Can Futarchy be the Future of Governance?

1. Background - Democracy, the god that failed.

Is there really someone who, searching for a group of wise and sensitive persons to regulate him for his own good, would choose that group of people that constitute the membership of both houses of Congress?

-Robert Nozick Anarchy, State, and Utopia P.14

1.1 On Democracy, The Failed God

Democracy fundamentally means a system in which the citizens of a nation become voters who elect politicians to represent them. However, because individuals are inherently selfish beings, achieving an ideal form of democracy—where the majority of citizens elect politicians who serve the public interest and govern the country—is very difficult. It is not an exaggeration to say that since the concept of democracy was introduced, its ideal form has never been realized.

In fact, every political system has its own ideals, but no system has ever achieved its ideals as democracy has not. Therefore, it cannot be said that democracy uniquely failed. However, as political systems around the world have evolved into better systems over time, democracy should also be regarded not as a sacred institution but as one that can be replaced with a better alternative if one exists.

I*t is of great importance in a republic not only to guard the society against the oppression of its rulers, but to guard one part of the society against the injustice of the other part. Different interests necessarily exist in different classes of citizens. If a majority be united by a common interest, the rights of the minority will be insecure.

-James Madison, the Federalist Paper #51

1.2 Problems of Democracy

1.2.1 Tyranny of Majority

What is the problem with democracy? As mentioned earlier, a significant issue with democracy lies in its design, which overlooks individual selfishness. Even in the United States, often referred to as the “cradle of democracy,” the focus was not solely on emphasizing democracy itself but on how to systematically check the tyranny of the majority that democracy can bring. If we look at key texts like the Federalist Papers or the Constitution, which are considered the bibles of American politics, we see that the Founding Fathers devoted considerable thought to how to check the tyranny of the majority and the tyranny of the masses. Unfortunately, despite the efforts of the Founding Fathers, they did not succeed in making democracy perfect. Democracy still operates based on the will of the majority, and politicians continue to make empty promises to gain the majority’s votes.

1.2.2 Term, a double edged sword

A more significant issue lies in the concept of “term limits” inherent in democracy. While term limits prevent any one politician from holding power for an extended period, they have a critical flaw: politicians are not held accountable for policies initiated during their terms. For instance, consider a government that excessively increases its spending. Most of this spending is covered by fiscal deficits. This occurs because: 1) imposing taxes directly burdens the public, potentially inciting anger and reducing the politician’s approval ratings, and 2) printing money to cover expenses leads to inflation, which can critically damage the national economy unless the country issues a key currency like the United States.

Fiscal deficits essentially transfer the burden of current spending to future generations, making it an attractive short-term solution from a myopic perspective. However, the problem is that most politicians, due to their term limits, will likely have retired from politics by the time these fiscal deficits become problematic, thereby evading responsibility.

*In addition, both princes and caretakers can increase their current spending by means of debt, and endowed with the power to tax, both tend to incur more debt than would private citizens. However, whereas a prince assumes a liability against his personal property whenever he borrows ftom (sells bonds to) the nongovernment public (hence the present value of his property falls), a democratic caretaker is free of any such consideration. He can enjoy all the benefits of higher current spending, while the liability and concurrent drop in property values falls upon others. Accordingly, government deb tis higher and increases faster under democratic conditions than under princely rule.

-Hans Hermann Hoppe, Democracy: the god that failed P. 84

Even when considering the value of currency, it becomes evident that democracy is not without its flaws. The countries that have accumulated the most debt in human history are democratic nations, illustrating that democracy does not solely possess advantages.

1.3 So What? - Have you heard about Futarchy?

I wonder if anyone has heard the term “futarchy.” Futarchy is an idea introduced by Robin Hanson, an economics professor at George Mason University. Simply put, it is a form of governance where policymakers predict the outcomes of their proposed policies and bet on these outcomes. Futarchy does not eliminate democratic processes; rather, it involves voting on the desired outcomes of policies and then “betting” on which policies will be most effective in achieving these outcomes. The process of selecting and enacting policies in futarchy works as follows:

First, the goals of the nation or group governed by futarchy are established (e.g., GDP, unemployment rate).
Policies needed to achieve these goals are proposed.
Prediction markets for these policies are opened, and people bet on which policy will be most efficient in achieving the target outcomes.
The policy with the highest likelihood of achieving the goals is selected.
If the policy achieves the desired outcomes, those who bet on it receive a payout; otherwise, they lose their money.

Here’s a question you might have: “What happens to people who bet on policies that were not adopted?” These individuals do not lose money since their policies were never implemented.

The advantage of futarchy is that it provides clear incentives to develop better policies. In many cases, the predictions of the general public have produced better results than those of experts, potentially improving the decision-making process. Lastly, since participants in the policy-making process have bet economic assets on the outcomes, they are likely to be more invested in ensuring these policies succeed. This can offset the “nothing ventured, nothing gained” mindset often found in traditional democratic systems.

2. Takeaway - Can Futarchy be an alternative to current Democracy?

2.1 Representative Futarchy rather than just Futarchy itself

Futarchy certainly has several advantages and seems capable of addressing some of the “irresponsibility” issues inherent in democracy. However, Robin Hanson’s proposed futarchy model appears too rudimentary and needs to be adapted and refined to suit current circumstances. For example, similar to how most democratic countries adopt representative democracy, allowing their representatives to formulate policies, a futarchy model could also have the betting done by representatives rather than the general populace. Citizens would set the national goals, while politicians would propose policies to achieve these goals and place their salaries as bets in the prediction markets. Ideally, they would bet more than just their salaries. This would at least prevent politicians from carelessly proposing “populist” policies just to gain public favor.

2.2 Utility of Blockchain: Testing bed for governance experiments

Many people are skeptical about the use cases for blockchain, but I have always believed that one of blockchain’s greatest utilities is as a “digital space for political experimentation.” Implementing a new political system at the national level carries significant risks. Therefore, blockchain, which can simulate a national environment while minimizing potential damages, is an ideal space for such political experiments. Given the rising popularity of blockchain-based prediction markets like Polymarket, now seems like a perfect time to experiment with futarchy.

2.3 What else other than Futarchy?

While futarchy could be an attractive alternative, its limitations and issues mean that other alternatives should also be considered. Nonetheless, the current interest in futarchy as an alternative to democracy is significant. This is because futarchy applies market logic to policy-making. I hope to see more attempts to replace existing political systems with market-based alternatives, beyond just futarchy.

3. Others’ Opinion

**3.1 Hasu from Flashbot -** “Futarchy is threat to Democracy”

From a mechanism design perspective, I personally see the mass adoption of prediction markets as a threat to democracy and an accelerant toward plutarchy. May not warrant banning them, and you probably couldn't anyway, but they are not unilaterally a force for good.[…] Now one could respond that if PMs exist at scale, the way we govern ourselves should also change, and new parts of the "human tech tree" like futarchy may be unlocked. This is def true, but not an experiment I particularly look forward to given democracy's good track record.

3.2 Kollan House from MetaDAO - “Experts don’t care about crowds unless they are better than experts.”

I think the market drives parties that can surface information that you may not know or have access to. Experts and specialists don't look at crowds unless the crowds are better than the experts and the specialists. So I don't think that there's this evolution where you want everybody voting per se. You just want to surface the best information because this is outcome driven.