Decentralised autonomous organisations (DAOs) have exploded in popularity in the ever-expanding crypto ecosystem, and they are widely regarded as the future of decentralised corporate governance.
DAOs are organisations that do not have a centralised hierarchy and were designed to work bottom-up so that the community collectively owns and contributes to decision-making. Recent research data, however, indicates that these DAOs are not as decentralised as they were intended to be.
A recent Chainalysis report examined the operations of ten major DAO projects and discovered that, on average, less than 1% of all holders have 90% of the voting power. The discovery highlights a high concentration of decision-making power in the hands of a select few, a problem that DAOs were designed to address.
The Solana (SOL)-based lending DAO Solend exemplified this concentration of decision-making power. To avoid cascading liquidations across the DEX books, the Solend team attempted to take over a whale’s account and execute the liquidation themselves via over-the-counter (OTC) desks.
This is pretty wild. The Solend team wants to take over the whale’s account and execute the liquidation themselves. The whale’s position is so degenerate that if SOL drops too low it will create cascading liquidations across the DEX books (and potentially bad debt). “DeFi” https://t.co/TEVKz18NSm pic.twitter.com/2A3t2fOhnl
— FatMan (@FatManTerra) June 19, 2022
The proposal to take over was approved with 1.1 million “yes” votes to 30,000 “no” votes; however, 1 million of these total “yes” votes came from a single user who owned a large number of governance tokens. After a fierce backlash, the vote was overturned.
The Chainalysis analysis emphasised that, despite all governance token holders having voting rights, the ability to submit a new proposal to the community and have it approved is not accessible to everyone.
The report suggested that between 1 in 1,000 and 1 in 10,000 governance token holders have enough tokens to create a proposal. When it comes to passing a proposal, only between 1 in 10,000 and 1 in 30,000 holders have enough tokens to do so.
The decentralised finance (DeFi) ecosystem accounts for 83% of all DAO treasury value and 33% of all DAOs by count. Aside from DeFi, other ecosystems that have seen an increase in the number of DAOs include venture capital, infrastructure, and nonfungible tokens (NFTs).