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How It Works

Detailed explanation of how the Prediction DAO system operates.

System Flow

For a complete flow diagram, see the Architecture documentation.

Proposal Lifecycle

1. Submission Phase

A proposer submits a proposal by:

  • Posting a 50 ETC bond
  • Providing title, description, funding amount
  • Specifying recipient address
  • Selecting welfare metric for evaluation
  • Optional: Adding milestones

The proposal enters a 7-day review period where the community can discuss it.

2. Activation Phase

After review, the Futarchy Governor activates the proposal:

  • Conditional Market Factory creates PASS/FAIL token pairs
  • LMSR market maker initialized with liquidity
  • Trading period begins (configurable 7-21 days)
  • Privacy Coordinator enables encrypted trading

3. Trading Phase

Traders participate by:

  • Registering public keys with Privacy Coordinator
  • Creating encrypted position commitments
  • Generating zkSNARK proofs of validity
  • Submitting trades in batched epochs
  • Optionally changing keys to prevent collusion

Market prices adjust based on LMSR:

P_pass = e^(q_pass/b) / (e^(q_pass/b) + e^(q_fail/b))
P_fail = e^(q_fail/b) / (e^(q_pass/b) + e^(q_fail/b))

Where: - b is the liquidity parameter - q_pass, q_fail are outstanding shares

4. Resolution Phase

When trading ends:

  • Oracle reporter submits welfare metric values for both scenarios
  • Provides evidence (typically IPFS hash to data)
  • Posts 100 ETC bond
  • 3-day settlement window begins

5. Challenge Phase

During the 2-day challenge period:

  • Anyone can challenge the oracle report
  • Challenger posts 150 ETC bond (must exceed reporter's bond)
  • Provides counter-evidence
  • Escalates to UMA for arbitration if needed

6. Execution Phase

After finalization:

  • 2-day timelock period
  • Ragequit window opens for dissenting members
  • If PASS market value > FAIL: Proposal executes
  • If FAIL market value > PASS: Proposal rejected
  • Bonds returned to honest participants

Market Mechanics

LMSR (Logarithmic Market Scoring Rule)

The system uses LMSR for automated market making with these properties:

Bounded Loss: Maximum loss = b * ln(2)

Instant Liquidity: No need to wait for counterparties

Probability Prices: Prices reflect implied probabilities

Sybil Resistance: Splitting trades doesn't reduce costs

Token Redemption

After resolution:

If PASS wins:
  PASS token value = actual welfare metric value
  FAIL token value = 0

If FAIL wins:
  FAIL token value = actual welfare metric value
  PASS token value = 0

Traders profit/loss:

Profit = (redemption_value - purchase_price) × token_amount

Privacy Architecture

Nightmarket-Style Position Encryption

  1. Commitment Phase:
  2. Trader creates position: (amount, direction, nonce)
  3. Computes Poseidon hash: H = Poseidon(position, nonce)

  4. Submits commitment

  5. Proof Generation:

  6. Generates Groth16 zkSNARK proof
  7. Proves position is valid without revealing details

  8. Includes public inputs (commitment, merkle root)

  9. Batch Processing:

  10. Positions accumulated in epochs
  11. Processed together to prevent timing analysis
  12. Only aggregate data revealed

MACI-Style Key Changes

  1. Registration:
  2. User registers public key with coordinator

  3. Key used to encrypt messages

  4. Key Change Message:

  5. Encrypted with old public key
  6. Contains new public key

  7. Submitted on-chain

  8. Effect:

  9. Invalidates all previous positions using old key
  10. Makes vote-buying unenforceable
  11. Prevents collusion

Oracle System

Designated Reporter Model

Phase 1: Report Submission - First reporter gets priority - Posts 100 ETC bond - Submits PASS and FAIL values - Provides evidence URI

Phase 2: Settlement - 3-day settlement window - Data aggregation and verification - Community review

Phase 3: Challenge - 2-day challenge period - Requires 150 ETC bond - Must provide counter-evidence

Phase 4: Escalation (if challenged) - UMA oracle system - Token holder voting - Final arbitration

Evidence Requirements

Oracle reports must include:

  • Methodology description
  • Data sources used
  • Calculation details
  • IPFS hash to full data
  • Timestamp ranges

Security Mechanisms

Bond System

Creates economic incentives for honest behavior:

Role Bond Returned If Slashed If
Proposer 50 ETC Good faith Spam/malicious
Reporter 100 ETC Accurate report False report
Challenger 150 ETC Challenge succeeds Frivolous challenge

Timelock and Ragequit

Timelock (2 days): - Prevents immediate execution - Allows time for community verification - Opens ragequit window

Ragequit: - Proportional treasury withdrawal - Available to token holders who disagree - Executed during timelock period

Access Control

Multi-sig Guardians: - Can trigger emergency pause - Initially 5-of-7 threshold - Powers decrease over time - Full decentralization by Year 4

Spending Limits: - 50,000 ETC per proposal max - 100,000 ETC daily aggregate max - Prevents treasury drainage

Welfare Metrics

Primary: Treasury Value

Measurement: Time-weighted average price (TWAP) of all treasury holdings

Calculation: 

TWAP = Σ(price_i × duration_i) / Σ(duration_i)

Data Sources: - DEX prices - Oracle price feeds - Cross-referenced for accuracy

Secondary: Network Activity

Composite Index including: - Transaction count - Active addresses - Contract interactions - Gas consumption

Formula: 

Activity = weighted_average(txCount, activeAddrs, gasUsed)

Tertiary: Hash Rate Security

Measurement: Network hash rate relative to comparable PoW chains

Calculation: 

Security = (network_hashrate / average_hashrate) × 100

Quaternary: Developer Activity

GitHub Metrics: - Commits per week - Pull requests opened/merged - Active contributors - Issue resolution rate

Scoring: 

DevActivity = weighted_sum(commits, PRs, contributors, issues)

Economic Model

Market Maker Funding

LMSR requires capital:

  • Initial: From proposal bond
  • Additional: DAO treasury allocation
  • Sustainable: Bounded loss property

Fee Structure

Currently minimal fees:

  • No trading fees (subsidized by protocol)
  • Gas fees only (network cost)
  • May add small spread in future

Incentive Alignment

Traders: Profit from accurate predictions

Proposers: Bond returned if proposal legitimate

Oracles: Bond and reputation at stake

Community: Protocol improves → token value increases

Upgradeability

Progressive Decentralization Timeline

Year 1: Guardian multisig active

Year 2: Increased threshold requirements

Year 3: Reduced pause authority

Year 4+: Full community control

Upgrade Process

  1. Proposal submitted for upgrade
  2. Goes through futarchy process
  3. Market decides if upgrade improves welfare
  4. If approved, UUPS proxy updated
  5. Meta-governance: system governs itself

For More Details