into our attack vectors: isn't this starting to get too complex, disrupting the democracy of the organisation? Doesn't this give whales new avenues to psychologically distort markets?
The answer to this is that any new governance solution will create new attack vectors. From this point onward, any upgrade to DAO governance will require votes, our votes, and as such it is our imperative to learn the ins and outs of whatever technology is proposed to us.
Conclusion
As is, the DAO contract, DAO 1.0, is an innovation in governance because it is decentralized and provably democratic. On closer inspection, it is at the end of the day a completely flat shareholder democracy, and as far as we can tell from looking at the market, this isn't much of an innovation performance wise. The improvements in performance will come with DAO 2.0 solutions, one's that could never exist without the blockchain.
At the end of the day, it is up to you to learn how these solutions work and whether we should adopt them. The only appeal I would like to add is not to focus to intensely on existing governance models for solutions. Yes, corporate and VC governance is tried and tested, but remember that they are models built in a world without a Turing-Complete blockchain.
It is easy to emulate the past, but that's not were the gains are made: the gains are made by looking to the future, and thinking about how far our current technology can take us.
The DAO