From Predicting Events to Creating Value

While prediction markets excel at forecasting events, that's just the beginning of what market-based information can achieve. Rather than just estimating probabilities, we can use markets to estimate the impact of events and decisions. This enables a fundamental transformation: organizations will finally be able to reward valuable ideas based on their measured impact.

This approach was formalized by economist Robin Hanson in his seminal 2000 paper "Vote on Values, Bet on Beliefs," which introduced futarchy as a new paradigm for collective decision-making.

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The true disruption comes from measuring impact of decisions.

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We Need Better Governance

When MakerDAO announced its rebrand as Sky in August 2024, the feedback from the community was mixed.

Ten days after the announcement, the MKR governance token was trading at 20% lower than before, a market cap reduction of over $500 million USD. One article was titled “The Sky Is Falling: Mr. Market Hates MakerDAO's Re-Brand”. This may be persuasive, but to be honest, it is hard to know for sure. The way most markets exist today, market movements can’t just be tied to specific causes like that.

When MKR holders finally voted on the rebrand, the outcome revealed another problem: almost all votes in favor came from just four entities. This was enough for a confortable majority, but as you might expect, many minority investors did not feel confident their interests were taken into account.

Futarchy can deliver better governance. The critical innovation is conditional markets, which allow accurate measurement of the impact of a proposal on metrics such a token prices. We won’t be just guessing based on the timing of market movements. Signals generated by these markets can help create value — first by leading to more efficient adoption and rejection of controversial proposals, but also and perhaps even more importantly, by generating credible incentives for value-generation.

How it Works

Instead of letting insiders decide on a major rebrand through simple voting, futarchy creates two conditional markets that price outcomes under different scenarios:

The difference between these prices reveals the expected value impact of the rebrand. If markets expect the rebrand to destroy value, the "Sky scenario" price would trade lower, giving a clear signal before any changes are made. These markets create a clear visualization of expected value impact:

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The prices on the different conditional pools represent market estimates, and are determined by supply and demand. There is no guarantee that these signals will be ultimately correct, or that the decision recommended by the market estimate is the right one. However, anyone who disagrees with the market estimate can trade on the conditional markets and make a profit in case they are right.

These market signals enable two powerful mechanisms. Let's look at these advantages in detail:

  1. A way to evaluate decisions before they're made. If a protocol commits to putting such proposals to market evaluation, and not going forward with changes without market approval, this serves as a strong protection for minority investors. Effectively, for a controversial proposal to be recommended by the market, the ones in favor effectively have to “buy out” all the investors that are against it.
  2. A foundation for rewarding valuable proposals. When markets show a decision or partnership would create value, the person who proposed it or makes it possible can be automatically rewarded based on the measured impact. If someone proposes a change that markets expect to increase MKR's value by $100, they could receive a percentage of this created value - creating powerful incentives for contributors to bring innovation that truly benefit all tokenholders.

From Signals to Systems