Overview

Since speculative markets excel at a task where democracies struggle, we might try to improve democracy by having it rely more on speculative markets. Robin Hanson

MetaDAO uses a mechanism called futarchy to make its decisions. Futarchy was invented by economist Robin Hanson in 2000 and MetaDAO is the first known instantiation of it.

The basic idea of futarchy is to give decision-making authority to markets.

We can demonstrate with an example: a company deciding whether to fire the CEO. A company organized as a futarchy would do the following:

1. Create two markets for the company’s stock: one ‘retain CEO’ market and one ‘fire CEO’ market.

2. Allow investors to trade in these markets for some time period, such as 10 days.

3. After the time period has elapsed, look at prices of the company’s stock in both markets. If 'retain CEO' stock is more valuable, retain the CEO and revert all trades in the ‘fire CEO’ market. If ‘fire CEO’ stock is more valuable, fire the CEO and revert all trades in the ‘retain CEO market.’

In essence, the market speculates on what the value of the company would be if the company fired the CEO, and then the company fires the CEO if the market speculates that it would make the company more valuable.

Given a reference asset, such as a stock or governance token, we can use the same process for any decision. First we have the market speculate on how valuable the asset would be conditional on a few potential actions, and then we select the action with the highest associated value.