Centralized Governance in Decentralized Organizations

By: Lin William Cong, Daniel Rabetti, Charles C.Y. Wang and Yu Yan

Format:Print
| Language:English
| Pages:46

Abstract

We systematically document governance centralization in decentralized autonomous organizations (DAOs) and study its drivers and economic implications. Using multiple data sources and granular on-chain transactional data, we compare our findings to those in corporate finance (and venture startup) settings, to derive several key insights. Unlike traditional firms, DAOs, including most Decentralized Finance (DeFi) projects, have lower participation rates and more concentrated voting power. Moveover, these governance features result in blockvoters controlling 76.2% of the voting power in decisions. Examining the economic implications of centralization, we observe significant abnormal trading activity around governance proposals. Analyzing trading behavior, we show that while blockvoters focus on influencing governance outcomes, proposal managers engage in insider trading—yielding an average market-adjusted return of 9.5%. The combination of concentrated voting power and insider trading can be value-destroying in the long run, particularly during times of crisis when governance becomes central to the survival of business organizations.