Is There Wisdom Among the DAO Crowd? Evidence from Vote Delegation

Nearly half of decentralized autonomous organizations (DAOs) allow vote delegation to facilitate user participation in governance and decision making. However, how well this mechanism works is largely unknown. We evaluate the efficacy of the vote delegation scheme by examining token holders’ vote delegation decisions and delegates’ voting behavior in MakerDAO, a pioneering and foundational DAO protocol. We find that token holders can discern delegates’ actions and reward delegates who act in their best interest with more delegated votes. Delegates vary in their incentives and expertise, which influence how they vote on proposals. Delegates whose interests are more aligned with token holders and who possess greater proposal-related expertise are more likely to vote correctly, whereas delegates with potential conflicts of interest tend to vote against token holders’ interest. Finally, we find that the effectiveness of the vote delegation scheme is positively related to the governance tokens’ future performance. Overall, our evidence suggests that vote delegation can contribute to DAO performance and growth, provided delegates have the requisite incentives and expertise.