DAO Governance

Decentralized autonomous organizations (DAOs) operate based on a set of decision-making rules encoded into smart contracts utilizing blockchain technology. They lack a central point of authority in contrast to traditional corporations. In our paper, we develop a theoretical model of DAO governance featuring strategic token trading and a token-based voting system to investigate potential conflicts of interest between a large participant (“whale”) and many small participants. Our results show that ownership concentration is negatively related to platform growth, but platform size, token illiquidity, and long-term incentives can mitigate the negative effects. We confirm these predictions using novel voting data on more than 200 DAO projects from July 2020 to July 2022.

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