Blockchain May Hold the Key to a Governance Crisis

Thai Stock Market
A Thai woman watches a stock index board at a bank in Bangkok on October 18, 2016. Manan Vatsyayana/AFP/Getty Images

This article was originally published by International Business Times.

The attraction of prediction markets as a system of governance can be summed up by the economist Alex Tabarrok who said: "a bet is a tax on bulls**t". Futarchy, the idea of using prediction markets as a guide to help organizations make decisions, was formalized by economist Robin Hanson in the 1990s.

The way Futarchy works is when an organization sets out some objective it is trying to maximize, and then allows people to economically back the choices they believe will achieve that goal. If a decision between X and Y needs to be made, tokens for X and Y are issued and a market for each token is created. Whichever market shows the higher price, that will dictate the decision to be taken, and on the winning market holders of the token are later paid out based on how well the organization ends up achieving its objective.

The wisdom of the crowd would lay bare the hierarchical way people act inside certain structures, which is based on how they want to be perceived and their small scale personal goals. Hanson has done academic research experiments but has never really succeeded implementing prediction markets in a corporate context. He claims people like top managers are perhaps afraid of markets arriving at decisions that might make them look stupid or superfluous.

Where Futarchy has met resistance trying to sneak inside established systems of governance, blockchain aims to recreate existing systems, and as such is looking for decentralized governance solutions.

Vitalik Buterin, the inventor of the Ethereum public blockchain, has been blogging about the potential of blockchain Futarchy for the past couple of years, and now sees many such projects about to blossom.

He said: "With blockchain we have a new class of entity, things like DAOs (decentralized autonomous organizations) that people are starting to come up with, and this kind of entity doesn't have a traditional governance structure.

People are interested in figuring out what a governance structure for that might look like. And at the same time blockchains are an environment where markets are very easy to make and so it seems like their might be a natural fit for building this sort of thing."

It's worth taking a step back here. We now have the technology to explore entirely new forms of crypto-economic democracy; a potential paradigm shift in governance within all sorts of organizations.

Buterin points to a number of projects looking at this in the Ethereum ecosystem such as Maker DAO that creates and insures the dai stable coin on the Ethereum Blockchain, as well as prediction markets like Gnosis and Augur.

Outside of Ethereum, there is a project called Truth Coin/Hivemind which is looking into this.

To outsiders, the evolution of DAO voting systems appeared to have been stopped in its tracks by the costly compromise to The DAO. But in fact many projects had been quietly working toward fruition before the hype and continue to do so.

Buterin said: "The DAO incident did not stop this whole concept or movement. I would probably compare it to something like the dotcom boom—obviously at a much smaller scale—where people started to get very excited as the concept started to finally get possible almost in reality.

"People's expectations did get a bit ahead of what was actually possible and there was bit of over excitement and then that all ended up screeching to a halt.

"But I think over the next year we are going to start seeing newer projects, a lot of which have been developing for the last half year, that are going to start coming online and developing their own designs, and which are going to end up very heavily learning from the problems of what's been tried before."

He pointed out that we are moving from a theoretical realm toward considering the actual infrastructure requirements for these futuristic systems to operate. "We are at this stage where the technology does exist. We are realizing that we need more infrastructure than we thought in order to make sure these things are actually safe.

"That infrastructure is starting to come online and the mood is changing and people are starting to really think about the specifics. There are a lot of things that you have to start thinking about when you are designing markets.

"If you look at them from a very far view you just see prices, but if you look at them from a very fine micro-structure view, you start thinking about liquidity, bids, asks, order books, order book design, front running, what happens when you have derivatives on top of prices and incentive compatibility issues.

"I think DAOs are starting to enter that stage and I think we are going to see several major kinds of designs emerge. We saw a simple voting DAO as one example, but then with simple DAOs you have to protect against majority collusion attacks. We are starting to see two or three designs in the middle. In many cases it's going to be the fine details that actually make or break in terms of whether a project succeeds or fails."

Buterin's long view regarding the state of public blockchain governance draws analogy from the history of U.S. democracy.

He said: "Both Bitcoin and Ethereum at this point have had exactly one sort of substantial governance crisis. I would argue that in the grand scheme of things, where we are at right now is maybe where U.S. democracy was in like 1795. This isn't even the Civil War; this is like the War of Independence."