Despite their name, many decentralized autonomous organizations aren’t autonomous, and control is often centralized among large tokenholders who have the power to sway governance decisions.
Whales or small groups of holders controlling as little as $17 million in tokens can attack protocols controlling over $2 billion in user funds.
Ironically, inactivity from other whales is also a problem. Their outsized voting power can protect protocols from governance attacks but is often wasted away doing nothing in the background.
“Participation in the current setup of DAO governance is very low, so the amount of money needed to attack these governance protocols is not so much,” Luca Prosperi, CEO of M^0 Labs, tells Magazine.
In several recent cases, DeFi whales have acquired a significant number of tokens and influenced governance decisions to get what they wanted.
Humpy’s controversial proposal highlights DAO governance flaws
The most infamous instance saw a crypto whale known as Humpy propose that Compound DAO allocate $25 million in COMP tokens to a yield-bearing protocol controlled by their group, the Golden Boys.
After two failed attempts, Humpy’s third succeeded on July 28. Compound security adviser Michael Lewellin suspected this proposal was made so that voting would take place over a weekend when participation is lower.
Though the proposal was ultimately canceled in favor of a yield-bearing product controlled by Compound, the situation could have been avoided if influential voters had been active.
Humpy’s group accumulated an estimated 325,333 COMP in the open market, just 75,000 short of the 400,000 quorum threshold.
Humpy’s crypto holdings as of Aug. 19. (DeBank)
At Compound, a16z holds the highest voting power through 333 delegations. Its 361,000 COMP represents 90.25% of the quorum.
Despite this, the VC firm rarely votes in governance decisions, even to thwart proposals…
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