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Renowned Futurists Merkle, Hanson on the Future of Government Using DAOs and Prediction Markets

Law & justice - Renowned Futurists Merkle

In May, Bitcoin Magazinecovered the spectacular launch of The DAO, a new kind of organization created and run using blockchain software rather than conventional corporate structures. The DAO ‒ an acronym for Distributed Autonomous Organization ‒ is similar to an open venture capital fund based on Ethereum smart contracts and rapidly became the world’s largest crowdfunding to date.

Shortly after its launch, The DAO had an equally spectacular crash caused by poorly understood aspects of its implementation of smart contracts, which a malicious attacker was able to exploit.

Emin Gun Sirer of Cornell University told The Economist, “the attacker simply read the terms and conditions more closely than anyone else.”

Regardless of misfortunes and temporary setbacks that are only to be expected in the early phases of a new technology with a potentially disruptive impact, DAOs have a huge potential. According to futurist David Orban, The DAO can be a pathfinder and a model for very ambitious crowdfunded initiatives to tackle important challenges, including a new global phase of the space program.

“From the $10 million order of magnitude crowdsales two years ago, to the $100 million crowdsale today, we will get to $1 billion in a couple of years, and then to $10 billion in another two-three,” he said.

Now, other renowned cryptographers, technologists and economists specialized in future studies are starting to weigh in. Futurist Ralph Merkle, who is also one of the inventors of public key cryptography, the inventor of cryptographic hashing and the originator of the “Merkle Trees” used in blockchain systems including Bitcoin and Ethereum, has published a paper titled “DAOs, Democracy and Governance.” Merkle’s thesis is that DAOs and crowdsourcing could lead to a new form of democracy which is more stable, less prone to erratic behavior, better able to meet the needs of its citizens and which better uses the expertise of all its citizens to make high-quality decisions.

“We call this new form of democracy a DAO Democracy,” says Merkle. “Further analysis and small-scale implementations combined with further research into their effectiveness, seem both warranted and urgently needed, given the range of problems facing humanity today and the more pressing problems anticipated in the future.”

Futarchy, proposed by futurist Robin Hanson, a professor of economy at George Mason University and the author of a much discussed recent book about radically futuristic economy, is a proposal to govern by prediction markets. “The proposal seems like an excellent approach for improving upon existing democratic forms of governance,” says Merkle.

Prediction markets are speculative markets created for the purpose of making predictions. The current market price for a prediction ‒ for example the election of a particular candidate ‒ can be interpreted as an aggregate, crowdsourced estimate of the probability of the prediction. Hanson, a leading prediction market researcher, was all over the news in 2003, when the Policy Analysis Market (PAM), a prediction market proposed by the United States' Defense Advanced Research Projects Agency (DARPA) and based on Hanson’s ideas, was canceled after a wave of accusations of incentivizing terrorism, which resulted in the resignation of John Poindexter, head of the DARPA unit responsible for developing the project.

In her 2015 book “Blockchain: Blueprint for a New Economy,” dedicated to advanced future applications of distributed ledger technology beyond currency (“Blockchain 1.0”) and smart contracts (“Blockchain 2.0”), futurist Melanie Swan defines futarchy as two-step democracy with voting plus prediction markets.

“The first step would be carried out by regular voting processes, the second step via prediction markets,” explains Swan. “Prediction market voting could be by different [cryptocurrencies] or other economically significant tokens. Prediction market voting is investing/speculating, taking a bet on one or the other side of a proposal, betting on the proposal that you want to win. As with random-sampling elections, blockchain technology could more efficiently implement the futarchy concept in an extremely large-scale manner (decentralized, trusted, recorded, pseudonymous.) The futarchy concept is described in shorthand as ‘vote for values, bet on beliefs,’ an idea initially proposed by economist Robin Hanson and expounded in the blockchain context by Ethereum project founder Vitalik Buterin.”

According to Swan, who founded the Institute for Blockchain Studies to examine the theoretical, philosophical and societal implications of blockchain technology, blockchain-based futarchy could became a common, widespread norm and feature or mechanism for all complex multi-party human decision-making. “One effect of this could be a completely new level of coordinated human activity that would be orders of magnitude more complex than at present,” notes Swan, cautioning that, of course, any new governance structure including futarchy has ample room for abuse.

“I’m encouraged that some people might actually try out versions of futarchy,” Hanson told Bitcoin Magazine. “It is perhaps unfortunate that they face especially difficult governance problems. But still, I’d love to see a head-to-head comparison with other mechanisms in most any governance context.”

Hanson isn’t entirely happy with Merkle’s proposal, however. In a blog post titled “Merkle’s Futarchy,” he worries about the possibility that futarchy implementations could ignore or sidestep the cautions and safeguards that were an important part of his original proposal, and criticizes what he sees as weak points of Merkle’s proposed implementation. “I’m happy to see the new interest in futarchy, but I’m also worried that sloppy design may cause failures that are blamed on the overall concept instead of on implementation details,” notes Hanson. “As recently happened to the DAO concept.”