Process

1. Funding Round Setup

Before launching a Conditional Funding Market (CFM) round, a structured set of CFM Parameters must be defined. These parameters detail the oracle settings (e.g., Reality.eth), the collateral token, each proposal’s funding ask, how the chosen metric is mapped onto the 0–1 payout scale, the final resolution date, the liquidity incentives, and the decision rule used to determine which proposals get funded.

The DAO (or Funding Entity) will also select which metric is used to evaluate each funded proposal’s success. While Total Value Locked (TVL) is one example, any objective, quantifiable measure can serve: daily active users, fee revenue, on-chain volume, security audits passed, number of research papers, or any combination of such metrics. An oracle (specifically, Reality.eth) will finalize the actual metric values at the end of the evaluation period, ensuring an objective resolution.

Below is an illustration of these parameters:

CFMParameters:
  oracle:
    name: RealityEth
    arbitration: "Example arbitration settings"
    instructions: "Instructions for verifying the final metric."

  metric:
    name: "Composite Ecosystem Score"
    metricsInvolved:
      - { name: "Users", weight: 0.5 }
      - { name: "TransactionVolume", weight: 0.5 }
    range:
      minValue: 0
      maxValue: 1000000
    mappingDescription: "Linearly maps actual score to a 0–1 payout scale."

  collateralToken: "USDC"
  resolutionDate: "2024-12-31T23:59:59Z"

  proposals:
    - { id: "A", name: "Project A", askAmount: 10000 }
    - { id: "B", name: "Project B", askAmount: 5000 }
    - { id: "C", name: "Project C", askAmount: 15000 }

  decisionRule:
    type: "TopN"
    N: 2
    description: "Fund the two proposals with the highest final prices."

  liquidityIncentives:
    totalRewardPool: 2000

2. Splitting into Conditional Outcome Tokens

When participants deposit collateral (e.g., USDC or an interest-bearing stablecoin) into the CFM smart contract, they receive a portfolio of “Funded” outcome tokens, one token for each proposal. Each outcome token is redeemable for $1/n if (and only if) its proposal is funded, where n is the total number of proposals that end up funded. If a proposal is not funded, its outcome token becomes worthless (0).

Key point: Because each deposit is split across all proposals’ outcome tokens, participants do not “lose everything” if they back a particular project that fails to get funded. Their remaining tokens in funded proposals collectively preserve their share of the collateral.

3. Splitting into UP/DOWN Tokens

For each proposal, a conditional scalar market (CSM) is created on top of its “Funded” outcome token, splitting it into two tokens:

• UP token – Gains value if the funded proposal’s final metric is high.

• DOWN token – Gains value if the funded proposal’s final metric is low.

These two tokens together always sum UP to $1/n for that proposal. A scalar payout rule defines:

• A minimum value $v_{\min}$ for the chosen metric (set to 0).
• A maximum value $v_{\max}$.

If, once the proposal is funded and reaches resolution time, the actual measured metric ends up exactly at $v_{\min} = 0$, the UP token pays $0 (and the DOWN token pays $1/n). At $v_{\max}$, the UP token pays $1/n (DOWN token $0). If the final metric is in between, the UP and DOWN tokens each pay some fraction summing to $1/n.

The current market price of the UP token can thus be interpreted as the market’s forecast of where the metric will land, normalized to the 0–$1/n range. For example, if the DAO sets $v_{\min} = 0$ new users and $v_{\max} = 1{,}000{,}000$ new users, and the UP token for proposal A is trading at $0.70/n, that means the market collectively expects the project to reach roughly 70% of that max range if funded, i.e., ~700k new users.

CFM Token Flow

                                        (n = # of funded proposals)
                                                ┌───────────────────────────┐
   $1 Collateral Deposited ───────────────────> │ Conditional Funding Market│
                                                └───────────────────────────┘
                                                           │
                ┌──────────────────────────────────────────┼───────────────────────────────────────────┐
                │                                          │                                           │
                ▼                                          ▼                                           ▼
  ┌────────────────────────────────┐           ┌────────────────────────────────┐           ┌────────────────────────────────┐
  │ "$1/n if Project A is Funded"  │           │ "$1/n if Project B is Funded"  │           │ "$1/n if Project Z is Funded"  │
  │        outcome token           │           │         outcome token          │           │         outcome token          │
  └────────────────────────────────┘           └────────────────────────────────┘           └────────────────────────────────┘
                │                                          │                                           │
                ▼                                          ▼                                           ▼
       ┌─────────────────────┐                    ┌─────────────────────┐                     ┌─────────────────────┐
       │     Scalar Market   │                    │     Scalar Market   │                     │     Scalar Market   │
       └─────────────────────┘                    └─────────────────────┘                     └─────────────────────┘
          ┌──────────┴──────────┐                  ┌──────────┴──────────┐                     ┌──────────┴──────────┐
          │                     │                  │                     │                     │                     │
          ▼                     ▼                  ▼                     ▼                     ▼                     ▼
  ┌──────────────┐   ┌──────────────┐       ┌──────────────┐    ┌──────────────┐       ┌──────────────┐   ┌──────────────┐
  │      UP      │   │     DOWN     │       │      UP      │    │     DOWN     │       │      UP      │   │     DOWN     │
  │   (0..$1/n)  │   │  (remainder) │       │  (0..$1/n)   │    │  (remainder) │       │  (0..$1/n)   │   │  (remainder) │
  └──────────────┘   └──────────────┘       └──────────────┘    └──────────────┘       └──────────────┘   └──────────────┘

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4. Trading and Price Discovery

Traders buy and sell UP and DOWN tokens based on their research and beliefs about each proposal’s future metric outcome. Because the underlying collateral is only redeemable if the proposal is funded, the “funding condition” is built in. If new information emerges, positive or negative, about a proposal, traders can react in real time by shifting the token prices to reflect updated expectations.

Traders who anticipate that a proposal's impact will exceed what its UP tokens imply will purchase UP tokens (hence increasing the CFM's estimate of the proposal's impact). On the other hand, those who believe the CFM's estimated impact of a proposal is too high will purchase DOWN tokens, reducing the CFM's estimate of the project's impact.

This continuous price discovery is how the market aggregates information to produce an expected performance score for each proposal.

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5. The Decision Rule

At a predetermined date, the DAO (or Funding Entity) applies its decision rule. Examples:

• Top-n Funding: Pick the n proposals with the highest UP token prices (i.e., highest expected metric outcome). Fund those projects, and each “Funded” token among those n is now worth $1/n.

• Budget-Constrained Funding: Sort all proposals by their “expected ROI” (price signals relative to funding asked) and allocate until the budget runs out.

No matter the rule, the mechanism determines which proposals are funded based on their final market signals.

Important: Once the DAO announces which proposals are funded, only those proposals’ outcome tokens hold value. Tokens for projects that did not get funded expire worthless.

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6. Metric Resolution

At a specified date several weeks or months after funding, the final metric (e.g., total users, TVL, or fee revenue) is measured for each proposal. A Reality.eth oracle then reports this metric on-chain for the CFM contract to read. Each funded proposal’s UP/DOWN tokens pay out according to the measured metric.