Felipe Montenegre of Theia Research and Profit from MetaDAO explore Futarchy, a governance model that uses prediction markets to make decisions, arguing it can solve the crypto industry's persistent "rug pull" problem and create a new class of "unruggable" tokens.
Governance by Betting, Not Voting
- "Instead of voting on what we should do, we bet on what the right thing would be to do."
- "In Futarchy, you allow markets to say whether they think a particular proposal will make the price of the token go up or down."
Futarchy, a concept from economist Robin Hansen, replaces traditional voting with conditional prediction markets. To decide on a proposal (e.g., Uniswap turning on its fee switch), two markets are created: one for the token price if the proposal passes, and another if it fails. Traders bet on the outcomes, and the decision that results in a higher token price is automatically executed, aligning governance directly with value creation. This mechanism incentivizes the most informed participants to trade, as they profit if they are right and lose if they are wrong.
Why Most Tokens Suck
- "If you gave money to somebody over the internet in the past 10 years through an ICO, you were rugged. That's the reality."
Unlike traditional equities protected by shareholder primacy laws, most crypto tokens lack robust investor protections, creating a "lemons market." This leads to numerous rug pulls, from teams outright absconding with ICO funds to more subtle "slow rugs" where founders collect large salaries for minimal work. Even legitimate projects can disenfranchise token holders by siphoning cash flows to a separate equity entity, leaving the token with no claim on the project's success.
The Unruggable Token
- "All of these rugs are stopped by Futarchy... if you raise $50 million in an ICO and the team wants to send it to their own Binance accounts and cash out, obviously that market's going to vote no."
Futarchy-based platforms like MetaDAO solve the rug pull problem by locking ICO funds in a programmatic on-chain treasury. The team receives a pre-approved monthly burn rate, but any expenditure beyond that—or any other major decision—must be approved by the market. This bakes token holder protection directly into the protocol, making it impossible for founders to misappropriate funds or make value-destructive decisions, as the market would immediately vote them down to protect its investment.
Key Takeaways:
- Futarchy provides a powerful mechanism to align project governance with token holder value, moving beyond flawed DAO voting models. By making tokens "unruggable," this model has the potential to solve crypto's lemons problem, lower the cost of capital, and attract a new wave of high-quality projects to on-chain capital markets.
- From Voting to Value: Futarchy transforms governance from a popularity contest into a pure value-maximization engine, where the only thing that matters is whether a decision increases the token's price.
- Investor Protection on-Chain: By locking funds in a market-governed treasury, Futarchy offers automated, code-enforced investor protections that mimic—and may even surpass—traditional shareholder rights.
- The End of the Rug Pull Era: Platforms like MetaDAO create a new asset class of "ownership coins" where the incentive to rug is eliminated, signaling a potential turning point for the quality and reliability of crypto investments.
For further insights and detailed discussions, watch the full podcast: Link
This episode reveals how Futarchy, a market-driven governance model, provides a powerful mechanism to end the era of crypto "rug pulls" by baking investor protections directly into a token's code.
What is Futarchy? Governance by Markets
- Core Mechanic: Futarchy allows markets to decide whether a specific proposal will increase or decrease a token's price. Felipe Montenegre, an investor at Thea Research, uses the example of Apple rehiring Steve Jobs. A Futarchy market would let participants trade on two potential outcomes: one where Jobs is rehired and one where he is not. The decision that results in a higher projected stock price is automatically executed.
- Conditional Trading: The system works through "conditional trades." For example, a trader could place an order to buy UNI tokens at $1.00 only if the fee switch is turned on. If the proposal fails, the trade is reverted. The outcome is determined by comparing the time-weighted average price (TWAP) across these conditional markets.
- Incentivizing Informed Participants: This mechanism incentivizes participation from the most informed individuals. As Felipe notes, "if you trade and you are right you will make money and if you trade and you are wrong you will lose money." This attracts sophisticated traders and experts who have strong, data-backed convictions about a proposal's impact, creating a more efficient decision-making process than typical DAO voting.
The Problem: Why Today's Tokens "Suck" for Investors
- The "Rug Pull" Epidemic: Felipe details numerous ways investors are rugged, distinguishing them from good-faith project failures. These include:
- Direct Theft: Teams raise millions in an ICO and simply walk away with the funds (e.g., Pixelmon raising $70M).
- Cash Flow Diversion: Revenue is siphoned to a private equity entity instead of accruing value to the token (e.g., the Uniswap Labs fee structure).
- The "Bali Slow Rug": Founders raise capital, move to a low-cost location, and collect large salaries for minimal work, draining the treasury without accountability.
- Foundation Misuse: Funds are funneled from a project's foundation to team members through inflated invoices for services like "branding."
- Lack of Legal Recourse: Unlike traditional equity markets, which are governed by the doctrine of shareholder primacy (the legal principle that a company's management must prioritize maximizing shareholder value), the token world lacks enforceable legal protections. This creates a "lemons market" where trustworthy teams struggle to differentiate themselves from bad actors, leading to a higher cost of capital for everyone.
Futarchy as the Solution: Creating "Unruggable" Tokens
- Programmatic Treasury Control: In a Futarchy-based system like Metadao, funds raised in an ICO are locked in a smart contract-based treasury, not sent to the team's private wallets. The team is allocated a pre-defined monthly burn rate for operational expenses.
- Market Veto on Malicious Actions: Any significant expenditure or strategic decision beyond the agreed-upon burn rate requires a proposal that must pass through the Futarchy market.
- If a team tried to send the treasury to their personal Binance accounts, the market would vote "no" by pricing the token to zero under that outcome.
- If a team proposed to divert intellectual property (IP) away from the token, the market would reject it.
- Felipe states, "All of these rugs are stopped by Futarchy... if you raise $50 million or $100 million in an ICO and then the team is like, 'well, we want to send it to our own Binance accounts and cash out,' obviously that market's going to vote no."
- Enforcing Capital Discipline: The system also prevents teams from holding excessive, unproductive cash. If a project's token trades below its net asset value (NAV), investors can submit a proposal to execute buybacks or a partial liquidation, forcing the team to return capital rather than squander it.
Metadao's Implementation: The Rise of "Ownership Coins"
- The Umbra Case Study: The episode highlights the ICO for Umbra, a privacy project on Metadao. While there was $156 million in demand, the team only accepted $3 million. They did this to ensure the token's market cap would trade above its cash treasury value (NAV), avoiding pressure from investors to liquidate the treasury.
- Founder Incentives: Metadao's framework includes performance-based token unlocks for founders, tied to price targets (e.g., vesting tranches at 2x, 4x, and 8x the ICO price). This aligns long-term incentives without giving teams unchecked control over the token supply.
- Legal Integration: Metadao also provides a legal wrapper. Projects are set up with a legal entity (e.g., a Marshall Islands LLC) where the operating agreement legally enshrines the on-chain Futarchy governance as the ultimate arbiter of the company's IP and assets.
Regulatory Risks and the Future Outlook
- The "Gary Gensler" Problem: Both speakers acknowledge that regulators could crack down on these new ICO models. However, Profit argues that operating in this "gray area" is inherent to building in crypto. He also notes that many existing token models are already on shaky legal ground.
- The Moral High Ground: Felipe suggests that by focusing explicitly on investor protection—the stated mission of the SEC—projects using Futarchy are better positioned to engage with regulators constructively. They are attempting to solve the very problems regulators are concerned about.
- The End Goal: The ultimate sign of success will be when existing, reputable projects migrate to a Futarchy model and receive a "valuation bump" from the market. This would signal that investors recognize and are willing to pay a premium for the superior protections offered by "ownership coins."
Conclusion
This episode makes a compelling case that Futarchy is not just a theoretical governance experiment but a practical solution to crypto's persistent investor protection problem. For investors and researchers, the key takeaway is that tokens governed by Futarchy represent a new, potentially de-risked asset class, transforming on-chain capital markets.
