Finance Series
DAO Governance
Working Paper Author/Authors
Jungsuk Han
Seoul National University
Jongsub Lee
Seoul National University
University of Florida
Key Finding
Ownership concentration has a negative effect on platform growth, but platform size, token illiquidity, and long-term incentives can mitigate its negative effect
Abstract
Decentralized autonomous organizations (DAOs) are entities without central leadership and operate based on a set of decision-making rules encoded into smart contracts using blockchain technology. In this study, we develop a theoretical model of DAO governance featuring strategic token trading under token-based voting to investigate potential conflicts of interest between a large participant (a "whale") and many small participants. Our results show that ownership concentration has a negative effect on platform growth, but platform size, token illiquidity, and long-term incentives can mitigate its negative effect. We confirm these predictions using novel voting data on major DAOs between 2020 and 2024.
