Simple Summary
Implement Conditional Markets to forecast the direct consequence of proposals on specific metrics related to the proposal. Start by interacting with the smart contracts directly and expand participants overtime as UI and usability is developed. Incentivize participation by airdropping conditional tokens redeemable for GNO if participants forecast is correct.
Motivation
Test Futarchy. GnosisDAO has made a public commitment to be driven by the concept of Futatchy, a form of governance devised by Robin Hanson. There is no better time to start seriously testing the concept than now.
In 2019 Alan Lu, Andre Meyer and Anton Shtylman of Gnosis created a demo of conditional token’s been used for their intended purpose, conditional markets. This demo asked three questions:
“What will DAI stability fee exceed 17.5%”
“What will the DAI total supply exceed 81 million”
“Will the DAI peg be above one dollar”
What was different is the market allowed me to build if this/ than that position. I.e If DAI stability fee is above 17.5% && the DAI peg is above one dollar THEN the dai supply will be less than81 million. To see a demo which has the same setup but asking questions related to Brexit, check this out, but please note its way outta date.
It blew my mind. The experience was unlike any other prediction market, it wasn’t will this event happen, not happen, but so much more. I had to think through how each of these questions related to each other. I would create position, stop and then double-check the Maker Docs to see exactly how stability fee affected total supply and how changes to stability fees had to affect total DAI supply in the past.
Now that the GnosisDAO is alive, it’s the perfect opportunity to test Futarchy as per Robin Hanson’s specs.
- We have audited LMSR market maker, whose specifications are taken directly from Hanson’s paper on a market maker for combinational (conditional) markets.
- We have conditional tokens.
- We have a community ready and willing to participate
Specification
Markets:
Conditional Markets in this case should be two conditions deep. GAS costs start getting really unwieldy when going into three and more conditions.
Two conditions allow us to ask IF a proposal passes, then what will be the effect on Y. Y should be a metric which is directly tied to the proposal. Consequently we also get a forecast on the effect on Y if the proposal does not pass.
We could see markets that allow users to back the following positions with funds: If GIP - 1 is passed, then Gnosis DAO Snapshots in the following month with have 100% more voters than GIP - 1.
Or
If GIP - 3 passes, then 3 months after launch there will be over â…“ of Uniswaps trade volume running on GP V2.
My personal belief is that the markets should be denominated in a stable coin. Using a stable coin as collateral reduces the cognitive overhead when backing a prediction with collateral that may fluctuate.
Contracts
LMSR Market Maker
Why LMSR? Because of timing. It’s ready, it’s safe, it works.
It’s not the end of conditional market makers. It has some drawbacks, one that comes to mind is that funding is only contributed by the deployer of the contract and can only be closed. No topping or removing of liquidity during a markets lifetime. But that’s fine for testing the concept of Futarchy. Gnosis will supply liquidity. In time the FPMM will be extended to handle conditional markets, but until then, let’s work with what we have right now.
Conditional Tokens
Conditional Tokens were built for this use case in mind. They like the LMSR have been audited and tested. Its time to use them as they were intended.
Implementation
Community first building. If this proposal was happening before the DAO I’d say let’s build out a slick user interface (we have one designed), integrate a subgraph for trade history, and a ton more bells and whistles. But now with the GnosisDAO, I think a progressive approach is suitable.
Version 1: Remix
If we were building a car, interacting directly with the contracts via remix would be equivalent to driving the car with no controls but instead pulling break and accelerator cables whilst turning using a screwdriver attached to the steering column. If you know how cars work, it can get you from A to B. But if you don’t, best wait until the car gets a steering wheel and brake pedals.
There is a small but active and technically competent community around conditional tokens and prediction markets. This first version would be aimed at them. I believe this approach is possible primarily due to the fantastic tutorial on conditional tokens put together by Alan Lu. I don’t see a reason why this approach(Gist + video guide) couldn’t be done to facilitate predictions using an LMSR market maker with two conditions.
Version 2: UI
Now that there has been a few runs using the contracts directly, the people who participated in version one known the contracts and how it works, its time to open the experience to a wider audience. For this, we need a UI. The UI would need to guide the user through the interactions, be intuitive and decentralized.
Version 3: Trade History
The most compelling feature is seeing how the odds have changed over time, but it’s not easy to build. This Trade history unlocks scalar markets. Scalar markets can be done without a trade history but with no idea of the price changes over time, its not all that intuitive.
What I think will actually happen
The above is a snapshot to illustrate that experimenting with futarchy using conditional tokens and the LMSR market maker should start as soon as possible and grow its audience over time. Perhaps the above won’t be necessary as it will become adopted by a product like Omen or perhaps a new independent product backed by GECO grants.
How to incentivize people to participate?
Conditional GNO. Reward those who make correct forecasts with GNO on top of the profits made from trading. Trading against the LMSR market maker is pretty good incentivization in itself. That said the people who contribute to testing futarchy, in my opinion, deserve a greater stake in DAO governance by receiving GNO.
How to distribute GNO for participating in futarchy experimentation? Well, a simple method could be to match each position taken with a proportional amount of conditional GNO. If the participant’s forecast is correct he/she gains additional GNO and greater governance rights in the DAO. Like yield farming, but with prediction markets.
Sadly this method is game-able. A trader could trade both sides of a market to gain conditional GNO on both sides of a bet, so no matter what happens they end up with GNO without having anything at stake. I feel there must be a way to reward correct forecasters with GNO without it been gamed, but this needs to be worked out and I look forward to ideas in the comments.