DAOs must rethink governance to avoid repeating traditional power structures

A sweeping new study dissects the evolution, promise, and pitfalls of decentralized governance models, especially those emerging in the blockchain-powered digital commons. Titled “Decentralizing Governance: Exploring the Dynamics and Challenges of Digital Commons and DAOs” and published in Frontiers in Blockchain, the study explores how Decentralized Autonomous Organizations (DAOs), tokenized decision systems, and algorithmic rule enforcement are transforming democratic participation and potentially replicating the very centralization they aim to dismantle.

Using Elinor Ostrom’s foundational principles of commons governance as a theoretical lens, the paper evaluates how blockchain tools can improve the regulation of shared digital resources. It presents a global critique of DAO mechanisms, from their financial tokenization structures to their environmental and geopolitical implications, revealing that without thoughtful design and legal clarity, DAOs risk becoming exclusionary, plutocratic, and even neocolonial.

Can blockchain-based DAOs really democratize digital governance?

The study investigates how closely decentralized governance systems align with Ostrom’s eight principles for managing common-pool resources. These principles call for locally adaptable rules, collective choice arrangements, monitoring, conflict resolution, and nested governance layers. The paper finds that while blockchain tools like smart contracts, tokenization, and quadratic voting offer scalable self-regulation and transparency, they often fall short in inclusivity and participation.

DAOs like MakerDAO, MolochDAO, and Commons Stack are cited as examples of decentralized systems that promise participatory governance but often centralize decision-making around early token holders or well-funded delegates. The study highlights that token-weighted voting frequently leads to plutocracy, where a small number of large token holders dominate governance outcomes. For example, 53% of DAOs surveyed were found to be inactive, with minimal voter turnout as DAO size increased. In Decentraland, average voter participation per proposal was less than 1%.

Mechanisms like delegated voting, employed in MakerDAO and Uniswap, are intended to mitigate voter apathy by allowing users to assign their votes to representatives. However, these often replicate traditional power hierarchies and reduce broader community engagement. Hybrid structures, like the bicameral governance model of the Optimism Collective, blend token-based and representative systems to address these inefficiencies, but the study notes they still risk re-centralizing authority.

What tools exist to mitigate centralization in DAO governance?

To curb centralization and increase equitable participation, the study highlights several innovative governance models:

• Quadratic Voting and Funding: Systems like Gitcoin Grants weaken the disproportionate influence of wealthy stakeholders by applying a nonlinear cost to voting power. These models amplify the collective impact of small contributors, better aligning with Ostrom’s call for congruent rules and widespread participation.

• Reputation-Based Voting: In contrast to token-weighted systems, this model gives voting power based on a user’s contributions, actions, and trust score, rewarding long-term engagement over financial investment. It supports rule formalization and monitoring, but faces risks like sybil attacks and bias unless bolstered by cryptographic identity verification.

• Soulbound Tokens (SBTs): These non-transferable tokens serve as proof of participation and reputation. Because they cannot be bought or sold, SBTs align governance influence with meritocratic input rather than wealth accumulation. However, they also raise privacy concerns and the need for fair distribution systems.

• Rotating Governance Councils: By implementing term-limited governance roles, DAOs can prevent power entrenchment and introduce diverse perspectives over time. This model reflects Ostrom’s principles of accountability and dynamic rule adaptation, though it requires robust mentorship and transition protocols.

The study stresses that these mechanisms must be contextually applied and embedded in broader governance frameworks that balance efficiency, transparency, and inclusivity.

What legal, environmental, and ethical challenges do DAOs face?

Despite their innovative promise, DAOs face critical challenges beyond internal governance. Legally, most jurisdictions still lack frameworks to recognize DAO structures. The study reviews the Wyoming DAO LLC law as an early effort to grant DAOs legal personhood, allowing them to own assets, enter contracts, and protect members from personal liability. However, critics argue this framework imposes traditional corporate norms on decentralized systems, risking re-centralization and jurisdictional conflicts.

The paper also delves into the environmental costs of blockchain infrastructure, especially in Proof-of-Work (PoW) systems. Case studies from Chelan County, Washington, and Dresden, New York show how cryptocurrency mining strains local energy grids, raises electricity costs, and damages ecological systems. The authors call for stronger environmental oversight and localized regulation to counter these unintended consequences.

Furthermore, the global application of blockchain technology raises geopolitical and ethical concerns. In the Global South, blockchain deployments, particularly in agriculture and fintech, can mirror historical patterns of economic extraction, consolidating control in the hands of corporations or foreign interests. Meanwhile, in countries like China, the technology has been co-opted to reinforce state surveillance and control. These dynamics challenge blockchain’s narrative of democratization, emphasizing the need for community-governed alternatives that resist digital colonization.

In addition, the study critiques the rise of "play-to-earn" (P2E) models like Axie Infinity, which blur the boundaries between labor and leisure while exposing economically vulnerable populations to market volatility, exploitation, and platform-driven changes without safeguards. These digital labor structures underscore how speculative blockchain economies can reproduce the very inequalities they claim to address.