Why Futarchy Matters: A Clearer North Star to Guide Fledgling Crypto Projects

Introduction

The crypto industry is a hotbed of innovation and risk-taking, backing even the most farfetched ideas in hopes of making them reality. Teams and investors alike face struggles along this journey. The most pertinent of these struggles have come to the surface over the last 12 months as the industry homes in on sustainability and real growth:

• For teams: how do you cultivate a committed holder base early on that cares about the project or won’t dump tokens at the first sign of turbulence, starving the project of time and runway? And in an industry that moves as fast as crypto, how do you stay nimble and informed enough to make winning decisions and pivot as quickly as possible?
• For investors: how do you assign value to an early-stage project with no revenue or user traction and liquid, freely tradable ownership? Traditional tools, such as discounted cash flow (DCF) models, revenue multiples, and comparable ratios, are difficult to apply here. Valuation ends up looking more like venture investing, anchored in abstract measures such as perception and conviction about the product, team, and market potential.

These challenges aren’t unique to crypto companies, but the decentralized nature of blockchain-based organizations enables novel fixes. When applied to decentralized autonomous organizations (DAOs), futarchy, a market-based governance model, brings forth:

1. Direct, economically backed signal for builders and the minimization of ambiguity about token holder sentiment in the decision-making process;
2. The limitation of information asymmetry and, by extension, the decentralization of DAO decision-making;
3. A conviction-weighted cap table shaped by market forces that naturally drifts toward the most accurate and supportive holders as DAOs make decisions; and
4. The ability for investors to directly express their conviction (or lack thereof) about specific DAO decisions by adjusting their exposure based on market signals emitted by proposal votes.

This report dives into how futarchy fundamentally applies to investing in, and decision-making by, early-stage crypto companies, where subjectivity is prevalent, ownership is freely tradable, and going from zero to one is the name of the game. Futarchy is actively being experimented with on Solana through MetaDAO’s collection of futarchic DAOs, and through Optimism’s grants allocation program. However, this analysis focuses on the foundational principles of futarchy and DAO governance rather than practical implementation details.

A Bird’s-Eye View of Futarchic Governance

The idea of governance through markets and economic signal was pioneered by economist Robin Hanson in his 2000 working paper “Shall We Vote on Values, But Bet on Beliefs?” In his paper, Hanson deubbed the alternative system “futarchy,” splicing “future” (as in futures markets) with the Greek suffix “-archy,” to evoke “rule by futures.” He introduced the label almost in passing, noting on the second page that he had “for no particular reason” adopted the term to describe his proposal.

Futarchic governance in the context of DAOs achieves the same goal of traditional token vote governance by guiding strategic decision-making. But it takes an alternative path to do so by separating the process of setting goals from the process of evaluating the means to achieve them. In traditional DAO governance, voters typically cast “risk-free” (in the sense that a user doesn’t take financial risk to cast their vote) token-weighted votes (i.e., one token equals one vote) that reflect both their values and their beliefs. When voters select an outcome for a given proposal, they are often expressing a blend of what they value (such as new product lines or opening the application to a broader set of users) and what they believe will best achieve those values (based on their assessments of the proposal’s ability to do so). The outcome that receives the most token-weighted votes is ultimately the path the DAO takes.

This contrasts with futarchy, through which individuals vote for goals in accordance with their values, while prediction markets—or “bets”—are used to gauge the most effective means of achieving those goals. This effectively separates the goal-setting component from the predictive component (i.e. achieving the desired outcome). The key advantage of futarchy is that it harnesses the predictive power of financial markets (asset prices and trading) to guide decision-making, with participants placing real monetary stakes behind their forecasts. This market-based approach aligns incentives for accurate forecasting and rigorous analysis in a way that cost-free, ballot-box-type voting typically can’t because no stake is on the line.

How this works in practice is a DAO proposal has two temporary, conditional markets for its token: pass market and fail market, each assigning distinct prices for the token that are denominated in dollar stablecoins. They are spun up for the duration of the vote. The primary markets for the token (e.g. decentralized and centralized exchange markets) continue to trade normally and the proposal markets run in tandem. These special-purpose markets are powered by separate automated market makers (AMMs), called pass and fail AMMs. Voters can choose to buy or sell a DAO token in either proposal market, pushing the synthetic proposal prices up and down. Notably, anyone can participate in these markets regardless of whether they hold the DAO token. For example, if you hold stablecoins but not the DAO token you can buy some through the proposal’s “pass” or “fail” markets.

Over the duration of the vote, a time-weighted average price (TWAP) of each market is recorded, and whichever is higher at the end wins the day. For example, if the community proposes to launch a protocol feature, and at the vote’s conclusion, the “pass” market price for the DAO’s token trades higher than that of the “fail” market, the market has signaled it collectively believes this feature would be beneficial to the DAO, and the proposal is adopted. Conversely, if the “fail” price is higher, the market has indicated the feature would be detrimental, and the proposal is rejected. Crucially, trades in the proposal markets are conditional: if you choose to buy DAO tokens at the “pass” price, you acquire them only if the proposal passes; otherwise, your stablecoins are returned. Similarly, if you choose to sell DAO tokens into the “fail” price, the sale only executes if the proposal fails, and your tokens are returned otherwise.

Because ownership transfers settle only if the corresponding outcome occurs, each position carries real economic exposure. Assuming an example where a proposal passes:

• A trader who buys in the pass market adds exposure to a token, thereby having more upside if the proposal adds value—but loses more if it passes and doesn’t add value (or hurts) to the DAO.
• A trader who sells into the pass market forfeits upside by trimming their exposure but is insulated if it proves harmful.

As a result, market prices reveal more than idle opinions because they are backed by skin in the game.

Below is a visual depiction of the trading lifecycle of a futarchic governance proposal.

The same dynamic is present when proposal markets fail:

Beyond merely determining proposal outcomes, futarchic governance votes function as powerful information markets. By forcing participants to put their money where their mouths are, futarchy aggregates distributed knowledge and sentiment into signals backed by economic stake, presumably leading to more robust decisions than is afforded by “risk-free” voting. This market-driven feedback provides direct insight for builders, offering clearer understanding into the collective perception of their proposals’ merits. For investors, futarchy creates a unique opportunity to directly express their subjective view on DAO decision-making, while allowing them to add or trim exposure based on what the market collectively believes is the optimal path for the DAO. This is especially significant in the context of early-stage DAOs, whose valuation is largely subjective and depends on the decisions they make and ultimately the path its product takes. Futarchy also means every participant on the cap table can adjust their holdings to reflect their conviction in specific decisions, creating a continuous alignment of financial stake with strategic direction. This dynamic inherently works to cultivate a conviction-weighted cap table for projects, because those whose insights consistently align with the winning decision will find their positions naturally reinforced, and crucially, all holders are empowered to maintain their preferred level of belief-weighted exposure bound to the DAO’s strategic direction.

Qualities of Startups and Early-Stage Companies

Defining some key qualities of early-stage companies is needed to understand how futarchic governance stands to benefit those building and investing in them:

• Perceived valuation: early-stage startups rarely generate revenue right away and are often building novel products. Their worth hangs on the quality of the product and team, and the belief they’ll unlock demand in the future through their decisions today. Unlike established companies, where past performance data and historical comps help anchor valuation, startups offer almost no such reference points, so pricing them is mostly signal-reading and conviction based on “invisible” inputs.
• Inference-driven decision-making: information asymmetry forces founders and individual investors to stitch together partial data, and heads-down builders often overlook signals from adjacent ecosystems and competitors. Decisions often end up riding more on probability than on hard proof.
• Investor conviction: early investors who share a deep, long-term belief in the team’s vision create a patient, aligned holder base. Steady hands reinforce stability in the face of market swings and give the project room to execute. Conversely, mercenary or low-conviction investors are quick to sell at the first sign of turbulence, amplifying volatility and forcing the team to manage distractions instead of building.

Taken together, these traits mean founders and investors are constantly guessing (and paying) for the right narrative and acting on it. Futarchy doesn’t eliminate this inherent subjectivity. Instead, it plugs directly into that reality by letting anyone trade DAO tokens on pass/fail outcomes on decisions, harnessing individual conviction and transforming it into aggregated market signals that DAOs act on. This process converts scattered hunches into unified, financially weighted forecasts, effectively funneling ownership toward those with the clearest, most durable conviction in aggregate. By requiring participants to put real capital behind their beliefs, futarchy transforms the very forces that make early-stage startups fragile into a governance mechanism that actively strengthens them, providing a less arbitrary path forward.

How Futarchy Complements Early-Stage Companies

The benefit of futarchy to DAOs in their earliest stages is twofold: 1) it offers an economically backed beacon of information and 2) it offers a dynamic cap-table-building mechanism that directly links DAOs’ strategic paths to their holder bases.

Information Beacons

As an information beacon, futarchy provides market-reinforced feedback on the viability of an idea and directly highlights the economic sentiment of token holders toward a decision.

Economically Backed Decision Making

Futarchic governance taps into a thesis like that of prediction markets. Just as predictions backed by economic stake yield more accurate forecasts, decisions backed by economic stake should yield more salubrious outcomes, because some value is on the line. This stake in the outcome reduces the overhead of arbitrary and poor decision making by attaching consequences to having a say in the outcome, thereby incentivizing voters to cast more robust and informed opinions. This system also benefits those who make the most accurate forecasts by granting them the ability to add or reduce holdings as they see fit, and potentially to benefit financially, further aligning individual incentives with the collective good of the DAO.

Moreover, by allowing anyone onchain to vote, futarchy limits information asymmetry by capturing the opinions of those beyond the DAO’s holder base. This is achieved by transforming votes into markets, which opens up the assessment of DAO decisions to anyone willing to risk capital. This market-driven system also makes manipulation difficult, because any attempt to control a vote can be diluted by anyone else in the market. The more a manipulator spends to drive a token’s “pass” or “fail” market price above or below the price in the primary market, the greater the incentive for others to counter their position and reap the arbitrage. Furthermore, this system makes manipulation inherently costly because it requires sacrificing real money to sway an outcome, which can result in direct economic losses for the manipulator or unilateral controller. This entire structure fosters a degree of decentralization that is nearly impossible for token-weighted voting to achieve.

Voting–Ownership Gap

In traditional governance systems, there’s potential for disconnect between how people vote (and in turn what the organization ends up doing) and how they allocate their capital. Someone might vote against a proposal but still buy more tokens because they believe in the overall project. Someone else might vote in favor while quietly selling because they’re concerned about execution risks. This creates a gap between stated preferences in governance and revealed preferences in markets, making it difficult for builders to understand what stakeholders truly think about specific decisions rather than their overall support for the project. This blind spot can lead to suboptimal decision making.

In futarchy, the act of voting isn’t so detached from market activity; instead, buying and selling tokens becomes the vote itself. This means that when a proposal is put forth, the market immediately signals its approval or disapproval through the direct buying or selling of tokens tied to the proposed decision. This is a crucial distinction from conventional governance, where market reactions (such as general buying or selling) happen totally independent of the vote, making it difficult to discern the true motivations behind these market actions and their connection to specific governance decisions.

This integrated approach reduces the ambiguity of holder sentiment information and its connection to optimal decision making, meaning that genuine views and conviction are captured directly within the voting mechanism. This allows DAOs to stay on the path that most aligns with the economic view of its holder base. Unlike traditional systems where supporters might vote one way and economically act in another, futarchy collapses the wager and the outcome into a single structure. This relationship is also critical because when a vote concludes, tokens are directly redistributed from those who don’t believe in the decision to those who do. This process not only clarifies market sentiment and applies it to the decision outcome, but it also directly realigns ownership with the (theoretically) most informed and conviction-driven participants, enabling DAOs to dynamically balance their cap tables as decisions are made.

Conviction-Weighted Cap Table

Building a committed holder base is one of the most challenging aspects of launching an early-stage crypto project. Most teams struggle to distinguish between genuine supporters and mercenary actors, leading to volatile token prices and distracted founders who spend more time and resources managing market dynamics than building products.

The dominant strategy for attracting early users has been airdrops, which effectively distribute free tokens to incentivize product usage. While this can generate initial activity and juice the metrics, it creates several problems that undermine long-term success:

• Mercenary behavior: airdrop recipients typically engage in minimal, inorganic activity undertaken solely to qualify for rewards, then immediately dump the tokens once received. This creates a holder base who are chasing a quick buck, often with minimal conviction in the project’s future.
• Blurred product-market fit signals: when users interact with a product primarily for financial gain rather than genuine utility, teams receive misleading feedback about product quality and market demand. People will use almost any product if there’s free money involved, making it difficult to assess whether the core offering solves a real problem.
• Starting from zero: once the airdrop ends and mercenary users exit, projects often find themselves back at square one with no lasting community. The temporary activity spike provides little sustainable foundation for growth.

This dynamic leaves early-stage projects caught in a paradox: they need users to prove traction, but the methods used to attract users often bring the wrong type of participants who actively harm long-term success.

How Futarchy Aims to Fix Holder Commitment Problems

Futarchy addresses the holder conviction problem by creating a natural selection mechanism for holders through market-based governance. Over successive proposals, token supply migrates toward the most accurate (i.e. trading on the side of the market that ends up winning) and high-conviction voters, while correct but lower-conviction and incorrect (i.e. trading on the side of the market that ends up losing) holders gradually slide off and lose relative share on the cap table. The drift is incremental (no one has to be wiped out in a single proposal) but persistent over time. When paired with more organic token-launching mechanisms, futarchy better sets DAOs up to have a more committed holder base as the project progresses.

Futarchy turns subjective, hard-to-quantify disagreement around DAO decision-making into voluntary conditional ownership swaps based on the aggregated perceptions of individual market participants. This can progressively concentrate token ownership in the hands of the most accurate forecasters (in the eyes of the market) and staunchest supporters of the DAO’s path forward.

Consider a proposal to add a new feature to a protocol. Three holders have different views:

• Alice wants to buy 1 token if the proposal fails because she thinks the proposed feature would be bad for the DAO. She wants more exposure if this decision doesn’t go through.
• Bob wants to sell 1 token if the proposal fails because he thinks the feature is bullish for the application. He wants to reduce exposure if the proposal doesn’t pass.
• Eve wants to buy 1 token if the proposal passes because she believes the feature will be valuable. She wants more exposure if it gets implemented.

If the market collectively decides the proposal should fail (fail price > pass price), Alice effectively acquires Bob’s 1 token through the synthetic proposal market. Both Alice and Bob traded on the side of the market that ultimately passed: Alice by buying tokens conditional on failure, and Bob by selling tokens he didn’t want to hold if the proposal failed. Alice gains exposure while Bob slides off the cap table. Both get their desired outcome. Eve, meanwhile, experiences no direct token transfer because her conditional purchase depended on the proposal passing, but she loses relative influence on the cap table to Alice, whose position grew.

This creates three distinct outcomes:

1. Alice (high conviction, traded on winning side of market): gains tokens and share on cap table.
2. Bob (low conviction, traded on winning side of market): loses tokens and leaves the cap table.
3. Eve (no bet on passed outcome): maintains absolute position but loses relative share on cap table to Alice.

This process happens automatically through conditional markets, creating an elegant mechanism where ownership naturally flows toward those whose judgment consistently aligns with collective market wisdom. Unlike airdrops that attract mercenaries, or traditional governance that separates voting from holders’ perceptions of the economic prospect of a decision, futarchy ensures that influence concentrates among participants who have both conviction in the decision and the market’s confidence in their forecasts.

The result is a cap table that becomes more conviction- and accuracy-weighted over time, populated by holders who have repeatedly demonstrated belief in the project’s direction by backing their opinions with capital.

The Limits of Futarchy

Futarchy doesn’t guarantee success. It is a means to better decision-making and to obtaining a more optimized set of holders, not an end in itself. Teams still need to execute on the insights futarchic governance provides, the underlying product idea still needs to be sound, and the product itself needs to be worthy of demand.

Moreover, the presence of markets in the decision-making process doesn’t guarantee the best outcome for the DAO every time. The idea is that reinforcing opinions with monetary consequences cultivates an environment where there is an incentive to make the best decision. People can still act irrationally, and markets can still misprice decisions. However, compared to “risk-free” token voting where holders still have a say in guiding a DAO’s strategic direction, futarchy provides a more incentive-aligned means of decisionmaking.

Futarchy’s primary value isn’t in guaranteeing that decisions will drive higher prices and adoption. No governance system can do that. But futarchy can give DAOs a stronger chance of success than what is afforded by traditional alternatives.

Conclusion

Futarchy offers a powerful framework for early-stage startups, enabling economically backed decision-making where investors can directly align their financial exposure with the direction chosen by the DAO. This mechanism is particularly beneficial for startups because it provides a stronger cold-start mechanism for building an application and establishing a strong holder base than is possible through traditional channels. While futarchy also brings benefits to established DAOs, the model is particularly useful to those in their initial stages where subjectivity runs rampant and building a high-conviction holder-base is paramount.

Disclaimer:

1. This article is reprinted from [Galaxy]. All copyrights belong to the original author [Zack Pokorny]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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