Futarchy and Blockchain: How Prediction Markets Can Revolutionize Betting and Governance

By Andrew Young, Co-Founder SX Network and Layer2 Blockchain Inc.

Over the years, economists and academics have been fascinated by the accuracy demonstrated by prediction markets. Whether it’s the outcome of sports games or the choice of the next US president, these markets have consistently proven to be a better predictor of the future than most research organizations.

With the advent of the Internet, it has not only become much easier to bet on the prediction markets, but its popularity has increased enormously. However, before seeing how it all started, it is essential to understand what a prediction market is.

Simply put, it is a market where users can place a bet on the outcome of any event and in the process earn money if the markets go their way. Events can range from political race results to the annual Timbuktu rush – markets operate on a binary pattern – winning money or losing your entire bet in case the markets go against you.

Betting on the blockchain

Even if the Internet is what it is, there are still several disadvantages associated with traditional prediction markets. They are often restricted and can only be accessed in the countries they originate from. They may also have internal restrictions; for example, a user who is considered a winner too often may be prevented from placing further bets. Also, because prediction markets are limited, their fees are usually relatively high and can discourage anyone looking to come in and make a bet. Due to their speculative nature, they are also subject to government regulations and therefore may be closed at any time.

Due to these limitations, the need for a more efficient and accessible way to bet became a necessity – providing the perfect opening for blockchain to make its debut. By providing an easily accessible prediction market on a global scale and issuing low gas fees, while being completely immune to government regulations, blockchain has suddenly become a safe haven for prediction markets. In fact, the adoption of blockchain technology and growing awareness of its applications continues to drive the market today to rapid growth.

When a user seeks to place a bet on a blockchain prediction market, they can do so using the platform’s native cryptocurrency or any other supported cryptocurrency. At the end of the betting period, the platform can verify the results via blockchain oracles that take real-world data and feed it into smart contracts that define the outcome of the bet. Some platforms use individual oracles, while others use a network of oracles for better reliability and to prevent the results from being subject to manipulation.

For example, if the bet was on annual rainfall in Timbuktu, weather.com would be a feasible choice for an oracle to verify the results.

Futarchy: the future of governance

Blockchain prediction markets offer the possibility of much more, as they now pave the way for a better model of governance than a representative democracy – Futarchy. An idea originally put forward by economist Robin Hanson, the model allows market participants, or voters, to buy stocks in an idea that may or may not take place over a period of time. Proposals and actions are tested by prediction markets to gauge the likely success or failure of policies.

Futarchy is now touted as the future of DAO governance. With a plethora of conflicting governance models vying for the most adoption, DAO governance remains a divided and confusing landscape for newcomers to this vertical.

Although it is a model built on political and economic models and unrelated to blockchain, Futarchy offers a viable future for blockchain integration.

In the Futarchy paradigm, a collective group of users chooses to vote on a specific idea and then bet on a prediction market using the native currency of the respective DAO or blockchain. If the prediction market favors this implementation, then the policy will be implemented. While this offers a cursory glimpse into the potential union between DAOs and Futarchy, it does point to a thriving future for blockchain governance waiting to be tapped.

One application-specific blockchain actively introducing futarchy into its governance models is SX Network, the creator of the SX.bet blockchain prediction market. Integrating this model has enabled the SX network to harness the power of market-based prediction technology to support the implementation of protocol upgrades.

Ultimately, as prediction markets increase in size, volume, and popularity, it will be useful to keep an eye on evolving DAO governance mechanisms to keep pace with these developments.

About the Author: Andrew Young is Co-Founder SX Network and Layer2 Blockchain Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Helen D. Jessen