A Deep Dive into Futarchy: What National Governments and Private Organisations can learn from a…

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A Deep Dive into Futarchy: What National Governments and Private Organisations can learn from a Blockchain Governance Model (Part 2)

Source: https://www.dreamstime.com/

Read first: A Deep Dive into Futarchy: What National Governments and Private Organisations can learn from a Blockchain Governance Model (Part 1)

How can Futarchy possibly ‘fix’ Democracy?

Recall the 3 points (that I mentioned in Part 1) to be addressed in order for democracy to be improved as a political system:

1. Increased accountability for policy decisions
2. More power to the masses, and increased voting resolution on the topics which individuals care about
3. Elimination of the policy making echo chambers

In my opinion, Futarchy will be able to address these points very well indeed because of the 4 main benefits that such a model will bring about, at least in theory:

  1. Incentivizing voters to make informed choices
  2. Reducing the influence of bad policymakers
  3. Reducing personality biases
  4. Marrying public participation and expert analysis

Incentivizing voters to make informed choices

A voter in any of today’s extant political systems will never have the zeal to educate him/herself on the policies that he/she will potentially be voting on.

This is simply because they will have no incentive to do so, since the probability of their votes having any impact on policy-making at all is negligible, if not zero. To put things into perspective, it is estimated that the possibility of an individual’s vote making a difference with regard to the Presidential Elections in the United States is one in one million.

In a Futarchy, one is incentivized to make a more informed choice or vote because if the results are proposed in their favor, they will be able to generate substantial profits. However, if things don’t go their way, they will lose the same amount of money.

Therefore, voters will be highly incentivized to do proper research, and to adequately educate themselves on the issue that they are voting on, if a prediction market is utilised for that end.

Reducing the influence of bad policymakers

As the systems of prediction markets evolve and mature, it will naturally start to eliminate people who are bad in projecting the correct (or more popular) outcomes as they tend to lose money every time they are on the wrong side.

As the number of eliminations increase, all “bad” predictors will necessarily be filtered out from the market, thereby reducing ‘bad’ influence on the overall decision-making process.

Reducing personality biases

Source: https://www.debate.org/

All voters will bring with them their own set of preferences and biases to the voting booth — that is something innate to humanity. Moreover, in this digital age where social media reigns supreme, voters can be easily swayed and influenced by the things they see online. As a result, most voters do not vote rationally; instead, they vote on biases, prejudices and social influence, increasing the likelihood that their votes will not be the most well-informed, or most holistically thought out.

With a Futarchic system, money will be at stake. Individuals will thus have to (try to be) be as rational as they can, and set aside personal biases or preferences to vote for something that will most likely get them the money.

Further, voters in a Futarchic system will no longer be voting for representatives because they will only be voting for policy proposals. In other words, voters can no longer vote on personalities — not a bad thing at all considering the recent rise in the number of demagogues populating political systems around the world.

Marrying public participation and expert analysis

Finally, Futarchy allows for a synergistic marriage between public participation and professional expert analysis.

When it comes to crucial decision-making, people tend to believe in technical specialists and experts more than a bureaucrat or political leader. A Futarchic system will thus allow for firms and/or individuals to incorporate their key findings in the decision by buying or selling in the market and earning profits based on conflicting information.

Limitations of Futarchy as a Political System

However, and as with all things, Futarchy isn’t without its downsides too; in fact, it might even severely hamper future decisions towards policy-making.

There are 6 main limitations of Futarchy as a potential political system:

  1. Market manipulation
  2. People will blindly follow market trends
  3. Volatility
  4. Low participation rates
  5. Value subjectivity
  6. Inability to truly measure Impact

Market manipulation

First, the Futarchic model doesn’t really provide adequate protection against manipulation by a single powerful entity or coalition.

If a group of people or entities who have the same end-game plan come together, they could actually hoard “yes tokens” while shorting the “no token” in the market. This will push token prices in favor of a particular outcome, allowing for a manipulation of the whole system.

People will blindly follow market trends

Next, it has been proven time and again that in most markets, people tend to premise their buy-choices not on in-depth research or hardcore information gathering, but on the recommendations and references of other people (who might not be the most accurate or honest).

Source: https://www.esquire.com/

They may also base their choices on market trends without doing their own due diligence — a very common occurrence that many in the crypto space are now terming ‘FOMO’ (fear of missing out).

Therefore, the whole idea that Futarchy will bring together good aggregators of information may actually be infeasible in application.

Volatility

On a pretty related note — the “informed” participant narrative also gets crushed under buyers simply following a market if there’s a distinct trend due to volatility.

One individual manipulating the market can cause it to swing one way and have the less-informed traders simply follow the market trend rather than understand what type of proposal they’re actually voting on.

Low participation rates

Additionally, much like traditional voting, turnout may prove to be quite the issue for prediction markets in a futarchy system. Traders and speculators might simply be the only ones playing the market while your standard voter might continue to veer away from the still-implicit communication costs.

Value subjectivity

“Values” also aren’t always easy to quantify, considering the fact that they can still be subject to emotional biases, which hurts the very root principle of a futarchy.

Individuals may end up with values that they don’t even align with if the voting phase is already tainted or is subject to any form of manipulation.

Inability to truly measure Impact

Finally — measuring whether or not a policy makes an impact is subject to human error and may prove difficult.

Other factors may have affected the originally established value, and simply reducing the effect of the proposal enacted to a binary isn’t easy, as it isn’t necessarily automated.

Therefore, in lieu of these drawbacks, and until they have been properly accounted for — perhaps it would be unwise to even attempt a Futarchy mode of governance when it comes to political systems around the world today.

There is just too much at stake here, and nations have too much to lose. We cannot propose such a radical change to political systems without showing concrete evidence that it can, and will, work first.

That is why I find that the best real-world institution to experiment with and test on — with regard to an implementation of the Futarchy governance model — would be private organisations.

This is because like democratic political systems, private organisations also have many flaws that I feel can be addressed by Futarchy. Unlike the former, however, private organisations have (relatively) less at stake, and we will likely be working with more room for error.

Source: https://corporatefinanceinstitute.com/

The Problem with Private Organisational Structures

As it would simply take up too much time and word-count to cover every single possible problem with every single form of private organisations, I consider that to be out of this article’s scope.

Instead, I will tap on my own personal experiences, as well as those of the people around me, to discuss this segment.

Therefore, a caveat — your experiences of private organisations may be totally different from what I am about to share; that is to be expected, and my sharing is not meant to be indicative of all, or even a majority of, private organisations in any way.

To begin, most private organisations adopt a hierarchical structure, with clearly defined and rigidly enforced chains of command. In such a structure, the organisation is split into multiple levels, with each lower level holding less decision-making power than the one above.

Source: https://www.forbes.com/

As a result, those near the bottom of this organisational pyramid will find it very hard, if even possible, to formalize any decisions at all. This is largely due to the immense number of hoops, or in organisational lingo — red tape, that they must jump and navigate through because of the need to adhere to the chain of command.

This will eventuate in 3 main issues:

  1. An unhealthy veneration of seniority and experience
  2. A heavy centralisation and concentration of decision-making power
  3. A lack of incentivization for hard work

An unhealthy veneration of seniority and experience

When an organisation is hierarchical, it tends to put those who have been there for a longer time, or are more senior, on a pedestal. This is regardless of these people’s true abilities, expertise or effectiveness as an employee, as long as they can out-stay a majority of others who will leave.

This veneration of seniority and experience regardless of ability is unhealthy, and extremely counterintuitive when it comes to the running of any organisation. Combined with the inherently top-down decision-making structures that such organisations usually work with, this may necessarily result in ineffective and out-dated policies that will not only stunt the organisation’s potential progress, but also negatively affect the other employees’ morale, or even, welfare.

Further, in employing the Peter Principle, where employees who have held down the same positions within the company for prolonged periods time (usually the senior staff in private organisations) are seen to be incompetent due to their inability to be promoted futher, it becomes very clear that private organisations that put people at the top purely because of their seniority and experience will never function to the best of its potential.

A heavy centralisation and concentration of decision-making power

Additionally, and as I have alluded to in the previous paragraphs, the decision-making process within any hierarchically-structured organisation is inherently very top-down.

In other words, most important decisions regarding the future of the organisation will usually be made exclusively in silo by a minority few in the upper echelons of the hierarchy. Decision-making power is thus heavily centralised in their hands, within a concentrated power hub that does not, or will not, take in input from anyone outside of it.

Source: https://www.truity.com/

There is no transparency at all in such a process, and most others within the organisation will be excluded to their detriment.

Further, since power is concentrated in the hands of only a few, there will definitely be politicking as employees attempt to climb up the hierarchy. This will not only soil the workplace culture, but also prove counterintuitive to a true and genuine progression of the company (since employees will likely say/do things that they think their superiors will wanna hear/see)

A lack of incentivization for hard work

Flowing from this, since those outside of the upper echelons will never really have any stake in the future direction of the organisation, they will also not be incentivized to work too hard for it.

I mean, why will anyone put in so much effort for an entity that they have no say in, or influence over? A sense of responsibility can only get one so far; incentives (that are aligned with personal desires and goals) are what truly pushes employees to work hard.

Moreover, because organisational decisions are made only by top executives, many of the programs or initiatives that the other employees must undertake may not be aligned with their interests, preferences, or even abilities. In this case, there is even less incentive for said employees to give their best, because it may not even be something that they believe in, or are able to execute, in the first place.

Futarchy as a Governance Model for Private Organisations

When decisions are made using the Futarchy mode, an organisation’s direction will no longer be solely beholden to a minority few (the top executives). This represents a flattening of the conventional hierarchical structure, and will ensure that power is diffused more evenly across the board.

Flat Hierarchy. Source: https://www.forbes.com/

Now, even the most junior of employees will have a more direct stake in both the short-term and long-term future of their company, as well as in their day-to-day activities.

Issue 2 (a heavy centralisation and concentration of decision-making power) is then naturally solved by virtue of Futarchy’s design, since the decision-making process will be democratized and made accessible to all.

By extension, Issue 1 (an unhealthy veneration of seniority and experience) will also be negated, since decision-making will no longer be concentrated in the hands of the senior and experienced. Sure, they may still expect to be venerated, and others may definitely still do so. However, since the power and influence that they are able to wield over the organisation will be greatly reduced and curtailed by a Futarchic model, such reverence will ultimately only be an empty notion.

Finally, and from all these — Issue 3 (a lack of incentivization for hard work) will also likely become a non-issue since they will now have a say and stake in the day-to-day workings, as well as the overall direction, of the organisation.

Final Thoughts: The future of Futarchy

Of course, it has to be acknowledged that all the above points were argued upon a very superficial conception of Futarchy in the setting of a private organisation; a true deep dive will take up much more time and space. Moreover, whether the top executives in said private organisations are even willing to try out such a model in the first place is also still very much all up in the air.

I mean, doing so will go against their very own personal self-interests and gain. For one, I already know for a fact that this model will never ever see the light of day as a proposal in the organisation that I am currently working in.

However, the revolutionary potential of such a model to improve private organisations and workplace culture should never be denied and belittled. More work must be done to see if an implementation in a real-world private organisation (not just in DAOs) is truly feasible and functional.

For me, I certainly hope that someday in this lifetime, I’ll get to see that come to pass.

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