The European Central Bank published a working paper on March 26, stating that governance across the four main DeFi protocols was highly concentrated.
Staff paper looks at Aave, MakerDAO, Ampleforth and Uniswap and finds that although governance tokens are held at tens of thousands of addresses, the top 100 holders control over 80% of the supply in each protocol.
Based on asset snapshots from November 2022 and May 2023, the authors found that a immense portion of governance tokens could be associated with either the protocols themselves or centralized and decentralized exchanges, with Binance being the largest identified centralized exchange holder across all four protocols.
The authors said the findings challenge the notion that decentralized autonomous organizations (DAOs) are inherently decentralized, raising questions about liability and complicating efforts to identify possible regulatory checkpoints under the EU’s Cryptocurrency Markets Regulation (MiCA). MiCA currently excludes “fully decentralized” services from its scope.
Top token holders dominate governance
The authors also look at who actually votes on key proposals, concluding that the largest voters are mostly delegates who exercise voting power delegated by smaller token holders.
The top 20 voters in Ampleforth control 96% of the delegated voting power, while the top 10 voters in MakerDAO hold 66% of the delegated voting power and the top 18 voters in Uniswap hold 52%. About a third of top voters cannot be publicly identified, and of those that can, the largest groups are individuals and Web3 companies, followed by university blockchain associations and venture capital firms.
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Cointelegraph reached out to Aave, Uniswap, MakerDAO and Ampleforth but did not receive a response via publication.
Kavi Jain, senior research fellow at Bitwise, told Cointelegraph that many immense DeFi protocols were not as decentralized in practice as they might seem, especially in the earlier stages when a petite group still has “significant influence on decisions.”
He pointed to a recent debate over Aave’s governance, which highlighted that even with a DAO structure, voting power can “still be concentrated among a few participants.”
MiCA grapples with DeFi liability issues
The article cataloged what supervision actually decides, concluding that the largest part of the proposals concerns “risk parameters” that shape the risk profiles of protocols. This raises further questions about liability, especially given that it is “impossible” to tell from public data whether protocol-related packages belong to founders, developers or treasuries, or whether exchange wallets vote for their own or clients’ positions.
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The methodology comes with some caveats, and the article itself warns that it does not cover the “full scope of the DeFi ecosystem” due to insufficient data.
The article also emphasizes that it reflects the views of the authors and not official ECB policy, however it cautions that the difficulty in reliably determining who controls core protocols makes it hard to rely on popular entry points such as governance token holders, developers or centralized exchanges, and states that the appropriate anchor may vary protocol from protocol to protocol and require information that is not publicly available.
His findings echo earlier warnings from the Financial Stability Board and others cited in the article that DeFi’s promise of disintermediation often masks novel forms of concentration and governance risks that resemble and sometimes amplify those seen in classic finance.
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