Decentralization illusion in Decentralized Finance: Evidence from tokenized voting in MakerDAO polls

TL;DR

This paper investigates the extent of centralization in MakerDAO's governance, revealing that despite DeFi's decentralization ideals, significant centralized control persists, affecting protocol performance and decentralization debates.

Contribution

It introduces measurements of governance centralization and empirically analyzes their impact on MakerDAO's governance and token distribution.

Findings

Governance centralization influences MakerDAO's protocol and voting power distribution.

Centralized governance persists in MakerDAO despite DeFi decentralization ideals.

DeFi investors face a trade-off between decentralization and protocol performance.

Abstract

Decentralized Autonomous Organization (DAO) is very popular in Decentralized Finance (DeFi) applications as it provides a decentralized governance solution through blockchain. We analyze the governance characteristics in the Maker protocol, its stablecoin DAI and governance token Maker (MKR). To achieve that, we establish several measurements of centralized governance. Our empirical analysis investigates the effect of centralized governance over a series of factors related to MKR and DAI, such as financial, transaction, network and twitter sentiment indicators. Our results show that governance centralization influences both the Maker protocol, and the distribution of voting power matters. The main implication of this study is that centralized governance in MakerDAO very much exists, while DeFi investors face a trade-off between decentralization and performance of a DeFi protocol. This further contributes to the contemporary debate on whether DeFi can be truly decentralized. centralized governance in MakerDAO very much exists, while DeFi investors face a trade-off between efficiency and decentralization. This further contributes to the contemporary debate on whether DeFi can be truly decentralized.