With traditional token-based voting often producing unclear or skewed results, a market-based governance model is slowly gaining traction.
In the search for better ways to govern decentralized autonomous organizations (DAOs), one idea is quietly gaining traction: a system where markets, not just votes, decide the outcome.
Galaxy Digital, a publicly traded crypto venture capital firm with $7 billion in assets, is betting that a governance model called futarchy could reshape how DAOs operate.
In research published earlier this month, the firm’s research associate, Zack Pokorny, wrote that market-based governance models offer clearer decision signals and stronger alignment between holders and outcomes, urging more early-stage projects to give it a try.
Futarchy converts DAO votes into bets, much like prediction markets such as Polymarket or Kalshi, where individuals trade on their predictions of what will happen. The difference is that, in futarchy, the market’s outcome doesn’t just reflect opinion, but actually determines what the DAO will do.
Galaxy argues that this market‑based twist could help early‑stage DAOs in two big ways. First, it gives builders a clearer, economically backed signal on which ideas matter most. Second, it naturally shifts token ownership toward the most accurate and committed participants over time, building a conviction‑weighted cap table.
In other words, holders who consistently back winning outcomes end up with more influence, while less‑sure participants slowly slide off.
Controversial Bets
Futarchy isn’t just a theory. On Solana, MetaDAO, a Paradigm-backed hub for running DAOs with market-based governance, has been live for months.
Users trade in pass/fail markets powered by AMMs, and some initiatives, like the liquid staking platform Sanctum, have already tried MetaDAO governance.
When asked what types of proposals are best suited for futarchy, MetaDAO co-founder Kollan House told The Defiant that proposals which have a clear impact on the token’s price tend to work well.
“We’ve also found volume is highly correlated with controversy. So the more controversial a proposal is, the higher the volume. What is controversial is debatable/unexpected at least for now, given the small set of examples we’ve got,” House said.
The MetaDAO founder also revealed that things that “don’t materially affect token price” or are inconsequential relative to the token price “haven’t been great results.”
House pointed out that the way thresholds are set for passing or failing proposals can also make a big difference. MetaDAO uses a token’s time-weighted average price to measure outcomes.
However, in some cases, a lower threshold might have allowed certain proposals to pass. He added that analyzing this more closely could help show which proposals are truly effective, though that work hasn’t been done yet.
Bots & Manipulators
Ethereum Layer 2 network Optimism tested a play‑money version of futarchy in its Season 7 grants program. Participants traded using PLAY tokens tied to their reputation — meaning no real money was at risk — while top forecasters competed for actual OP rewards. Around 430 vetted users placed nearly 6,000 trades during the experiment.
According to Optimism’s report, the futarchy-based selection matched or even outperformed the traditional Grants Council in identifying high-impact projects, driving roughly $32.5 million more in TVL growth over 84 days for its unique picks.
However, the experiment revealed some challenges. Forecasts tended to overestimate actual outcomes, which the report attributed to the play‑money setup, saying the “play money structure created no downside risk for inflated predictions.”
The experiment also revealed a major bot problem, filtering out over 4,000 suspected sybils to reach 430 real forecasters, showing bots remain a challenge in play‑money setups.
Pros and Cons
Futarchy isn’t new. Ethereum’s co-founder Vitalik Buterin explored it back in 2014, noting in a blog post that markets might help focus debate on proposals rather than personalities, and that experts could earn profits by trading on their research.
Yet, he also cautioned that futarchy is better suited for large-scale decisions than for more detailed, fine-grained tasks.
Prediction markets can be manipulated by large players, and finding metrics that truly capture “success” is more difficult than it seems. Similar risks appear in futarchy, where outsiders might exploit open markets to skew results away from a DAO’s objectives. The system’s complexity may also deter less experienced users, a concern MetaDAO’s founder has also acknowledged.
When asked about manipulation, House admitted to having observed it in their markets but pointed out that the manipulators ultimately ended up losing.
“If the proposal is bad for the token price, then the manipulator is buying out all the counterparties and ends up with a worthless token. We’ve seen manipulation in our markets, and the manipulator lost in the end after their capital was exhausted. Capital at risk here is the most important deterrent,” he explained.
Additionally, futarchy can’t prevent a founder from promising to deliver, raising money, and then pulling the rug on investors.
Kevin Heavey, co-founder of crypto research firm Temporal, broke down the Parrot DAO case in a piece for Umbra Research. The DAO’s assets were distributed among token holders based on the number of tokens they owned, which may seem fair at first.
“The catch here was that the team held most of the tokens because they minted themselves those tokens for free, so this represented the founders pocketing at least $47m of investor funds after doing almost no work,” Heavey explained.
Futarchy would not have prevented this, Heavey adds, noting that the original sin of the Parrot Protocol “was giving funds to a team with no mechanism to stop them from running away with the money.”
Challenges to Broader Adoption
Galaxy admits futarchy isn’t a silver bullet. Markets can misprice outcomes, and people can still act irrationally. Good governance still needs sound products, solid execution, and clear metrics. But by adding financial stakes to decisions, futarchy could tilt incentives toward more thoughtful, data‑driven outcomes.
When asked whether futarchy is ready for broader adoption, House pointed to one key challenge: liquidity.
“The profit potential with low liquidity and a focus on metric-based markets is likely the biggest problem faced by futarchy. Crypto for better or for worse has put a focus on making money trading (which is good for markets), and if futarchy cannot be competitive with the other profit opportunities in crypto, then it’s going to be hard to gain traction outside of a select group of interested parties,” he said.
Still, House believes futarchy is a clear improvement over traditional token voting. “I think this is a stepwise improvement to token voting, so I think if DAOs are willing to accept the results and use token based futarchy, then I think they’ll see the benefits, but there cannot be half measure adoption, or at least we haven’t seen it (and theory would indicate it wouldn’t be as valuable),” House explained.
In August 2024, MetaDAO raised $2.2 million in a funding round led by Paradigm to support its operations. Although the team isn’t raising additional funds at the moment, House said they plan to do another round within six to eight months, ideally before introducing revenue mechanisms to the protocol.
“We’d love to expand the tooling, but want to build futarchy as a protocol that can stand on its own two feet,” he said.
