A new report from the Cambridge Centre for Alternative Finance finds that decentralised autonomous organisations behind DeFi protocols exhibit levels of power concentration comparable to the world’s most unequal countries, with governance often dominated by a few large players.
The Cambridge Centre for Alternative Finance, a research institute based at the University of Cambridge, examined the level of centralisation among DAOs as part of the launch of its new DeFi analytics tool, the Cambridge DeFi Navigator.
Among the DAOs analysed, the consolidation of power was “shocking,” Christopher Jack, the Cambridge DeFi Navigator programme lead, told DL News.
Jack’s team applied the Gini coefficient — a widely used metric for assessing income or wealth inequality within a population — to evaluate the concentration of power within DAOs. In this scale, a score of zero indicates perfect equality, while a score of one signifies complete inequality.
The analysis found that the 10 biggest DAOs all have Gini coefficients ranging from 0.97 to 0.99. For comparison, South Africa — the most income-unequal country globally — has a Gini coefficient of 0.63.
“When I speak to industry participants, they’ve all said to me governance is quite concentrated in the hands of a few large players,” Jack said. “That’s really what you see here as well.”
DAOs were heralded as a progressive way to govern new technologies like blockchain apps in a fairer and more decentralised way. But in practice, many have become dominated by small groups of large token holders who wield disproportionate influence and often make key decisions in private.
The analysis forms part of a larger investigation into DeFi using data spanning from the sector’s inception in 2018 to the present day. It looks at DeFi adoption, ecosystem trends, and protocol distribution, as well as DAO governance and custody.
The results were compiled into a publicly available dashboard on the Centre for Alternative Finance’s website.
Measuring DAO power
DAOs operate by issuing so-called governance tokens, which give holders the right to propose and vote on changes to the DeFi protocols they manage.
While some remain highly restricted, governance tokens from DAOs are also typically tradable in crypto markets.
The idea is that anyone can buy a DAO’s tokens and participate in governance. Many DeFi protocols attempt to distribute their tokens among as many users as possible through airdrops.
The Cambridge DeFi Navigator analysis shows that while these distribution methods initially succeed in spreading tokens widely, within weeks, the majority of tokens consolidate into a few large wallets.
The analysis measured how distributed a DAO’s token was among all wallets holding it. For example, at Aave, the biggest DeFi lending protocol with $34 billion of deposits, the top 121 wallets hold over 10,000 AAVE tokens each, collectively accounting for almost 73% of AAVE token supply.
Jack said his team plans to break down the data further in a future update by looking at the percentage of wallets that hold a certain percentage of token supply, which should make it easier to understand.
The issue of centralisation extends beyond token distribution. Critics have also pointed out other ways DAOs fail to achieve true decentralisation.
In October, Billy Gao, Head of Governance at Stanford University’s blockchain club, said key decisions for the Uniswap protocol were made by its creator, Uniswap Labs, behind closed doors without consulting its DAO.
DeFi’s rise
Another surprising insight from the Centre for Alternative Finance’s analysis came from looking at historical data.
The analysis found that in 2018, when DeFi on Ethereum started to take off, 90% of the value was concentrated in just one or two protocols. Fast forward to 2024, and now over 140 protocols make up 90% of the sector.
“The interesting point there has just been to see how complex the ecosystem has become in such a short time frame,” Jack said. “To us, this signals that there’s a lot of user interest, but that there’s also a lot of developer interest.”
Jack attributed DeFi’s comparatively fast growth to developers being more motivated to build something that they have control over. In the private sector, anything an employee builds belongs to the company that employs them.
“There’s quite a few developers that have been fed up with creating stuff on corporate software, because they can just shut it off,” Jack said.
But with the DAOs that control DeFi protocols becoming increasingly centralised, as the Cambridge DeFi Navigator’s analysis found, the coveted control developers have over their creations may be under threat too.
Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.