ECB research questions how decentralized DeFi governance really is.
The European Central Bank published a working paper on March 26 finding that governance in four major DeFi protocols is too concentrated.
The staff paper looked at Aave, MakerDAO, Ampleforth and Uniswap, and while management tokens are held in tens of thousands of addresses, the top 100 holders control more than 80% of supply in each protocol.
In the year Based on snapshots of holdings from November 2022 and May 2023, the authors found that top governance tokens can be linked to their own protocols or to centralized and decentralized exchanges, with Binance being the largest centralized exchange holder in all four protocols.
The authors' findings challenge the idea that decentralized autonomous organizations (DAOs) are inherently decentralized, raising questions of accountability and complicating efforts to identify possible regulatory anchor points for EU markets under the framework of the Crypto-Assets Regulation (MiCA). MiCA currently excludes “fully decentralized” services from its scope.
Top token holders control governance.
The authors looked at who votes on key proposals, saying that top voters are mostly delegates who use proxies from smaller token holders.
The top 20 voters in Ampforth control 96% of proxy votes, the top 10 voters in MakerDAO hold 66% of proxy votes, and the top 18 in Uniswap hold 52%. A third of the best voters cannot be publicly identified, and among those who can, the largest groups are individuals and Web3 companies, followed by university blockchain associations and venture companies.
Related: DAOs May Have to Leave Decentralization to Court Institutions
Cointelegraph reached out to Aave, Uniswap, MakerDAO and Ampleforth, but did not receive a response by press time.
Kavi Jain, senior research associate at Bitwise, told Cointelegraph that many large DeFi protocols are not as decentralized in practice as they appear, especially in the past, where a small group still has “meaningful influence over decisions.”
He pointed to a recent Aave management debate that showed how even with a DAO structure, voting power “can still be concentrated among a few participants.”
MiCA faces a DeFi liability problem.
The paper catalogs what management actually determines, noting that the bulk of protocols that shape the protocols' risk profiles are related to “risk criteria.” That raises further questions about accountability, especially given that protocol-related holdings are “impossible” to tell from public information whether founders, developers or treasuries or exchanges are picking their own or clients' positions.
Related: How a 2.85% pricing error triggered $27M in liquidity on Aave
There are some caveats with the method, and the paper itself warns that it does not capture “the full breadth of the DeFi ecosystem” due to insufficient data.
The paper emphasizes that it reflects the views of the authors rather than official ECB policy, however, it warns that the difficulty of reliably identifying who controls major protocols makes it difficult to rely on popular entry points such as administrative tokens, developers or centralized exchanges, and that the anchor involved may vary from protocol to protocol and may require unavailable information.
The findings echo earlier warnings from the Financial Stability Board and others in the paper that Diffie's admissions often mask new focus and management risks, and sometimes add to those seen in traditional finance.
Magazine: Ethereum Fusaka Fork Explained For Dummies – What the hell is PeerDAS?
