Why Do Decentralized Autonomous Organizations Recentralize?

Abstract

Decentralized autonomous organizations (DAOs) represent a novel organizational form designed to enable collective decision-making without formal hierarchy. Despite their decentralized design, many DAOs exhibit tendencies toward centralization in the governance process. This study explains this governance paradox via the lens of transaction cost economics (TCE), highlighting how human asset specificity contributes to the emergence of centralized governance structures in settings where formal authority is absent. Specifically, we argue that human asset specificity, assessed through the technicality, complexity, and readability of governance proposals, is associated with a higher degree of centralization in the governance of DAOs. We test our hypotheses using a novel dataset of 3,807 proposals across major decentralized finance (DeFi) DAOs. Consistent with the predictions of TCE, empirical analyses show that proposals characterized by higher technicality, higher complexity, and lower readability are associated with higher levels of centralization. These results imply the relevance of TCE for governance in decentralized organizations-a novel form of organizations and offer practical guidance for protocol designers seeking to preserve decentralization in DAOs.