Futarchy and the 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 alike have been fascinated by the accuracy demonstrated by prediction markets. Whether it be the outcome of sports games or choosing the next US president, these markets have consistently shown themselves to be a better indicator of the future than most research organizations.

With the advent of the Internet, it has not only become a lot easier to bet in prediction markets, but its popularity has hugely increased. However, before we look at how this all began, it is essential to understand what a prediction market is.

Put very simply, it is a market where users can place a bet on the outcome of any event and, in doing so, earn money if the markets go their way. Events can range from the outcomes of political races to the annual rainfall in Timbuktu — with the markets operating on a binary model — by either winning money or losing your entire bet in case the markets go against you.

Betting on Blockchain

Even with the Internet being what it is, there are still several drawbacks associated with traditional prediction markets. They are often restricted and can only be accessed in the countries where they originated. they may also have internal restrictions; for example, a user who is considered to be winning too frequently might be stopped from placing further bets. Moreover, since there are limited prediction markets, their fees are usually relatively high and can be a turn-off for anyone looking to enter and make a bet. Due to their speculative nature, they are also subject to governmental regulations and can therefore be shut down at any time.

As a result of such limitations, the need for a more efficient and accessible way of betting has become a necessity — providing the perfect opening for blockchain to make its debut. By providing a prediction market that could be easily accessed globally, and emit low gas fees, while also being completely immune from governmental regulations, blockchain suddenly became a safe haven for prediction markets. In fact, the adoption of blockchain technology and growing awareness of its applications continue to drive the market today at rapid growth.

When a user is looking to place a bet on a blockchain prediction market, they can do so by using the native cryptocurrency of the platform or any other supported cryptocurrency. At the close of the betting period, the platform can verify the results through blockchain oracles which fetch real-world data and feed it into smart contracts defining the bet outcome. Some platforms use individual oracles, while others use a network of oracles for better reliability and to avoid the results being prone to manipulation.

For example, if the bet was about the 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 so much more, as they now pave the way for arguably a better governance model than a representative democracy — Futarchy. An idea initially put forward by economist Robin Hanson, the model allows market participants, or voters, to buy stock in an idea that may or may not take place over a certain period of time. Proposals and actions are tested by prediction markets to gauge the likely success or failure of policies.

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

Despite being a model built upon political and economic models and no connection to the blockchain, Futarchy proposes a viable future for blockchain integration.

Within 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, the policy will then be implemented. While this offers a surface-level insight into the potential union between DAOs and Futarchy, it denotes a blossoming future for blockchain governance that is waiting to be tapped into.

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

Ultimately, as prediction markets increase in size, volume, and popularity, it will be worth keeping an eye on how DAO governance mechanisms evolve to keep in sync 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.

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