Research: Ownership of Top 10 Web3 DAOs is Surprisingly Concentrated

Chainanalysis | Team | Jun 27, 2022

Decentralized autonomous organizations (DAOs) are a staple of web3. Internet-native and blockchain-based, DAOs are intended to provide a new, democratized management structure for businesses, projects, and communities, in which any member can vote on organizational decisions just by buying into the project.

At a high level, this is how DAOs work:

1. DAO founders create a new cryptocurrency, known as a governance token;
2. They distribute these tokens to users, backers, and other stakeholders;
3. Each token corresponds to a set amount of voting power within the organization. Each token also corresponds to a price on the secondary market, where it can be bought and sold at will.

See: Sounds like a DAO, Looks like a DAO: Introducing the Modern Digital Organization

While this process is often described as a way to decentralize power, governance token data suggests that DAO ownership is highly concentrated.

The concentration of governance token holdings

By analyzing the distribution of ten major DAOs’ governance tokens, we find that, across several major DAOs, less than 1% of all holders have 90% of voting power.

This has meaningful implications for DAO governance:

• For example, if just a small portion of the top 1% of holders worked together, they could theoretically outvote the remaining 99% on any decision. This has obvious practical implications and, in terms of investor sentiment, likely affects whether small holders feel that they can meaningfully contribute to the proposal process.
• Overly concentrated voting power in DAOs can result in decision-making that seemingly contradicts the tenets of decentralization on which web3 is built.

See:  Blockchain-based replacement for traditional crowdfunding: DAOs

• For instance, in June 2022, the DAO governing the Solana-based lending protocol Solend faced a problem: Solana’s price was dropping, and if it fell much further, the protocol’s biggest whale user would face a margin call that could render Solend insolvent and send roughly $20 million worth of Solana onto the market, potentially tanking the asset’s price and upending the entire Solana ecosystem. The DAO called a vote to take control of the whale’s account and liquidate its position through OTC desks, rather than the open market.

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