Often, the largest governance token holders have such a significant share that they discourage smaller users.
A new report produced jointly by DappRadar and Monday Capital analyses the distribution of tokens and the governance proposals of the main DeFi protocols. Despite efforts to decentralize control over the yield farming phase, the researchers argue that many projects, especially those with strong venture capital links, remain highly centralized.
In particular, the report analyzed protocols such as MakerDAO, Curve, Compound and Uniswap, all of which have an enormously distorted token distribution in favour of large holders. Analysts noted that Maker’s governance seems to be the most mature of all, thanks to its greater experience in the market. The place where preliminary discussions and analysis are conducted by community members is the MakerDAO forum, and it is open to everyone, regardless of how many MKRs they own.
However, the actual on-chain voting process seems to be mainly controlled by the large holders, as the first 20 addresses hold about 24% of the total offer. Compared to other projects analysed, however, this distribution is still quite fair.
On Compound, the researchers noted that the ranking of keepers includes mainly venture capitalists, team members and some other blockchain projects, in particular Dharma and Gauntlet.
Only 2.3% of the addresses have a proxy, a requirement for making proposals and voting. Therefore, only a small part of the community is involved in governance, and the actual percentage is probably even lower due to the presence of aggregate exchange addresses. The total offer is also strongly distorted in favour of the first 20 addresses.
Curves and Uniswap have similar problems: regarding the first one, the report reports an address that seems to hold 75% of the voting power; the second one has been affected by scandals and accusations of governance manipulation by various insiders.
The researchers have identified three main causes that have led to this centralization of power. The first is that users see governance tokens as a financial income, and not as a voting tool:
„Protocols have started using their governance tokens as a ‚reward‘ for users participating in the network. Mind you, the idea sounds good, „governance is for those who use the product,“ but in reality the financial incentives have been stronger than the governance tokens.
The second issue is that systems are designed as plutocracies, a system where wealth is a source of power. There are no minimum participation requirements that can establish „sufficient decentralisation“, and the large initial holders are able to exercise their power almost without any brake. We also point out, moreover, that there is no easy way to prove one’s identity on-chain, and therefore the plutocracy is the only mechanism of governance that can be used so far.
Finally, researchers pointed out that initial investment plays a key role in the centralization of governance. Venture capitalists and other investors will often have large initial holdings, which may also discourage other users from trying to gain voting power.
In their conclusion, analysts say that current distribution mechanisms encourage the centralization of power, suggesting that the current outcome is not surprising given the architecture.