6. How can Soulbound token and Futarchy be used in crypto governance ?

This piece is written by @hasaki from Phezzan Discord server

Disclaimer: This article is written by a member of the Phezzan community. Views in this article do not represent the views of the Phezzan team. Phezzan Protocol may or may not use Soulbound Tokens/Futarchy when it builds its governance structure. However this is a good article about Soulbound tokens, Futarchy, and how they can be used in crypto governance.

As a crypto user, I am pretty sure that everyone used to hear about a DAO or a governance token at least once. Governance has let the project's users develop it in the way they want and orient its future. In other words, the project whether it is successful or not will be dependent on the community. Governance has many different models, and all of them have their advantages and drawbacks. I think that the Phezzan team will choose a model that combined of Soulbound token and Futarchy - a new and optimal one. Today, I will explain what it is and my speculation.

1) Definition

a) Soulbound token

Firstly, I will tell you a short bio of Vitalik Buterin: " I was born in Russia in 1994 and moved to Canada in 2000, where I went to school. I happily played World of Warcraft from 2007 to 2010, but one day Blizzard removed the damage component from my beloved warlock's Siphon Life spell. I cried myself to sleep, and on that day I realized what horror centralized services can bring. I soon decided to quit. ". After that, Ethereum was born. And soulbound token is inspired by the Soulbound feature of Warcraft's item. It is “ Soul” and “Bound”. In WoW, items with the soulbound feature are no longer tradable, tied to the owner. In crypto words, soulbound tokens are non-transferable and non-tradable. Once you have minted that token into your wallet, it will stay there forever ( Bound to your wallet). This token acts as an identification. It asserts ownership and is proof that the holder obtained this token through a recognized activity ( usually contributing to the community or a winner of a contest ), not buying "hands-on" from someone else.

=> Soulbound token is the same as the non-transferable NFT

b) Futarchy model: Governance by a prediction market.

Futarchy is a form of government proposed by economist Robin Hanson, in which elected officials define measures of national wellbeing, and prediction markets are used to determine which policies will have the most positive effect. In other words, the Futarchy model will work like this: After a valid proposal is given by a community, the Phezzan team will make two pairs of markets that let people make conditional trades. For each pair, in one market trades are conditional on adopting the proposal, while in the other trades are conditional on the opposite. The difference between the prices in a pair estimates how much the proposal changes the future outcome ( The future outcome can be the price of an asset or whatever the proposal impacts on ).

=> Futarchy model will use a speculation market ( Robin Hanson uses a bet market ) to predict which proposal will have a better effect on the project. Decision-makers will use this source of information to refer to.

c) Futarchy model: an example of the

That is the definition of the Futarchy model. Now, I will show you an example of prediction markets so that you can easily understand the mechanic:

( I will use the prediction market of FTX, which is more simple and easier to understand in comparison to Robin Hanson's example. You can go to this link to use it: https://ftx.com/trade/BOLSONARO2022 )

There is an event that will happen in October 2022. The election held in Brazil on October 2, 2022 will determine who is elected president. One of the candidates is Jair Bolsonaro. Therefore, I made a contract ( you may call it an asset ) that represents the event that Jair Bolsonaro becomes the president. This contract has 2 outcomes: it will expire to $1 if Jair Bolsonaro wins the 2022 Brazilian presidential election and $0 otherwise. In other words, if you buy this contract and Jair Bolsonaro becomes the president, you will receive $1. This asset is traded by the speculators, and the asset price runs from $0 -> $1. So if someone is willing to buy this asset for $0.60, we can interpret this roughly as they are saying the chance Jair Bolsonaro will win is at least 60%. ( Since they are willing to pay 0,6 to be able to receive 1$ back if they win ). And a market price of $0.60 can be interpreted as a consensus among traders that p(Jair Bolsonaro wins) ≈ 60% ( p means the percentage of the event happens ).

=> In conclusion, a prediction market like this can tell you a percentage of an event that could happen. Specifically, you can imagine it like this: D is a good impact on the project ( price pumps or raise more funds ) and H is a proposal. Then we have a contract: D will happen if H is passed. The consensus price of the contract will show you the percentage of D that happens with H. From this, you can estimate the policy effect. The voters now can refer to this to make a decision.

From this picture, I can tell that the percentage of Donald Trump winning the 2024 US election is 43%.

2) The purpose of governance and many governance models

In this part, I will go through the history of crypto governance, which can show you why Soulbound and Futarchy is a more optimal way of governance.

a) First of all, what is the purpose of decentralized governance?

Defi should go with DeGov. Decentralized governance is a user action that is allowed to vote on a project proposal. When the proposal reaches the acceptance threshold, it will be executed, and vice versa. The proposal will decide the future of a project, therefore it needs real contributors and real users who clearly understand the project and aim for the long-term profit of the project. The project will need loyal community members and the actual users to orient, not the ones who just think about their profit ( Buy/ sell tokens and airdrop hunters ). That is the final purpose of governance.

b) The first model of governance is off-chain vote:

In this model, any eligible user can vote through Web2 social apps such as Discord or Telegram. You just need an account. This way has a critical drawback: Transparency. Everyone can easily fake their IP and create many accounts to vote for their desired proposal.

c) The second model, which is also the most popular model, is that voting on-chain by tokens:

In this model, if you own the project token, you can easily vote for any proposal. The more tokens you own, the more power you vote. For example, I own 10 PHZ tokens while Bob owns only 1 PHZ token. If I vote Yes and he votes no, I will win. This kind of model has a super super great drawback: The validator, the whale and the capital, who owns lots of tokens can vote for their benefit. In the recent Terra 2.0 hard-fork, although many small users do not want to fork the new chain, the decision is in the hands of the validator - who holds the majority of LUNA. => In this model, small users are nothing. Besides, the whale can just buy the tokens before the snapshot time and then vote. After that, they sell again. This model cannot capture the value for the token and doesn't have the long-term benefit. Example of this model: Token House Optimism

d) The third model is stake token to vote:

In this model, you must stake your token ( which needs 14 days or 28 days to release ) to vote on a proposal. This can lead to many benefits: For the stakers, you can receive the protocol fee and the staking APR as a reward. The project's team will receive a long-term commitment from the users. Win-win situation. A more innovative governance model is veToken, which can mean you can choose how long you will lock your token. The longer you lock, the larger your vote power is. However, one more time, the drawback of whales and capital appears. They have a lot of tokens, so their votes are more powerful than small investors. Example of this model: Curve Finance or Cosmos Staking.

=> The aim of Phezzan is small investors, not the whale or capital

3) The combination of Soulbound NFT and Futarchy model.

I will show you the advantages of each model and my speculation on how both of them work together

a) Soulbound token

In my opinion, the Soulbound token will be the future of crypto governance. As I said above, you have to achieve it through activities such as participating in a contest, contributing to the project or becoming the top real users of a protocol. The project team will assess your effort and give it to you. Only the users who have Soulbound tokens can vote on the proposal. The advantages:

+ It means that you are a loyal member of that community who has contributed to the development of the project

+ It is non-transferable, so the whale cannot buy it to benefit themselves

+ Only the ones who clearly understand and care about the project can vote, not everyone

b) Futarchy model

I think that this model can encourage everyone to participate in the governance process. Right now, only 1% of circulating tokens participate in the Snapshot vote, which means the token holders don't take care of the project's future. This model has many advantages:

+ Incentivize community members to join in the vote since they can make a profit from it ( Actually, it is just market trading, so if you are good you can make a profit from it. ). You participate and the Phezzan team will give you a $1 reward if you win

+ Encourage community members to read about the project, and read about the proposal to have a better decision when they want to trade those assets to make a profit

+ The decision-makers can have more information to make sure what they should vote ( The most important part of Futarchy )

+ Through this model, the Phezzan team can have a better way to distribute the Phezzan token compared with Liquidity mining, reducing the inflationary pressure ( Because the reward will be from the project's treasury ).

c) My speculation about this combination and how it works

Now, about the combination, first of all, only the soulbound token holder can vote while the community who holds Phezzan tokens can participate in the Futarchy model to give the predicted impact to the Soulbound token holder. The SBT holder can refer to the predicted impact to vote on-chain. That is how the combination will work.

However, in my opinion, this kind of tokenomic will lack something. How can the Phezzan token capture the value from the governance? In my opinion, they will also deploy the veToken and split the governance into two parts like Optimism: Citizen house and Token house.

+ The ones who have Soulbound token in their wallet can vote for important proposals related to the success of the protocol such as retroactive, liquidity mining pool reward, code in the smart contract, the DAO treasury,....

+ The ones who hold Phezzan tokens now need to stake their token into the protocol. The longer you stake, the more reward and more powerful votes you will have. You can vote for normal proposals, such as what game should the community play today, where we should organize an offline meeting,... You also need to stake your token in the protocol if you want to participate in the futarchy model. You will receive the protocol fee, Staking APR or something like that as a reward.

=> These things will make Phezzan tokenomic more optimal than ever. However, that is just my speculation and concept. Will the Phezzan tokenomic look like that or will it be successful? We will need more time to answer it.

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