Chainalysis presented a study that found that, while decentralized autonomous organizations (DAOs) have emerged as the future of decentralized corporate governance, they have significant flaws in their operation.
DAOs, according to the study, are the foundation of many blockchain and Web3 projects. DAOs, which are internet-native and blockchain-based, are designed to provide a new, democratized management structure for enterprises, projects, and communities, allowing any member to vote on organizational decisions just by investing in the project.
Voting Power Concentration
However, according to the most recent Chainalysis analysis, while the manner by which DAOs operate is generally touted as a way to decentralize power, DAO ownership is highly centralized.
Chainalysis examined the operations of ten large DAO initiatives and discovered some compelling evidence that DAOs are not as decentralized as envisioned. According to the report, voting power in DAOs is highly concentrated.
On average, less than 1% of all members have acquired more than 90% of total voting power. To put it another way, less than 1% of all members in big DAOs have 90% voting power.
This indicates that a significant amount of authority has been concentrated in the hands of a small number of founder members, a problem that DAOs were designed to address. This is an undemocratic scenario in which a few individuals (about 1% of all token holders) might override any decision made by the remaining 99 percent of token holders.
Aside from that, the research stated that the stringent conditions placed on people proposing a vote violate the notion of decentralization.
Chainalysis discovered that: 1) A user must have between 0.1 percent and 1 percent of the outstanding token supply to create a proposal, and 2) A user must own between 1 percent and 4 percent to pass it after researching the governance structures of ten large DAOs. As a result, the majority of users find it difficult to propose a vote.
Another oddity involving the operation of DAOs was also highlighted in the Chainalysis paper.
According to the study, if too many holders produce proposals, the average proposal's quality may suffer, and the DAO may become infected with governance spam. However, if too few holders develop a plan, the community may believe that “decentralized governance” is a myth. Another issue that DAOs have yet to address.
DAOs Boosted by DeFi
Aside from looking at voting power within DAOs, Chainalysis stated that DAOs cover a wide spectrum of projects and services in Web3. According to the study, DeFi-related DAOs are ahead of other categories such as venture capital, infrastructure, and NFTs, which have far less on-chain valuables than DeFi protocols. According to the research, the DeFi landscape accounts for 83 percent of the DAO treasury value.
According to the analysis, centralized services account for only 17.9 percent of DAO treasury funds. This implies that DeFi protocols are heavily involved with DAOs, as the remaining 82.1 percent is sourced via decentralized platforms.
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