Decentralized Governance Capture: The Hidden Threat to DAOs

One of the loftiest promises of Web3 and decentralized autonomous organizations (DAOs) is community governance. DAOs are frequently framed as democratic, transparent and censorship-resistant alternatives to corporate structures. But under the surface there is a growing issue: Decentralized governance capture.

In reality, most DAOs are anything but democratic. Rather, they can be hijacked by the likes of the whales and the VCs, with genuine fears around unfairness, abuse and the long-term loss of decentralization.

What Is Decentralized Governance Capture?

Centralized governance capture is when decision-making powers of a DAO are monopolized by a small cohort of participants, commonly referred to as whales, early insiders, or noteholders.

Although DAOs are meant to grant the power of voting to holders of tokens, the result is often the same: The more tokens you own, the more politically powerful you are. This sets up a dynamic where governance can be “captured” by the holders of the most tokens, rather than by the community as a whole. 

Reasons for Governance Capture in DAOs

1. Token-Weighted Voting Systems

The vast majority of DAOs operate on 1 token = 1 vote mechanism. This implies the more number of tokens you have, the more weight you carry. It's simple, but it mimics shareholder governance very well, and allows rich actors to capture.

2. VC and Early Investor Concentration

A lot of this projects in Web3, they are all getting sort of venture funded. VC firms already drive hard bargains in early fund-raising rounds. Once governance goes live, they can vote down the community on significant decisions.

3. Low Voter Participation

Voter turnout for DAOs is commonly quite low. Even a few active addresses can tip large proposals, magnifying the power of whales.

4. Delegation Dynamics

Voters frequently delegate votes to known individuals or entities. Although delegation enhances participation, it can also concentrate power in the hands of a small number of prominent delegates. 

Examples of Web3 Governance Capture

• MakerDAO: Was criticized for allowing mega VC funds to have too much say in decisions about governance proposals.
• Uniswap DAO: Some governance votes showed that a small number of large token holders were able to sway outcomes with minimal input from the larger community.
• Small DAOs: Many community-led DAOs are subject to similar risks, as initial insiders control the treasury and long-term protocol direction.

The Risks of Governance Manipulation

1. Erosion of Decentralization

When decision-making is effectively in the hands of a few agents, the DAO is not decentralized. It could turn into a disguised form of centralized governance.

2. Misaligned Incentives

The whales and VC funds might be more interested in short-term profits or favorable exits, as opposed to the long-term health of the community. This is not sustainable for ecosystem.

3. Community Disillusionment

When holders of tokens realize that their votes are irrelevant, they become apathetic. This undermines participation and leaves DAOs even more susceptible to capture.

4. Regulatory Scrutiny

DAOs that have been are captured begin to look like companies and the more identifiable those making decisions are, the more likely aggressive enforcement becomes. 

Solutions to counteract DAO governance capture

The Web3 community is currently trying out mechanisms to retain fairness and decentralization:

• Quadratic Voting: Scales votes based on the square root of coins owned, cutting down on whale control.
• Reputation-Based Voting: Power is associated with contribution or participation, instead of token holdings.
• Capped Voting Power: Reduces the impact of any one wallet's voting power.
• Dynamic Delegation Models: Advocating for a number of factors to consider, instead of concentrating influence in a few hands.
• Progressive Decentralization: Moves the project’s center of power from founders and investors to communities as the protocol develops. 

The Future of DAO Governance

For DAOs to deliver on their democratic potential, they need to tackle the dangers of governance manipulation and capture head on. Voting based on tokens is insufficient. Unintelligently designed, DAOs can simply mirror the same power dynamics they set out to disrupt.

The next stage of DAO development will be driven by hybrid models of token-based governance and reputation, contribution, identity, and other mechanism to make this influence more fairly distributed.

Conclusion

Governance centralization capture is one of the most critical issues for DAOs today. DAOs are advertised as open and democratic - but in practice, whales and VCs rule the roost. Governance capture counteracts decentralization, erodes trust in the community, and poses challenges to long-term sustainability.

To achieve a truly decentralized future the Web3 ecosystem will need to innovate beyond 1 token = 1 vote, building governance systems that balance fairness, resilience, and inclusivity. Only then will DAOs fulfill their promise as the next generation of community-owned enterprises. 

 

This article is contributed by an external writer: Natalia Ivanov, Crypto Whales Info.

 

Disclaimer: The content created by LBank Creators represents their personal perspectives. LBank does not endorse any content on this page. Readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor can this article be considered as investment advice.