“Shadow-Centralization” in Decentralized Autonomous Organizations

Decentralized Autonomous Organizations (DAOs) implement the allocation and transfer of governance rights through blockchain token contracts, paradoxically leading to a phenomenon of “shadow-centralization”, deviating from their inherent aim of fostering decentralization. The delegation mechanism within DAOs enables members to delegate their governance rights to others. Given varying participation levels in voting, there's a notable discrepancy between the distribution of holding rights based on governance token possession, and the eventual apportionment of voting power exercised during the voting process. Analyzing both on-chain and off-chain DAOs, we investigate how such “differentiated centralization” between holding and voting impacts the performance of DAO-governed platforms (DApps). The results indicate that increased centralization from holding to voting within DAOs adversely affects DAO-governed DApps performance. This negative impact is mitigated when the average experience and social capital of voters surpass those of governance token holders. We discuss both the theoretical and practical implications of these findings.