Mechanism overview

Key components of a CFM

A CFM (Conditional Funding Market) has two main elements:

1. Conditional markets: Each proposal has two distinct conditional markets: a Funded market and a Not Funded market. The Funded market predicts the outcome if the proposal receives funding, while the Not Funded market predicts the outcome if it does not. The Funded market has Funded-UP tokens and Funded-DOWN tokens, while the Not Funded market has Not Funded-UP tokens and Not Funded-DOWN tokens; these reflect the market's forecast of the reported metric in that scenario.

2. A decision rule: Once the market prices are established, the Funding Entity decides which proposals to fund. The decision is based on the forecasted impact of each proposal, calculated as the difference between the Funded market’s price and the Not Funded market’s price. Each Funding Entity can define their own rule, such as “fund the top n proposals with highest forecasted impact,” or “sort proposals by expected return on metric per dollar asked, then pick until the budget is exhausted.”

CFM process outline

┌───────────────────────────────────────────────────────────┐
│ Funding entity launches CFM                               │
│     - Chooses metric, proposals, timeline                 │
│     - Mints `Funded` and `Not Funded` tokens              │
│       for each proposal                                   │
└───────────────────────────────────────────────────────────┘
                       │
                       ▼
┌───────────────────────────────────────────────────────────┐
│ Traders: beliefs & research                               │
│     (Participants assess each proposal in both            │
│      funded and not-funded scenarios)                     │
└───────────────────────────────────────────────────────────┘
                       │  Trades
                       ▼
┌───────────────────────────────────────────────────────────┐
│ Conditional markets                                       │
│     - Two markets per proposal: `Funded` & `Not Funded`   │
│     - Each market has its own `UP` & `DOWN` tokens        │
│     - Prices reflect expected metric in each scenario     │
│     - Aggregates traders’ information                     │
└───────────────────────────────────────────────────────────┘
                       │  Conditional market prices 
                       ▼
┌───────────────────────────────────────────────────────────┐
│ Decision rule                                             │
│     - E.g., budget-based or ROI-based, using              │
│       forecasted impact                                   │
│     - Calculates forecasted impact (price of Funded-UP -  │
│       price of Not Funded-UP), to find highest-value      │
│       proposals                                           │
└───────────────────────────────────────────────────────────┘
                       │  Selected proposals
                       ▼
┌───────────────────────────────────────────────────────────┐
│ Funding allocation                                        │
│     - Selected proposals receive funding                  │
│     - For each proposal, one market resolves and the      │
│       other becomes void:                                 │
│     - If funded: `Not Funded` tokens → 0                  │
│     - If not funded: `Funded` tokens → 0                  │
└───────────────────────────────────────────────────────────┘
                       │
                       ▼
┌───────────────────────────────────────────────────────────┐
│ Proposals proceed & resolve                               │
│     - At resolution date, an oracle (e.g., Reality.eth)   │
│       reports the metric value.                           │
│     - For funded proposals, their `Funded` tokens         │
│       pay out.                                            │
│     - For not-funded proposals, their `Not Funded`        │
│       tokens pay out.                                     │
└───────────────────────────────────────────────────────────┘