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Web3's surprising level of centralization! Chainalysis: 1% of holders control 90% of DAO voting power

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When a small number of people control a very large amount of governance tokens, it is questionable whether DAO can still make decisions for the best collective interests of all participants.

This article is authorized for republication by ForesightNews, original article here.

  • Original Title: "Dissecting the DAO: Web3 Ownership is Surprisingly Concentrated"
  • Original Source: Chainalysis
  • Original Translation: Aididiao

Decentralized Autonomous Organization (DAO) is the primary organizational operating model of the Web3 era. DAOs based on internet and blockchain technology provide a unique democratic management structure for businesses, projects, and communities, where any member can participate in governance by purchasing governance tokens for decision-making voting.

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The operation of DAO can be summarized as follows:

  1. DAO founders create governance tokens
  2. Distribute governance tokens to users, supporters, and other stakeholders
  3. Each governance token corresponds to a certain amount of voting rights, and governance tokens can be traded on the secondary market

Although this process is considered a decentralized way, data shows that DAO ownership is highly centralized.

Level of Decentralization in Governance Tokens

By analyzing the distribution of governance tokens in ten DAOs, it was found that in several major DAOs, less than 1% of holders possess 90% of the voting power.

Percentage of users holding 90% of governance tokens in DAOs

The highly concentrated distribution of governance tokens has a significant impact on DAO governance. If only a small fraction of the top 1% of holders initiate voting, theoretically their decision-making power will exceed the remaining 99%. Small investors may not be able to make meaningful contributions to the proposal process.

Impact of High Concentration on DAO Governance

For governance token holders, there are three key governance steps. Voting is straightforward and can be done by any holder, but creating proposals and getting them passed are not tasks that all holders can accomplish.

Based on the requirements of these ten DAO proposals, it is found that:

  1. Users must hold between 0.1% and 1% of the token supply to create proposals
  2. Users must hold between 1% and 4% of the token supply to get proposals passed

Using these standards, it is found that only between one-thousandth and one-ten-thousandth of holders in these ten DAOs have enough tokens to create proposals.

Number and percentage of holders able to create proposals in DAOs

If too many holders can create proposals, the quality of average proposals may decrease, and the DAO may be filled with governance junk. However, if too few can create proposals, community members may question the authenticity of "decentralized governance."

It is reasonable for between one-thousandth and three-thousandth of holders to have enough tokens to create proposals when it comes to individuals creating proposals separately.

An excessively concentrated voting power may lead to decision-making processes conflicting with the decentralized principles of building web3.

For example, in June of this year, the Solend DAO, a lending protocol based on Solana, faced an issue: if the price of Sol further declined, the largest whale user of the protocol would face additional margin calls, potentially leading to insolvency of Solend, with approximately $20 million worth of Sol tokens being dumped, causing a sharp drop in asset prices and significant damage to the entire Solana ecosystem. The DAO called for a vote to control the whale user's account, hoping to settle their position through OTC trades rather than liquidating in the open market.

The proposal easily passed with over 1.1 million "Yes" votes to 30,000 "No" votes. However, over 1 million of the votes came from a user holding a significant amount of governance tokens. Without the participation of ordinary voters, the proposal would have failed due to a participation rate of less than 1%.

This situation sparked strong opposition from the cryptocurrency community, with many questioning platforms that claim to be decentralized but serve the interests of a few, overriding user intentions to control user funds. Although the Solend DAO later voted down the proposal, when a minority of holders control a very large share of governance tokens, questions arise about whether the DAO can act in the best collective interests of all participants.

How Does DAO Governance Work Exactly?

Actual governance processes vary greatly among different DAOs. Here are some examples starting with Uniswap.

Example: Uniswap Governance

Anyone holding Uniswap governance token UNI is a member of that DAO. They can participate in governance by using their address, delegating voting rights to another address, publicly sharing their suggestions, or submitting their own proposals. Proposals can vary widely, such as recent proposals on whether to fund a donation program; integrate a new blockchain; and lower the governance proposal submission threshold, among others.

Prior to submitting a proposal, it must pass through two stages: signaling and consensus check.

  1. The signaling stage determines if the community has enough willingness to change the status quo. It lasts for two days with a threshold of 25,000 UNI in favor.
  2. The consensus check revolves around formal discussions on potential proposals. It lasts for five days with a threshold of 50,000 UNI in favor.

If both checks pass, an official governance proposal can be voted on. There will then be a seven-day voting period during which community members can discuss the merits of the proposal on the governance forum. After the voting period ends, if there are at least 40 million votes in favor and a minority of votes against, the proposal will pass and will be enacted in the following two days.

Example: Dream DAO Governance

Not all DAOs operate in the same governance process as Uniswap, but most run on similar foundations, such as Snapshot voting systems and Discord chat servers. Dream DAO is no exception, although its vision and governance process are unique.

Dream DAO was created by the 501(c)(3) charity Civics Unplugged, aiming to provide training, funding, and community for the global Gen Z generation, helping young Gen Z individuals adapt to the future by changing some past habits and mindsets using Web3.

Holder of SkywalkerZ operates the DAO community. SkywalkerZ NFTs can serve as governance tokens and provide crowdfunding incentives to those who donate to the project. When donors purchase SkywalkerZ NFTs, they can transfer voting rights to future Gen Z youth, who can gain voting rights in the DAO without purchasing NFTs. NFT buyers can apply to join the DAO and become voting members, or they can leave them to the Gen Z students they sponsor. In either case, the NFT belongs to the buyer.

By gifting voting rights through NFTs, financial barriers for Gen Z to participate in DAO governance processes are eliminated, allowing them to immerse in Web3 and actively use blockchain technology.

Where are DAOs Most Common and Well-Funded?

DAOs will become an essential organizational operating model in web3, managing:

However, in terms of user base and fund size, DeFi-type DAOs account for 83% of the total treasury value and 33% of all DAOs, holding a significant lead.

Distribution of assets and number of various DAOs

DAOs focusing on venture capital, infrastructure, and NFTs also have a significant share, indicating attractiveness to investors, developers, and artists. However, their on-chain asset values are relatively small.

The boundaries between different types of DAOs are blurry. Game DAOs are often related to NFTs, venture capital fund DAOs typically fund DeFi, and infrastructure DAOs support all the above categories.

Asset Management: What Assets do DAOs Hold?

Although DAOs vary in type and size, most on-chain treasuries hold similar cryptocurrencies. The most commonly held cryptocurrency is the stablecoin USDC, with over half of the 197 DAOs analyzed holding USDC stablecoins.

Most commonly held cryptocurrencies by DAOs

Stablecoins held in DAO treasuries rarely constitute the majority of the treasury value, with an average of only 23% of assets being stablecoins. Among the DAOs studied, 85% of treasuries consist of a single asset.

Distribution of DAOs with stablecoin holdings

The volatility of on-chain treasury values is roughly similar to that of Bitcoin. Assuming that the assets currently held by DAOs are their historical investment portfolios for the past year, it was found that:

  • DAOs with assets over $1 million have an average annualized volatility of 82%, compared to 69% for Bitcoin.
  • DAOs with assets over $1 million have an average maximum drawdown of 51% over the past year, compared to 72% for Bitcoin.

The value of DAO treasuries is closely related to Bitcoin price movements. 38% of on-chain DAO treasuries have a correlation with Bitcoin between 0.5 and 1.0.

Distribution of the correlation between DAO treasuries and BTC prices

One of the most interesting areas of fund management for smaller DAOs is mergers and acquisitions (M&A). M&A allows DAOs to enter other relevant areas without developing internal tools. As the DAO model matures, DAO M&A is expected to become more common.

So far, DAOs have had limited access to financial tools and related regulations. For example, very few DAOs use loans or credit due to their uncertain legal status. As the DAO model matures, we may see more standardized regulations, management strategies, and practical outcomes.

Who Contributes to DAOs?

Although we have not collected statistics on DAO participants, we can glean some information about DAO contributors through on-chain data.

As expected, DAO participants are advanced users of cryptocurrency services. Only 17.9% of DAO treasury funds come from centralized services, with the remaining 82.1% coming from decentralized services. This indicates that the majority of DAO contributors also utilize DeFi platforms to custody their cryptocurrencies.

The Future of DAOs

As DAOs continue to evolve, specialized tools and teams that help DAOs grow and govern have emerged. Superdao simplifies the creation of DAOs; Snapshot streamlines governance; and Coin Center advocates for DAO development in Congress. We look forward to what DAOs can achieve, what they will become, and to what extent they will achieve decentralization in the future.