When is a DAO Decentralized?

TL;DR

This paper develops a framework to assess decentralization in DAOs, addressing regulatory challenges by defining 'sufficient decentralization' through five key dimensions, supported by expert insights.

Contribution

It introduces a comprehensive framework with five dimensions to evaluate DAO decentralization, aiding regulatory decisions and advancing understanding of decentralized governance.

Findings

Five dimensions for decentralization assessment: Token-weighted voting, Infrastructure, Governance, Escalation, Reputation.

Proposes a definition of 'sufficient decentralization' for regulatory purposes.

Provides practical application and future propositions on DAO regulation.

Abstract

While previously a nascent theoretical construct, decentralized autonomous organizations have grown rapidly in recent years. DAOs typically emerge around the management of decentralized financial applications and thus benefit from the rapid growth of innovation in this sector. In response, global regulators increasingly voice the intent to regulate these activities. This may impose an excessive compliance burden on DAOs, unless they are deemed sufficiently decentralized to be regulated. Yet, decentralization is an abstract concept with scarce legal precedence. We investigate dimensions of decentralization through thematic analysis, combining extant literature with a series of expert interviews. We propose a definition of 'sufficient decentralization' and present a general framework for the assessment of decentralization. We derive five dimensions for the assessment of decentralization in DAOs: Token-weighted voting, Infrastructure, Governance, Escalation and Reputation. We present a discretionary sample application of the framework and five propositions on the future regulation and supervision of DAOs. We contribute new practical insights on the topic of compliance and decentralized organizations to the growing discourse on the application of blockchain technology in information systems and management disciplines