With Donald Trump’s return to the White House, cryptocurrencies have seen renewed momentum, spurred partly by the administration’s more permissive stance on digital assets. In a notable move, an executive order issued in January barred federal agencies from developing a U.S. central bank digital currency (CBDC), commonly called a “digital dollar.” This action signalled a departure from state-backed innovations favouring private-sector solutions, effectively throwing greater support behind decentralised cryptocurrencies and stablecoins. As regulatory pressure eases, the crypto landscape is entering a transformative phase that has reignited interest in alternative financial models such as Decentralised Autonomous Organisations (DAOs).
DAOs are often hailed as revolutionary institutions capable of delivering a more democratic and transparent financial system. Instead of relying on top-down hierarchies typical of corporations—where CEOs, CFOs, or boards make decisions—DAOs promise community-driven governance. Members participate directly in decision-making by casting votes with governance tokens, digital assets that function like shares. These votes determine everything from fee structures to developmental roadmaps. In theory, this system distributes power evenly among users and reflects the ideal of collective ownership. Yet, the reality appears far more complex and, in some cases, troubling.
Despite their reputation for openness, many DAOs suffer from significant centralisation of power. Governance tokens, the foundation of DAO decision-making, are frequently concentrated in the hands of a small number of early adopters, developers, or investors. Stefan Kitzler, a researcher at the Complexity Science Hub (CSH), explains that while every user has the right to vote, the identities behind wallet addresses remain hidden, making actual participation difficult to assess. “In principle, every user can participate,” he notes, “but it remains unclear who these users actually are, as only pseudonymous addresses are available.” This lack of transparency undermines the democratic image of DAOs and invites scrutiny regarding who controls them.
Kitzler and his team conducted a large-scale study investigating the extent of centralisation in DAO governance. Analysing over 35,000 proposals from 872 DAOs and nearly one million voters, their research, published in Financial Cryptography and Data Security, revealed a stark contrast between theory and practice. In 7.54% of the DAOs studied, core contributors—such as project owners and developers—held enough voting power to decide outcomes unilaterally. Furthermore, in about 20% of these organisations, insiders could pass at least one proposal without broader community involvement. These findings cast serious doubt on the decentralised nature of many DAOs, raising concerns about accountability and fairness.
The 2022 case of Tornado Cash serves as a cautionary tale. Once celebrated as a decentralised privacy-enhancing tool, the platform came under fire when the U.S. government sanctioned it for allegedly facilitating money laundering by North Korean hackers. Two of its developers were later arrested, prompting public debate over the proper level of decentralisation within such platforms. According to Kitzler, “inner circles” in many DAOs suggest that decision-making power often resides with a tight group of influential individuals. Bernhard Haslhofer, head of the Digital Currency Ecosystems research group at CSH, adds that even DAOs managing millions of dollars have shown signs of unilateral control—findings that surprised the research team.
The problem is compounded by the opaque nature of blockchain transactions, which makes it virtually impossible to determine the real-world identities behind extensive token holdings. This anonymity creates vulnerabilities in governance processes, such as potential vote manipulation. The researchers observed instances where tokens were transferred just before necessary votes, suggesting strategic behaviour aimed at swaying outcomes. As cryptocurrencies surge in popularity and policy discussions intensify globally, understanding how DAOs function in practice—not just in theory—has never been more critical. “Our findings provide empirical insights that can help shape future regulations,” Haslhofer concludes, “so that DAOs can live up to their original promise of decentralised, community-led governance.”
More information: Stefan Kitzler et al, The Governance of Decentralized Autonomous Organizations: A Study of Contributors’ Influence, Networks, and Shifts in Voting Power, Financial Cryptography and Data Security. DOI: 10.1007/978-3-031-78679-2_17
Journal information: Financial Cryptography and Data Security Provided by Complexity Science Hub