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With Donald Trump back in the White House, cryptocurrencies continue to gain momentum. Trump's administration has signaled a more hands-off approach to crypto regulation. In addition, an executive order issued in January prohibited federal agencies from developing a U.S. central bank digital currency (CBDC)鈥攁 "digital dollar"鈥攁 shift that appears to favor private cryptocurrencies and stablecoins instead.

In this changing economic landscape, Decentralized Autonomous Organizations (DAOs) are being hailed as a step toward a more democratic financial future, offering fairness, transparency, and shared control. However, when it comes to decision-making within DAOs, the reality may not be as democratic as it seems.

Who holds the power?

Instead of having managers like CEOs or CFOs make decisions, as is common in traditional companies, DAOs operate on a grassroots democratic basis. They are run by communities, where each participant can vote on key decisions鈥攆rom how funds are managed to what fees are charged, to what kinds of software updates are implemented. These decisions within a DAO are made using governance tokens, a type of digital share that grants voting rights to its holders.

But who actually holds these governance tokens鈥攁nd the power they represent?

"In principle, every user can participate in decision-making. However, it remains unclear who these users actually are, as only pseudonymous addresses are available," says CSH researcher Stefan Kitzler.

A few dominate the many

By investigating the involvement of vested users in decision-making, Kitzler and his colleagues questioned just how decentralized these organizations really are. Their , published in Financial Cryptography and Data Security, reveals that the promise of transparency and democracy often clashes with the reality of concentrated power.

"In practice, governance tokens are often highly concentrated in the hands of a few early adopters or investors," says Kitzler.

The team analyzed 35,124 proposals from 872 DAOs, involving 986,557 voters. They found that in 7.54% of all DAOs, contributors鈥攕uch as developers, administrators, or project owners鈥攈eld the majority of votes, enough to control decisions. In about 20% of DAOs, contributors decided at least one proposal on their own.

A real case

In 2022, Tornado Cash, a well-known DAO-based application, was sanctioned by the U.S. government. Authorities alleged it was used to launder money tied to North Korean hackers. Two of the project's developers were later arrested. While DAOs are designed to distribute power, this case raised concerns about whether some decisions are still being made by a handful of insiders.

"In our study, we found signs of 'inner circles' forming in many DAOs," says Kitzler, "as contributors tend to be centrally positioned within the DAO governance ecosystem and often hold disproportionately high influence."

"Even in large DAOs managing millions of dollars, we have sometimes seen signs of unilateral control," adds Bernhard Haslhofer, who leads the Digital Currency Ecosystems research group at CSH. "That was surprising."

Shifting tokens, shifting power

The anonymous nature of blockchain transactions makes it difficult to identify the real owners of these tokens, which makes the governance process less transparent and potentially vulnerable to manipulation.

The researchers also noticed a tendency for governance tokens to change hands shortly before important votes, which may point to strategic behavior鈥攐r manipulation鈥攊n DAO decision-making processes.

With cryptocurrencies once again surging in popularity and regulatory discussions heating up around the world, this study comes at a crucial time.

"There's a growing need to understand how these systems actually work," says Haslhofer. "Our findings provide empirical insights that can help shape future regulations鈥攕o that DAOs can live up to their original promise."

The study "The Governance of Decentralized Autonomous Organizations: A Study of Contributors' Influence, Networks, and Shifts in Voting Power" by Stefan Kitzler, Stefano Balietti, Pietro Saggese, Bernhard Haslhofer & Markus Strohmaier was part of the book series Lecture Notes in Computer Science and was included in the .