In a recent study conducted by researchers from the University of Texas at Austin and Princeton University, the impact of tokenization on decentralization within decentralized autonomous organizations (DAOs) was examined. The findings shed light on the challenges faced by DAOs and emphasized the importance of a focused and engaged community.
The research highlights that as a DAO expands, participants are increasingly incentivized to view DAO tokens as investments rather than as tools for decentralized decision-making. This shift in perspective can divert subsidies away from users and hinder their active participation. Furthermore, in some cases, investors may even acquire a majority stake in order to gain control over the platform, undermining the very essence of decentralization.
Unlike traditional hierarchical organizations with a central leader, DAOs distribute authority among individual participants through tokens. These tokens function as votes, preventing exploitation by those overseeing the DAO. The research paper distinguishes tokens from securities by stating that tokens represent claims to a platform’s services, while securities represent claims to its revenue.
For a DAO to thrive, it is crucial that participants share a common purpose and are willing to utilize their tokens to vote for actions aligned with that purpose or to access community-oriented services. The researchers utilized models to simulate the long-term effects of user growth and tokenization on DAO outcomes. Their primary finding is that tokenization aims to transfer ownership from initial equity holders to the platform’s users. However, this comes at the cost of lacking a single entity capable of subsidizing network participation. Consequently, purpose-driven DAOs become vulnerable to being treated like traditional stocks by investors.
Lead researcher Michael Sockin expressed concern about the negative consequences of prioritizing high returns on cryptocurrencies, as it discourages spending and perpetuates a scenario reminiscent of the centralized power dynamics seen with companies like Amazon and Apple. The intention behind DAOs was to move away from such structures.
This study emphasizes the need for careful consideration when designing and scaling DAOs. It underscores that maintaining a strong sense of community purpose and preventing token hoarding are vital to preserving the decentralized nature and effectiveness of DAOs. By addressing these issues, the potential of DAOs as innovative models for collective decision-making can be fully realized.