The Edge Podcast - MetaDAO

In this episode of The Edge Podcast, which took place on September 13, 2024, DeFi Dad and Nomatic hosted Proph3t from MetaDAO to discuss the implementation of futarchy, decision markets, and how MetaDAO is revolutionizing governance in DeFi, and more! Read our notes below to learn more.

Background

DeFi Dad (Host) – Host of Edge Podcast

Nomatic (Host) – Co-Host of Edge Podcast

Proph3t (Guest) – anonymous Founder of MetaDAO

MetaDAO – a market-governed organization

Exploring MetaDAO: Revolutionizing Decision Markets and Governance in DeFi

DeFi Dad talks about MetaDAO, which he describes as the world’s first decision market platform. He outlines that the discussion will cover how organizations can use MetaDAO to create decision markets, how traders can interact with these markets, and why this mechanism is well-suited to address poor decision-making in various contexts.
Proph3t explains that before creating MetaDAO, he worked on smart contracts in DeFi and had experience with caching systems in Web2. This establishes his technical expertise in relevant fields.
Proph3t describes the origin of MetaDAO, citing inspiration from a YouTube video by economist Robin Hanson. The video introduced the concept of using markets to make decisions at various levels, from small businesses to governments. Proph3t, being a self-described “market nerd,” found this idea compelling and saw its potential application in the DeFi space.
Nomatic asks Proph3t to explain the term “futarchy.” Proph3t elaborates that Robin Hanson coined the term in 1999, combining “future” and “archy” to mean “government of the future.” He explains that futarchy involves using markets to make decisions, providing a corporate example to illustrate the concept.
Proph3t details how futarchy might work in a corporate setting, using the example of deciding whether to fire a CEO. Instead of a board vote, futarchy would use market predictions about stock prices under different scenarios (firing vs. retaining the CEO) to inform the decision. This example demonstrates how market-based decision-making could potentially lead to more informed choices.
DeFi Dad shares a personal anecdote about considering the idea of politicians voting based on poll results, drawing parallels to decision-making markets.
DeFi Dad asks Proph3t to elaborate on the problems he observed in DeFi governance and how MetaDAO could potentially address these issues.
Proph3t highlights the critical importance of decentralized governance in DeFi, arguing that without it, DeFi loses its core value proposition. He then outlines several key issues with current governance systems:
- Extremely low participation rates, with median participation in Snapshot votes being only 0.1% of token holders.
- Lack of understanding among voters about the issues they’re voting on.
- The prevalence of “DAO theater,” where token holders tend to simply follow team recommendations without meaningful engagement or critical thinking.
Proph3t’s explanation suggests that MetaDAO aims to address these governance issues by leveraging market mechanisms to potentially increase engagement, improve decision quality, and reduce the problems associated with low-information voting and DAO theater.

Understanding MetaDAO, Futarchy, and Decision Market Governance

Nomatic asks Proph3t to differentiate between MetaDAO and the Futarchy protocol. Proph3t explains that the Futarchy Protocol allows for the creation of market-governed organizations, while MetaDAO is both the first organization to use this protocol and its primary developer.
Nomatic requests a step-by-step example of how a proposal works through the decision market process.
Proph3t uses the Uniswap fee switch as an example to explain how futarchy works:
- In traditional governance, $UNI token holders vote on whether to turn on the fee switch.
- In a futarchy system, people trade on what the value of $UNI would be if the fee switch is turned on or off.
Two conditional markets are created: one for $UNI tokens if the switch is turned on, and another if it’s not. Trades in these markets are only executed if the corresponding condition is met. The Futarchy protocol would automatically implement the decision based on the time-weighted average prices in these markets.
Nomatic asks about the types of users participating in these futarchies. Proph3t says that about 400 accounts have traded in futarchies so far. Typically, half of the traders are community members of the project in question. The other half are generalized prediction market traders. Community members often aim to influence decisions they see as beneficial. Generalized traders are primarily motivated by profit.
DeFi Dad asks about potential misapplications of this decision-making process, using Aave’s collateral listing as an example.
Proph3t says that for collateral listings, a different metric might be more appropriate, such as the probability of Aave experiencing a blow-up within a certain timeframe. Markets have a good track record of aggregating information effectively. He cites examples like Polymarket’s success in predicting elections and internal prediction markets at companies like Google and HP outperforming expert forecasts.
Proph3t mentions the 1986 Challenger disaster, where the market priced in the cause of the explosion much faster than the government investigation. He says that information about collateral risk in DeFi is relatively public, and knowledgeable individuals would be incentivized to trade in these markets for profit, thereby contributing to accurate pricing.

Comparing Polymarket and MetaDAO: Key Differences, Decision Markets, and Early Adoption

DeFi Dad asks about the differences between Polymarket and MetaDAO, referencing Polymarket’s success in predicting election outcomes and its current $681 million market for betting on whether Donald Trump or Kamala Harris will win.
Proph3t explains the key differences between Polymarket and MetaDAO. Polymarket is a prediction market where users bet on whether something will happen, while MetaDAO runs decision markets where users bet on the potential impacts of given actions. Prediction markets like Polymarket target speculators and are zero-sum, meaning every dollar gained is a dollar lost by someone else.
Decision markets can be positive-sum and primarily target organizations. They can provide value by helping organizations make decisions, potentially distributing this value to market participants. Proph3t notes that globally, $250 billion is spent annually on management consultants, indicating the value attached to decision-making.
He theorizes that if organizations find value in decision markets, traders will naturally follow as they seek opportunities to make money.
Nomatic asks about the process behind decision markets, questioning whether bets are accompanied by reasoning or if it’s mostly blind betting. He uses the example of $wBTC contracts moving to another provider and how that might affect Aave.
Proph3t says that there’s a mix of both approaches in decision markets some traders explain their reasoning publicly, similar to how people might post a thesis on Twitter after buying a DeFi coin. Many traders remain quiet, operating with small social media presences despite having a good understanding of the market.
He shares an example of a recent proposal where a trader made significant moves to almost get a proposal passed without much public discussion. When approached, this trader provided a reasoned explanation for their actions, demonstrating that some participants have well-thought-out strategies even if they don’t publicly share them.
DeFi Dad asks about early adopters of MetaDAO’s technology (mentioning FutureDAO, Dean’s List, and Drift) and asks about the most interesting decision markets so far.
Proph3t highlights Dean’s List‘s proposal to revamp their tokenomics as particularly noteworthy. Proph3t describes a case in MetaDAO where someone attempted to manipulate a market by spending $250,000 to pass a proposal that would allow them to buy tokens below market price.
He explains how the market’s self-correcting mechanism prevented this manipulation: whenever the manipulator placed high bids, other traders would sell to them at the inflated price, intending to buy back later at the lower spot price. This process repeated, ultimately causing the proposal to fail.
Proph3t sees this as a practical demonstration of the theory that manipulation in markets is challenging because traders can profit by trading against noise traders or manipulators.

MetaDAO Development and Futarchy: Challenges, Innovations, and Future Expansion

Proph3t explains the current state and strategy of MetaDAO: Futarchy and decision markets are new concepts that require building confidence for adoption. DAOs are interested but cautious, preferring to test the system gradually rather than fully committing.
Proph3t mentions Drift as an example of a DAO taking this approach. He describes a recent proposal to use futarchy for grant decisions, which is seen as a good starting point. The team is developing a system where custom financial contracts can be created to evaluate grant effectiveness. This system would allow a grants committee to score the effectiveness of a grant after a set period, with the market predicting these scores in advance.
DeFi Dad brainstorms potential applications for decision-making markets: Helping teams decide which blockchain network to deploy on. Making decisions about major development roadmaps for large blockchain networks. Creating an on-chain venture capital or angel syndicate model.
Proph3t confirms that someone is currently working on an on-chain venture model using their technology. He mentions a “DAO 2.0” concept, referencing the original DAO idea from 2015. He sees this as a reinvigoration of crypto’s core values.
DeFi Dad asks about potential drawbacks of the decision market model.
Proph3t outlines several constraints and challenges: Markets can’t effectively price extinction risk, as the contracts become meaningless if catastrophic events occur. Some decisions may need to remain private, though markets could still provide input. Current time constraints: proposals take a few days to resolve, limiting throughput and increasing latency. He suggests that involving AI traders could potentially reduce latency to minutes.
Nomatic asks about the learning curve for traders and potential manipulation risks.
Proph3t acknowledges the current high friction for traders: He expresses surprise that anyone is trading in these markets given their complexity. The team is working on simplifying interactions, moving away from low-level conditional tokens to more intuitive conditional trades. He agrees that AI agents could be beneficial traders due to their lack of emotional bias and ability to process vast amounts of information.

Challenges and Opportunities in Market Systems for DAOs: MetaDAO and Futarchy Implementation

Nomatic asks about potential manipulation risks in the system, specifically asking if DAOs like Drift could manipulate decisions in their favor.
Proph3t acknowledges that manipulation isn’t impossible but argues it’s significantly harder in market systems compared to voting systems. In voting systems, mechanisms like Hidden Hands and Votium allow direct manipulation by paying for votes. In market systems, manipulators act as “noise traders,” trading on non-alpha information. This creates opportunities for others to profit by trading against them, resulting in a self-correcting mechanism.
He illustrates this with an example of flash crashes in traditional markets, where manipulated prices quickly return to normal as traders recognize and exploit the artificially lowered prices.
Proph3t shares a recent example from their own system where someone heavily sold in the “pass” market, dropping the price from about 700 to 50. However, the price rebounded to its previous level within 15 minutes as other traders recognized the opportunity. He argues that this self-correcting nature makes market manipulation more challenging and less effective than in other systems.
Proph3t addresses the specific question about DAOs like Drift manipulating decisions. He provides an example where a team proposed building a data dashboard for Drift, requesting $50K in Drift tokens.
Despite the Drift team being theoretically supportive, which likely would have led to approval in a traditional grant committee, the market rejected the proposal. This example demonstrates how markets can potentially be less influenced by the team’s preferences than traditional voting methods would be.
Nomatic asks about Robin Hanson’s involvement with MetaDAO and his thoughts on their implementation of futarchy.
Proph3t discusses Hanson attended a Solana event called Mountain DAO in Salt Lake City with the MetaDAO team. He spent a weekend intensively working with the team, focusing on mechanism design problems.
Proph3t describes the experience as “super helpful,” with Hanson deeply engaged in whiteboard sessions to tackle complex issues. One key problem they worked on was the issue of “commitment” in decision markets – determining what actions are permissible after a proposal fails.
Proph3t explains that this commitment problem is crucial because the incentive to price markets differently depends on the assurance that outcomes will be followed through. He notes that Hanson came up with the futarchy idea 26 years ago and has had to accept the slow pace of adoption.
Proph3t suggests that Hanson sees political considerations as a major hindrance to adoption, especially by those who might lose power in such systems. He describes Hanson as “cautiously optimistic” about MetaDAO’s work, indicating a mix of hope and realistic expectations given past experiences.
DeFi Dad asks about MetaDAO’s plans for transitioning to a permissionless system.
Proph3t outlines their current focus and future vision. The immediate priority is perfecting the experience for existing DAOs on the platform. He draws a parallel to successful Web2 platforms, highlighting the importance of creating a “really good experience” for core users before expanding.
Proph3t uses Drift as an example, stating that if they can make Drift’s experience “really, really good,” it becomes an effective case study to attract other DeFi DAOs. Looking to the future, he envisions MetaDAO evolving into a platform where developers can build their own businesses using the futarchy protocol.
He mentions potential specialized use cases, such as using decision markets for hiring decisions, which might require specific adaptations different from other use cases like grants or product decisions. While not fully committed to this idea yet, Proph3t expresses interest in exploring the possibility of opening up the platform for developers to build on top of MetaDAO’s Futarchy protocol.

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Show Information

Medium: YouTube (Video)
Show: The Edge Podcast
Show Title: MetaDAO: Why The World Needs Decision-Making Markets
Show Date: September 13, 2024