DAOs far from being decentralized? The Chainalysis report sends shivers down the spine

Chainalysis dots the “i’s” – The concept ofdecentralized autonomous organization (DAO) was born in the infancy of the Ethereum (ETH) network. These organizations aim to decentralize governance of a protocol. Unfortunately, in practice, the latter turn out to be highly centralized around a handful of actors.

What is a DAO?

A CAD (Where decentralized autonomous organization) is a new structure to the ecosystem of the web 3. This makes it possible to distribute the governance of a project.

In practice, the founders of a DAO will issue tokens, commonly called governance tokens. These tokens will subsequently be distributed to the actors of this protocol as well as to its community.

Each token represents a voting power which can be used to participate in decision-making relating to the evolutions and improvements of the protocol. Although, on paper, the DAO is supposed to allow a decentralization of governanceThe reality is different.

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Slightly centralized DAOs

On June 27, Chainalysis, the company specializing in blockchain analysis, published a report alarming about the situation of the DAOs. Indeed, after a study of several DAOs, the company discovered that on average, less than 1% addresses held 90% of the voting power.

Distribution of tokens in DAO governance – Source: Chainalysis

“This has significant implications for DAO governance. For example, if a small portion of the top 1% of holders worked together, they could theoretically defeat the remaining 99% on any decision. »

Report of chain analysis

This centralization tokens results in a large bias on voting systems that want to be decentralized. This seems biased on the entire voting process.

In fact, not all users have the possibility of proposing an improvement or modification of the protocol. In fact, it takes on average hold 0.1 to 1% of the set of governance tokens to perform a voting proposal. Therefore, only a few prominent players wield this power.

Moreover, on average, the addresses holding between 1 and 4% of the set of tokens have the possibility of making pass any proposalto the detriment of the rest of the community.

An example is worth a thousand words: Solend

Earlier this month, the protocol Solend faced a size problem. In short, an important debt position was about to be liquidated by protocol. Its liquidation could have led to a cascade of liquidationsharmful to the protocol.

To overcome this problem, the developers wanted to take the fund control to liquidate them over-the-counter (OTC). To do this, they created a proposal through the protocol’s governance module. It is at this time that the centralization problem of governance came into play.

Indeed, the proposal was accepted with 1.1 million SLND tokens in favor and 30,101 against. However, of the 1.1 million tokens deployed in favor of the proposal, 1 million came fromone and the same address.

Solend developers have created a proposal through the protocol governance module
Solend DAO Governance Voting Result

This perfectly illustrates the problem caused by too much centralization of tokens in the hands of a single address. Thus, it is able to guide the result of a supposedly decentralized vote, as it sees fit.

Alternatives to overly centralized governance

Obviously, the problems caused by too much centralization of tokens around the same actor are widely known. As a result, some protocols have sought alternatives to create governance systems that overcome this weakness.

Chainalysis thus puts forward the proposal of Dream DAO. In this system, governance is managed by the SkywalkerZ NFT holders. For every NFT purchased by a donor, a new SkywalkerZ is reserved for a future Gen Zer who can join the DAO as a voting member. Its integration into the governance process will then have been free.

Other protocols, such asOptimismhave chosen to divide their governance into 2 inseparable entitieswhere only one entity has a token-based voting system.

DAOs can also pave the way for new types of attacks. Exactly, the protocol Beanstalk recently suffered a governance attack.

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DAOs far from being decentralized? The Chainalysis report sends shivers down the spine


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