MetaDAO: Market Incentives for Improved Decision-Making

Introduction

The fallibility of traditional governance and decision-making processes can lead to the malinvestment and the misallocation of resources. MetaDAO offers a decision market protocol to align market incentives with identifying decisions that maximize the value of a reference asset, usually a DAO governance token. This governance framework, called “futarchy,” is a novel experiment in governance strategy that lets market forces and profit incentives determine an optimal decision on a proposal. 

MetaDAO’s Conditional Markets

MetaDAO offers a set of smart contracts on the Solana blockchain to implement a futarchy. In a futarchy, decisions are not voted on, but rather, traded on with a specific reference asset. For a futarchy to function, institutions or organizations must have some tradable reference asset, in which all stakeholders have a vested interest in and an incentive for profit. This could be a company’s equity, or a governance token for a DAO. With this reference asset, all stakeholders collectively share an aligned incentive to engage in decisions that are accretive to the asset’s market value.

When a proposal is introduced, two derivative markets are formed; a conditional-on-pass market (pass), and a conditional-on-fail (fail) market. Traders can come to the market and deposit underlying tokens, be it the reference asset (e.g DAO token) or the quote asset (USDC). In receipt for this deposit, the user mints and receives two conditional tokens; one corresponding to the token on the pass market, and another for the fail market. 

Each of these markets represents a claim on the underlying assets should a proposal pass or fail. The decision to pass or fail a proposal is determined by the spread between these two market prices, called the Pass Threshold. If one market price is adequately larger than another, satisfying the Pass Threshold, then that market is implemented as the decision.