Futarchy: When prediction markets become a governance tool, a governance experiment that subverts the DAO decision-making paradigm.

In March 2025, Optimism initiated a milestone on-chain governance experiment. By allocating 500,000 OP tokens as incentives through the Futarchy mechanism, this 21-day social experiment not only tested the feasibility of prediction markets in public chain ecological governance but also revealed the complex tensions in the evolution of decentralized decision-making mechanisms.

01. Futarchy governance experiment

Optimism launched an innovative Futarchy governance experiment in March. The literal translation of Futarchy is prediction experiment. In the blockchain, Futarchy is a governance model that guides decision-making through prediction markets, leveraging the predictive capabilities of financial markets and the real monetary investments of participants to incentivize more accurate predictions and analyses. In this experiment, Optimism allocated a total of 500k OP (100k * 5) incentives in a Futarchy manner to explore a new model for distributing incentives that encourage ecological development for public chains. Most of the progress of the experiment has been completed, and LXDAO member Loxia, as one of the participants in the experiment, expressed cautious optimism about the future of this governance model.

The Futarchy proposed by MetaDAO simply means that when someone proposes a governance purpose (such as "airdrop tokens to incentivize users"), Futarchy will define two conditions: "pass" and "veto" token market. Participants need to pledge real assets in exchange for the corresponding token for trading - if they are optimistic that the proposal will push up the price of the token, they will buy the "pass" market token; Otherwise, bet on the "veto" market. In the end, the fate of the proposal is determined by comparing the weighted average prices of the two markets, and the participants can redeem the collateral assets, but the decision results directly affect the value of their holdings. This design cleverly binds individual interests to collective goals:

To profit, one must deeply study the long-term impact of proposals on the organization’s Token price, rather than relying on intuition or following the crowd to vote. MetaDAO's practice shows that even if malicious proposers attempt to manipulate the market, they will incur losses due to the need to acquire "pass" tokens at high prices. MetaDAO believes that when every decision is refined through the stakes of real money gambling, collective wisdom has a chance 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 criteria for measuring national well-being, while prediction markets are used to determine which policies will have the most positive impact. The New York Times listed "Futarchy" as a buzzword in 2008. Later, this concept was also introduced into discussions of blockchain and DAOs.

The slogan of Futarchy is:

"Vote on values, bet on beliefs." This sentence means:

Citizens should express "what we want" (i.e., "values") through democratic processes.

Then use the prediction market to determine "which policies are most likely to achieve these goals" (i.e., "belief" - a judgment about causal relationships).

Economist Tyler Cowen stated: "I am not optimistic about the future of Futarchy, or whether it can succeed once implemented. Robin said, 'Vote on value, bet on belief,' but I think value and belief cannot be so easily separated."

Cowen believes that human values and beliefs are highly intertwined, making it difficult to completely separate "goals" from "the means of achieving those goals." For example, a person might claim to pursue social equality (value), but their support for certain policies (beliefs) is actually based on ideological preferences rather than a rational prediction of the policies' effects.

In other words, the prediction market cannot completely shield itself from human emotions, cognitive biases, and value orientations, so the operational mechanism of Futarchy may not be able to achieve its theoretical rationality and efficiency.

03、Futarchy for Optimism

The designers of the Futarchy governance experiment believe:

• When decision-makers are rewarded or punished for their accuracy (accurate → reward, inaccurate → punishment), they tend to make more thoughtful, unbiased decisions;
• At the same time, a permissionless futarchy model can attract more participants (crowd wisdom) rather than being limited to a centralized decision-making body.

At the same time, in order to make the experiment more open and to obtain more data for testing, the experiment organizers have opened participation rights. Anyone with a Telegram account or a Farcaster account can participate, and all predictors will receive 50 OP-PLAY entry chips (which are OP-PLAY, the tokens have no actual value and are only for experimental use as fake chips). Actual participants in OP governance will receive more OP-PLAY chips.

So what is the prediction question that this round of Futarchy revolves around?

If a project receives 100k OP incentives, which protocol(s) will achieve the largest TVL growth after three months?

This time, there are 23 projects participating in Futarchy, and each participant in the experiment needs to predict the TVL increment of these 23 projects after "receiving 100k OP incentives." At the start of the experiment, the initial predicted TVL for all projects is the same (the same starting line, as a reference in the selection of projects for the testing experiment). As time goes on, users will stake OP-PLAY and engage in speculation by buying call options (UP token) and put options (DOWN token) for different projects. The five projects with the highest prediction results will each receive 100k OP in incentives.

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

In the 21-day rise and fall game, the top five 100K OP funded projects selected through Futarchy:

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

At the same time, the five funded projects selected by the Grants Council (only issued once in case of overlap):

• Extra Finance
• Gyroscope
• Reservoir
• QiDAO
• Silo

04. The limitations of the Futarchy model in governance.

The limitations of this TVL judgment indicator:

"If the price of ETH rises, protocols that have locked a lot of ETH will appear to have a significant increase in TVL, even if they have done nothing." — @joanbp, March 13

"It seems that we are using Futarchy to decide who should receive grants, but if the TVL growth only reflects market price changes, then this metric cannot reflect whether the project has made good use of the grants." — @joanbp, March 13

The perspective of establishing indicators for prediction experiments is also very important:

"We should choose those metrics that— even if participants want to 'manipulate'—can only be 'won' by doing things that are beneficial to the ecosystem." —@Sky, March 17

The deviation brought by simulated tokens (a deviation may also occur if the real token value is insufficient)

"This is 'fake money', not 'real money'. Many people will place both sides of the bet at the last moment just to avoid losses."

— @thefett, March 19

*41% of participants hedge risks in the final stage (bilateral betting to avoid losses)

"I feel that I haven't brought any special insights, but rather diluted the influence of those who truly understand the project."

— @Milo, March 20

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

The success or failure of the prediction market largely depends on the depth of user participation. However, this experimental experience has a high entry threshold, lacks transparency, and is cumbersome to operate, which greatly affects the judgment and participation of the participants.

Common feedback from users includes:

• I don't know how many tokens there are in total.
• A single bet requires 6 on-chain interactions. (Therefore, I didn't make many transactions in this experiment, as the interface is too complicated.)

• The explanation of whether there is a loss for betting on the wrong project is unclear.
• The profit and loss logic of the leaderboard is difficult to understand.

"I initially thought PLAY was used up, but each project resets, and I can't figure out how much I've spent in total." — @Milo, March 20

"It seems a bit excessive to sign six transactions for one prediction." — @Milo, March 20

"I don't understand the leaderboard. Sometimes I feel like I should be making a profit, but it shows I'm down 46%." — @joanbp, March 19

The data report issued by Butter officially shows that this experiment:

1. Total transaction volume is 5,898 transactions, but 41% of addresses participated only in the last three days, indicating that the learning cost for users is too high.
2. Each prediction requires 6 on-chain interactions (see interface screenshot), resulting in an average of only 13.6 trades per person.
3. Despite having 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 led to prediction bias (for example, Balancer's predicted value exceeded the project's self-estimate of $26.4M)

05, Summary

1. The establishment of gaming indicators will have a decisive impact on the Futarchy experiment

Good indicators should have:

• Measurability: Data is clear and easy to verify;
• Correct direction: Can guide participants to do things that "even for the sake of winning, are promoting the positive development of the system";
• Not easy to gamify: Difficult to be simply "scaled up" by financial tricks or price fluctuations.

For example, in this Futarchy experiment, the TVL measured in USD is easily influenced by the price fluctuations of mainstream coins like ETH, making the prediction results resemble more of a "bet on coin prices" rather than assessing who genuinely has growth potential.

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

• Rocket Pool ( prediction TVL growth 59.4M) actual TVL growth is 59.4M, actual TVL growth is 0
• SuperForm ( prediction 48.5M) actual drop 1.2M
• Balancer & Beets ( prediction 47.9M ) actual drop 13.7M

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

• Extra Finance ( prediction 39.7M) actual growth 8M
• QiDAO( prediction 26.9M) actual growth 10M

This validates the community's skepticism - the TVL metric is strongly correlated with market prices and fails to effectively reflect the project's true operational capabilities.

2. The results of Futarchy's "best forecaster" are not entirely objective

• This experiment reflects more on the participants' OP-PLAY trading ability rather than the selection of "predictive ability", as all underlying assets experienced significant daily fluctuations, providing participants with considerable operational space (the anonymous account @joanbp topped the chart through high-frequency trading (406 trades/3 days)).
• In the latest OP-PLAY trading win rate leaderboard, as recognized OP ecosystem professionals, the grouping win rate of Badge Holders is the lowest.
• Only 4 out of the top 20 predictors hold OP governance identities (skydao.eth/alexsotodigital.eth, etc.)

3. The Paradox of Prediction Impacting Decision-Making:

The characteristic of Futarchy lies in prediction as decision-making, where collective expectations directly influence outcomes (such as which project receives a grant in this experiment). This differs from general prediction markets that purely forecast external events, creating some unique motivational challenges. As discussed in the OP forum, a voter in Futarchy has two orientations:

Firstly, follow the trend by betting on popular projects to ensure these projects receive funding (predicting correctly but not necessarily having high returns, as most people are betting this way);

Secondly, choosing undervalued projects that are unconventional can lead to the greatest personal gains if it later proves that the minority was correct. This mechanism, which combines the attributes of both voting and betting, leaves participants somewhat at a loss. At the same time, when predictions themselves shape the future (because the flow of funds can influence project development), Futarchy has a certain self-fulfilling or self-defeating cycle: if everyone bets on a certain project, resources are allocated to it, and it naturally has a better chance of success; conversely, those projects that are not favored may fail even if they could have succeeded due to a lack of resources. This closed loop necessitates cautious interpretation of the predictive accuracy of the Futarchy experiment and requires consideration in its design on how to mitigate the biases of this self-confirming cycle.

In this Futarchy experiment, we not only saw how governance mechanisms can be "gamified", but also recognized the potential of Degen in the prediction market—they are no longer just profit-driven passersby, but potential professional governors. Only when institutional design can anchor Degen's energy to public goals, turning speculation into co-construction and betting into judgment, does Futarchy have the chance to activate the regenerative governance spirit of Web3 (Regen). This experiment awakened a possibility: governance need not be a Puritanical rational negotiation, but can also be a deeply gamified consensus formation. Awakening the Regen bloodline of Degen may be the evolutionary direction for future DAO governance.

06, citation

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Content | Loxia

Editing & Typesetting | Huanhuan

Design | Daisy