A new report, jointly developed by DappRadar and Monday Capital, analyzes the token distribution and control proposals contained in the major DeFi protocols. Despite efforts to decentralize control at the yield-breeding stage, the researchers claim that many projects – especially those with strong venture capital roots – remain highly centralized.
The researchers analyzed projects such as MakerDAO (MKR), Curve (CRV), Compound (COMP) and Uniswap (UNI).
All of them have a clearly distorted token distribution, which is preferred by large owners. The analysts found that maker governance appears to be the most mature due to its lengthy existence. The MakerDAO forum is where members of the community conduct preliminary discussions and analysis. It is open to everyone, regardless of their MKR involvement.
Nevertheless, the actual voting process in the chain seems to be primarily controlled by large owners, as the top 20 addresses make up around 24% of the total offer. Compared to some of the other projects analyzed, this distribution is still fairly fair.
For Compound, the researchers found that the COMP owners ranking mostly includes venture capitalists, team members, and a few other blockchain projects – Dharma and Gauntlet in particular.
Only 2.3% of the addresses have a delegation required to make and vote on proposals. As a result, only a small fraction of the community is involved in governance, and the actual percentage is likely even lower given the existence of aggregated exchange addresses. The overall offer has also shifted significantly towards the top 20 addresses.
Curve and Uniswap face similar problems, with the former having a single address that appears to have 75% of the voting rights, while the latter suffers from scandals and allegations of insider governance.
The researchers identified three main causes that led to this centralization of power. The first is that users see the governance tokens as an asset rather than a voting tool:
“Protocols have started to use their governance tokens as rewards for users who join the network. While the idea sounds good – governance goes to those who use the product – the reality is that the financial incentives have been stronger than the governance incentives. “
The second problem is that the systems are designed as plutocracies – where wealth defines power. There are no minimum shareholding requirements that could justify “adequate decentralization”, and large first-time owners can exercise their power largely undisputed. It is worth noting that there is no easy way to prove identity in the chain, which makes plutocracy the only practical mechanism of governance to date.
Eventually, the researchers found that initial investment plays a huge role in centralizing governance. Venture capitalists and other investors often have large initial stakes, which can deter other users from gaining governance power as well.
In their conclusion, the analysts claim that it is the mechanisms of distribution that encourage the centralization of power, suggesting that the current outcome is not a surprise.