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Futarchy is a form of governance that uses prediction markets to make decisions. The process can be broken down into three main phases: Pledging, Trading, and Resolution.

1. The Pledging Phase: From Draft to Active Proposal

Every proposal starts as a Draft. To become an Active Proposal, it must gather enough community support in the form of financial pledges.

Creating a Draft

To create a new proposal, a user must submit a draft and make a minimum initial pledge. This serves as an anti-spam measure and demonstrates initial "skin in the game."

Pledging Support

Other users can then pledge their support for the draft by committing both $metalos and USDC.

• $metalos as Collateral: The pledged $metalos is used as collateral to create the conditional tokens (pMetaLOS and fMetaLOS) that will be traded in the prediction market.
• USDC as Liquidity: The pledged USDC provides the liquidity for the trading pools.

The 2:1 Pledge Ratio

To ensure market stability, pledges must maintain a 2:1 value ratio of USDC to $metalos. For example, if you pledge $20 worth of $metalos, you must also pledge $40 of USDC.

Activation

A draft becomes an Active Proposal when it meets its activation thresholds within the pledging period. In the current configuration, that means 100 USDC plus the paired $metalos collateral requirement shown in the app. If a draft fails to activate, all pledges are fully refunded.

2. The Trading Phase: The Prediction Market

Once a proposal is active, its prediction market is created on a whitelisted Automated Market Maker (AMM) like Uniswap V2.

Trading Conditional Tokens

Users can then trade two conditional tokens:

• pMetaLOS (Pass): Represents a successful proposal.
• fMetaLOS (Fail): Represents a failed proposal.

Traders use USDC to buy pMetaLOS if they believe the proposal will have a positive impact on the protocol, or fMetaLOS if they believe it will have a negative impact. The price of the pMetaLOS token reflects the market's real-time prediction of the proposal's success.

3. The Resolution Phase: Determining the Outcome

The outcome of the proposal is determined by the final price of the pMetaLOS token.

Time-Weighted Average Price (TWAP)

To prevent manipulation, we use a Time-Weighted Average Price (TWAP) oracle to read the price from the AMM over a set period (e.g., 60 minutes).

• If the TWAP is above a set threshold, the proposal is approved.
• If the TWAP is below the threshold, the proposal is rejected.

Settlement

After the proposal is resolved, participants can redeem their assets.

• Pledgers (LP providers) can redeem their LP tokens to reclaim their share of the USDC liquidity and the winning conditional tokens.
• Traders who hold the winning conditional tokens can redeem them for the underlying $metalos collateral.