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In a nutshell

VIENNA — The crypto revolution promised to eliminate middlemen and democratize finance, but researchers have uncovered a dirty secret about Decentralized Autonomous Organizations (DAOs). Insiders have maintained enough control to largely dictate decisions, researchers said.

A new international study has revealed that the insiders — such as developers, administrators, and project owners — held enough voting power to decide the outcome of proposals by themselves in about 8% of DAOs. Even worse, these insiders single-handedly determined the outcome of at least one proposal in more than 20% of the organizations studied.

Even though these organizations are marketed as democratic, many function more like groups controlled by a small number of insiders who have a lot of power.

For anyone unfamiliar with the crypto world, DAOs are supposed to be democratic communities where members vote on decisions using special “governance tokens.” The more tokens you hold, the more voting power you have, similar to owning shares in a company, but with decisions made directly by token holders instead of a board of directors.

Examining nearly a million voters across 872 DAOs and analyzing over five million votes, the research team discovered that even major financial platforms like Uniswap, which handles billions in trading volume, showed concerning levels of insider contribution.

How Insiders Maintain Control

The study, published in Financial Cryptography and Data Security, highlighted three major ways insiders maintain control despite the democratic facade. First, contributors — the study’s term for insiders — occupy central positions in voting networks. Essentially, they’re the popular kids sitting at the cool table. Their influence spreads further due to their position.

“In our study, we found signs of ‘inner circles' forming in many DAOs, as contributors tend to be centrally positioned within the DAO governance ecosystem and often hold disproportionately high influence.”

Second, these insiders tend to vote together in patterns that look suspiciously like coordinated voting blocs.

Lastly, right before important votes, there are sudden shifts in who owns governance tokens. In nearly 15% of proposals studied, significant changes in voting power occurred days before the vote. This could be a coincidence, but it also could be a strategic manipulation tactic.

Instead of long-term community members making decisions based on what’s best for everyone, we’re seeing what looks like strategic voting power grabs right before important decisions. The researchers found that contributors participated in over 60% of proposals where these majority shifts occurred, suggesting they may be involved in these strategic token movements.

Major Crypto Platforms Aren’t Immune

You might assume this problem only affects small, unknown DAOs, but the study found even the crypto big leagues aren’t immune.

Uniswap, one of the largest decentralized exchanges where people trade billions in crypto, showed nearly 30% contributor involvement in voting. Aave, a major lending platform, wasn’t far behind at 28%. Even in these massive organizations, insiders still maintain outsized influence.

The research team built what amounts to a social network map of voting behaviors, showing who tends to vote with whom. These maps revealed that insiders typically occupy central positions and tend to cluster together in voting communities.

This means insiders stick together and maintain positions of influence, forming what looks like inner circles within these supposedly democratic organizations.

The Regulatory Reckoning

These findings largely negate the narrative that DAOs represent a decentralized and democratic alternative to traditional governance. If a small group of insiders can effectively control the outcome of proposals and maintain outsized influence, are these organizations really any different from traditional companies with a democratic veneer?

Financial regulators are increasingly focused on identifying who controls these supposedly decentralized protocols. After incidents like the Tornado Cash sanctions, where developers allegedly manipulated governance to avoid anti-money laundering controls, understanding who really pulls the strings has become crucial for regulators.

For anyone who thought DAOs represented a revolutionary new model for democratic organizations in the digital age, this study delivers a sobering reality check. The promise of decentralization appears significantly compromised, raising fundamental questions about whether truly democratic digital organizations are possible or merely a clever marketing ploy.

Paper Summary

Methodology

The researchers collected data from Snapshot (an off-chain governance platform), the Ethereum blockchain, Ethereum Name Service, and The Graph. They identified 986,557 voters across 872 DAOs with 7,478 recognized contributors. To ensure accuracy, they cross-verified 438,668 votes from 8,116 proposals against blockchain records, finding 97.48% consistency. They measured contributor influence by calculating voting power across proposals, analyzing decision-making involvement, and building co-voting networks to map voting patterns. They also tracked token balance changes before votes to spot strategic behavior.

Results

The study revealed that in 7.54% of DAOs, contributors held enough voting power to decide governance on average. In 20.41% of DAOs, contributors’ votes alone