Intro to advisory markets
Advisory Markets
Advisory markets are prediction markets where traders forecast how different decisions will impact a chosen metric, while the decision maker retains authority over the final choice. For instance, traders might forecast whether deploying to a new blockchain will increase token price, while the DAO retains the deployment decision.
Their primary advantage over futarchy-style decision markets is that they provide useful insights into expected outcomes while allowing decision makers to evaluate market performance, and gain trust in them over time before delegating decision-making authority to market prices. Advisory markets also enable outsiders without decision-making authority to create markets that persuade decision makers by demonstrating that their proposals will likely lead to better outcomes, thereby justifying further investigation and evaluation.
These markets provide a credibly neutral signal of a proposal’s expected benefits. Market signals carry credibility because any trader can correct prices they believe to be inaccurate, creating a self-correcting mechanism that lends legitimacy to the information conveyed.
Applications of Advisory Markets
Strategic and Product Development
Advisory markets can evaluate proposals for new major products, strategies, initiatives, or decisions. They can also predict the future success of competing projects according to key performance indicators.
Protocol Operations and Configuration
Markets can assess the impact of enabling, disabling, or adjusting protocol fee switches, deploying to new chains, and integrating new protocols or assets. They can also evaluate the impact of adopting features or changes recently and successfully adopted by competing protocols or projects.
Token Economics and Fundraising
Token-related decisions include predicting token prices conditional on launch parameters and evaluating various airdrop distribution approaches. Markets can also evaluate proposed capital raises or token supply adjustments (https://www.overcomingbias.com/p/futarchy-for-fundraising).
Budget and Resource Allocation
Advisory markets can evaluate large-scale DAO capital allocation proposals. They can assess the impact of defunding contentious DAO programs that currently consume large budgets, defunding potentially parasitic or potentially misaligned entities in the ecosystem, and ending or deploying incentive campaigns. These markets can identify both opportunities and instances of waste or spending misaligned with token holder interests.
Corporate Governance
Corporate governance applications include evaluating executive or CEO equity compensation proposals. Markets can also aid in selecting suppliers or service providers (https://www.overcomingbias.com/p/futarchy-for-ad-supplier-choice).
External Market Analysis
Beyond crypto-specific contexts, advisory markets can evaluate the impact of election outcomes on national currencies or stock markets for any countries where the election outcome can materially impact national currency or stock markets.
Retrospective Evaluation Predictions
Markets can predict the results of future retrospective evaluations. For example, they might predict the result of a temp-check polling the DAO one year later on whether an initiative was overall worthwhile. Authors of large proposals can use such markets to increase their proposal’s credibility by demonstrating that the market predicts it will be evaluated positively in the future.
Criteria for When Advisory Markets Are Most Useful
Not all of these criteria are necessary, but each enhances the effectiveness of advisory markets.
Material impact on the chosen metric. Decisions must influence a substantial amount of resources or capital, or achieve impact through other means, so that effects are visible when comparing conditional market prices rather than being obscured by market noise.
Timely impact on the metric. Decisions should materially affect the metric within several months of enactment. This requirement avoids the capital-efficiency downsides of extremely long-lived metric markets. Financial asset price metrics offer a significant advantage here because they quickly incorporate the expected effects of decisions once enacted, enabling fast resolution.
Non-trivial probability for all options. Any option under consideration must have a meaningful chance of being chosen, as traders have minimal incentive to trade in conditional markets for outcomes with a negligible chance, given the market only resolves if the outcome occurs.
Manipulation-resistant metrics. Metrics must resist manipulation sufficiently that decision makers can trust the market’s reliability. Without this property, decision makers may worry that interested parties could manipulate the metric and by extension the market. Asset price metrics generally perform well on this dimension.
Contention and disagreement. A high level of disagreement among traders regarding which approach will yield the best outcome increases trading volume and by extension liquidity and market accuracy.
Clear definitions and methodology. Both the metric calculation methodology and decision definition must be unambiguous. Clarity ensures that traders can confidently participate knowing how markets will resolve, and decision makers can trust the market’s accuracy.
Subsidized liquidity from interested parties. If someone has an interest in a particular outcome being chosen, they may subsidize conditional market liquidity to improve accuracy and increase the weight decision makers place on the market’s prediction of that outcome’s effect.
Decision maker receptivity. Decision makers should be willing to further investigate or consider proposals that conditional markets identify as likely beneficial. This receptivity means that even if a proposal initially seems unlikely to be accepted, the market’s endorsement can lead to it being considered and potentially adopted, thereby giving traders a reason to identify and trade in conditional markets for promising but underappreciated proposals.
Informed participation and timely decisions. Decision makers and other informed parties should be able to trade in the market, and decisions should occur relatively soon. These conditions help avoid decision selection bias.
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futonomous mechanism design. cryptoecon. austrian econ. epistemology. liberty.