Futarchy: When forecasting markets become governance weapons, a governance experiment that subverts the DAO decision-making paradigm

In March 2025, Optimism launched a landmark on-chain governance experiment. The allocation of 500,000 OP tokens to incentivize through the Futarchy mechanism. This 21-day social experiment not only tests the feasibility of predicting the market in the ecological governance of public chains, but also reveals the complex tensions of the evolution of the decentralized decision-making mechanism.

01. Futarchy Governance Experiment

Optimism launched a very novel Futarchy governance experiment in March. Futarchy's literal translation is a prediction experiment. In blockchain, Futarchy is a governance model that guides decisions through prediction markets, leveraging the predictive power of financial markets and the real monetary input of participants to incentivize more accurate predictions and analysis. In this experiment, Optimism used Futarchy's method to allocate a total of 500k OP (100k * 5) incentives to explore a new incentive distribution model for public chain parties to incentivize ecological development. Most of the progress of the experiment has been completed. LXDAO member Loxia, one of the participants in the experiment, expressed cautious optimism about the future of this governance method.

Futarchy proposed by MetaDAO is simply put in the form of governance when someone proposes a governance purpose (such as "airdrop tokens to incentivize users"), Futarchy will define two conditional token markets "pass" and "veto". Participants need to pledge real assets in exchange for corresponding tokens for transactions - if they are optimistic about the proposal, they will push up the token price, buy "pass" market tokens; otherwise, bet on "veto" the market. Finally, the fate of the proposal is determined by comparing the weighted average prices of the two markets, and participants can redeem the mortgaged assets, but the decision results directly affect their holding value. This design cleverly binds personal interests to collective goals:

If you want to make a profit, you must study the long-term impact of proposals on the price of the organization's tokens, rather than voting on intuition or voting with the stakes. MetaDAO's practice shows that even if malicious proposals try to manipulate the market, they will lose more than they need to acquire "pass" tokens at high prices. MetaDAO believes that when every decision is tempered by real money and silver, collective wisdom has the opportunity to overcome human weaknesses.

02. The origin of Futarchy

Futarchy is a form of government proposed by economist Robin Hanson. In this governance model, elected officials define the measures of national welfare, while forecasting markets are used to determine which policies have the most positive impact. The New York Times listed "Futarchy" as a buzzword in 2008. Later, this concept was also introduced into discussions between blockchain and DAO.

Futarchy's slogan is:

"Vote on values, bet on beliefs." The meaning of this sentence is:

Citizens should use democratic procedures to express “what we want” (i.e. “value”).

Then use the forecast market to decide "what policy is most likely to achieve these goals" (i.e., "belief" - a judgment of causality).

"I won't be optimistic about Futarchy's future, or whether it will succeed once it is implemented. Robin said, 'Vot on value, bet on belief', but I don't think value and belief are separated so easily."

Cowen believes that human values ​​and beliefs are highly intertwined, and it is difficult to completely separate “goals” from “ways to achieve them.” For example, a person may claim to pursue social equality (value), but his support for certain policies (convictions) is actually out of ideological preferences, rather than rational predictions of policy effects.

In other words, the prediction market cannot completely block human emotional, cognitive bias and value-oriented interference, so Futarchy's operating mechanism may not be able to achieve its theoretical rationality and efficiency.

03. Futarchy for Optimism

The designers of Futarchy governance experiments believe:

• When decision makers are rewarded and punished for their accuracy (accurate → reward, inaccurate → punishment), they tend to make more thoughtful, non-biased decisions;
• At the same time, a permissionless futarchy model can attract more people to participate (mass wisdom) rather than being limited to centralized decision-making agencies.

At the same time, in order to make the experiment more open and to obtain more data to test the experiment, the experimenter has opened up the participation authority. Anyone who has a telegram account or a Farcaster account can participate. All forecasters will receive 50 OP-PLAY entry chips (the tokens do not have actual value, they are fake chips for experiment purposes only), and actual participants in OP governance will receive more OP-PLAY chips.

So what is the prediction problem surrounding this round of Futarchy?

If a project gets 100k OP incentives, which/protocols will achieve the largest TVL growth in three months.

There are 23 projects participating in Futarchy this time. Each person participating in the experiment needs to predict the TVL increment after these 23 projects "get 100k OP incentives". At the beginning of the experiment, the initial prediction of TVL for all projects is the same (the same starting line, as a reference, in the project selection of the test experiment). As time goes by, the user mortgages the OP-PLAY and starts the game by buying call options (UP tokens) and put options (DOWN tokens) for different projects. The five projects with the highest prediction results receive 100k OP incentives for each project.

After the experiment, participants selected five projects through OP-PLAY participation in the forecast market. For comparison, Grants Council also selected five of its own funded projects:

In the 21-day game of ups and downs, the top five 100K OP funded projects selected by Futarchy:

• Rocket Pool: $59.4M
• SuperForm: $48.5M
• Balancer & Beets: $47.9M
• Avantis: $44.3M
• Polynomial: $41.2M

Meanwhile, the five funded projects selected by Grants Council (only once if there is overlap):

• Extra Finance
• Gyroscope
• Reservoir
• QiDAO
• Silo

04. The limitations of Futarchy model in governance

Limitations of this TVL judgment indicator:

“If ETH prices go up, those protocols that lock a lot of ETH will look to grow a lot on TVL, even if they do nothing.” — @joanbp, March 13

“We seem to be using Futarchy to decide who should receive the grant, but if TVL growth only reflects changes in market prices, then this indicator does not reflect whether the project makes good use of the grant.” — @joanbp, March 13

The setting angle of the indicators for predicting experiments is also very important:

“We should choose metrics that — even if participants want to ‘manipulate’ — can only 'win’ by doing what is good for the ecology.” — @Sky, March 17

Deviations caused by simulated tokens (there will be deviations if the real token is insufficient)

"This is 'fake money', not 'real money'. Many people will place bilateral bets at the last minute just to avoid losing."

— @thefett, March 19

*41% of participants conduct risk hedging at the end (bilateral betting avoids losses)

“I feel like I’m not bringing any special insights, but diluting the influence of those who really understand the project.”

— @Milo, March 20

The user experience is not good and affects the effectiveness of the game:

The success of the forecast market depends largely on the depth of user participation. However, the threshold for this experiment was relatively high, the information was not transparent, and the operation was cumbersome, which greatly affected the participants' judgment and participation.

Problems that users generally report include:

• I don't know how many tokens there are in total.
• A single bet requires 6 on-chain interactions. (So ​​I haven't made several transactions in this experiment, and the interface is too complicated)

• It is unclear whether the wrong project is losing money.
• The ranking profit and loss logic cannot be understood.

"I thought PLAY was used at first, but every project was reset and I didn't understand how much I spent in total." — @Milo, March 20

"A prediction will require six deals, which is a bit too much." — @Milo, March 20

"I can't understand the rankings. Sometimes I feel like I should be profitable, but the result shows a loss of 46%. "— @joanbp, March 19

In the data report issued by Butter, this experiment:

1. The total transaction volume was 5,898, but 41% of the addresses participated in the last three days, indicating that the user's learning cost was too high.
2. A single prediction requires 6 on-chain interactions (see interface screenshot), resulting in an average of only 13.6 transactions per person.
3. Despite 2,262 visitors, the conversion rate is only 19%, and the participation rate of OP governance contributors is only 13.48%.
4. 45% of projects did not disclose plans to predictors, and information asymmetry caused prediction bias (such as Balancer's prediction value exceeds the project's self-estimation of $26.4M)

05. Summary

1. The establishment of game indicators will have a decisive impact on Futarchy 's experiment

A good indicator should have:

• Measurability: clear data and easy to verify;
• The direction is correct: it can guide participants to do things that “even in order to win money, it is promoting the positive development of the system”;
• Not easy to gamify: it is difficult to be "grown and stronger" by simple financial skills or price fluctuations.

For example, in this Futarchy experiment, TVL in US dollars is easily affected by fluctuations in the price of mainstream currencies such as ETH, making the prediction results more like "betting on the price of currency" rather than evaluating who has the ability to grow.

The official report issued by Butter shows that the interim TVL data as of April 9, 2025 has exposed the limitations of the indicators:

• Rocket Pool (Forecast TVL growth of 59.4M) Real TVL growth is 59.4M, real TVL growth is 0
• SuperForm (forecast 48.5M) actually fell 1.2M
• Balancer& Beets (forecast 47.9M) actually fell 13.7M

The total actual TVL decline of all Futarchy selected projects reached $15.8M, while the Grants Council selected projects during the same period:

• Extra Finance (forecast 39.7M) Real growth of 8M
• QiDAO (forecast 26.9M) actually grows by 10M

This verifies the community's doubts - TVL indicators are strongly related to market prices and fail to effectively reflect the project's real operational capabilities.

2. Futarchy 's "Best Forecaster" results are not completely objective

• In this experiment, the participants' OP-PLAY trading ability is more reflected, rather than the "predictive ability" selection, because in this experiment, all targets had a significant daily increase and fall, and the participants had considerable operation space (anonymous account @joanbp reached the top through high-frequency trading (406 transactions/3 days))
• In the final OP-PLAY trading win rate ranking, Badge Holders has the lowest group win rate as a recognized OP ecology professional.
• Only 4 of the top 20 forecasters hold OP governance identities (skydao.eth/alexsotodigital.eth, etc.)

3. Predicting the paradox that affects decision making:

Futarchy’s characteristic is that prediction is decision-making, and collective expectations directly affect the results (such as which project in this experiment received a grant). This is different from the general prediction market purely predicting external events, creating some unique dynamic challenges. As discussed in the OP forum, a voter has two orientations in Futarchy:

First, bet on popular projects with the flow to ensure that these projects receive grants (the predictions are correct but not necessarily high returns, because most people bet on this);

Second, if the underestimated projects are later proven that minorities are right, the personal gain will be the greatest. This mechanism that combines the dual attributes of voting and betting makes participants feel a little at a loss. At the same time, when prediction itself shapes the future (because the flow of funds will affect the development of the project), Futarchy has a certain cycle of self-realization or self-frustration: everyone suppresses a certain project, and if the resources are given, it will naturally have a better chance of success; on the contrary, even if it is not favored, it will fail because it cannot get resources. This closed loop makes Futarchy experiments need to carefully interpret their prediction accuracy and design considerations on how to mitigate the bias of this self-certification cycle.

In this Futarchy experiment, we not only see how the governance mechanism is "gaming", but also see clearly Degen's potential in the prediction market -they are no longer just profit-seeking passers-by, but potential professional governors. Only when institutional design can anchor Degen's energy to public goals, make speculation a co-construction, and make bets a judgment, Futarchy has the opportunity to activate the regenerative governance spirit (Regen) belonging to Web3. This experiment awakens a possibility: governance does not have to be Puritan rational negotiation, but can also be a deep gamification consensus formation. The Regen bloodline that awakens Degen may be the evolutionary direction of future DAO governance.

06. Quote

[1] https://en.wikipedia.org/wiki/Futarchy

[2] https://gov.optimism.io/t/experimenting-with-futarchy-for-optimism-grant-allocation-decisions/9678

[3] https://ggresear.ch/t/futarchy-vs-grants-council-optimisms-futarchy-experiment/57

[4] https://medium.com/@netrovert/futarchy-redefining-dao-governance-5f554d523dee

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Content | Loxia

Editing & Typesetting | Ring

Design | Daisy