‘Dirty Secret’: Insiders Are Pulling The Strings In Crypto, Study Reveals

VIENNA — The crypto revolution promised to eliminate middlemen and democratize finance, but researchers have uncovered that Decentralized Autonomous Organizations (DAOs) have a dirty secret. According to a new international study, the insiders who created them often maintain enough control to dictate decisions, making a mockery of their democratic branding.

The research, published in Financial Cryptography and Data Security, revealed that in about 8% of DAOs, the insiders – developers, administrators, and project owners – held enough voting power to control decisions all by themselves. Even worse, these insiders single-handedly determined the outcome of at least one proposal in more than 20% of DAOs.

Even though these organizations market themselves as democratic, many actually work more like groups controlled by a small number of insiders with a lot of power.

For anyone unfamiliar with the crypto world, DAOs are supposed to be democratic communities where members vote on decisions using special “governance tokens.” The more tokens you hold, the more voting power you have, similar to owning shares in a company, but with decisions made directly by token holders instead of a board of directors.

The research team examined almost a million voters across 872 DAOs, analyzing over 5 million votes. They discovered that even major financial platforms like Uniswap, which handles billions in trading volume, showed concerning levels of insider control.

How Insiders Maintain Control

The study exposed three major ways insiders maintain control despite the democratic façade. First, contributors (the study’s term for insiders) occupy central positions in voting networks. Essentially, they’re the popular kids sitting at the cool table. Their influence spreads further because of their position.

“In our study, we found signs of ‘inner circles’ forming in many DAOs,” says study author Stefan Kitzler from Complexity Science Hub, in a statement. “As contributors tend to be centrally positioned within the DAO governance ecosystem and often hold disproportionately high influence.”

Second, these insiders tend to vote together in patterns that look suspiciously like coordinated voting blocs.

Lastly, right before important votes, there are sudden shifts in who owns governance tokens. In nearly 15% of proposals studied, significant changes in voting power occurred days before the vote. This could be a coincidence, but it also could be a strategic manipulation tactic.

Instead of long-term community members making decisions based on what’s best for everyone, we’re seeing what looks like strategic voting power grabs right before important decisions. The researchers found that contributors participated in over 60% of proposals where these majority shifts occurred, suggesting they may be involved in these strategic token movements.

Major Crypto Platforms Aren’t Immune

You might assume this problem only affects small, unknown DAOs, but the study found even the crypto big leagues aren’t immune.

Uniswap, one of the largest decentralized exchanges where people trade billions in crypto, showed nearly 30% contributor involvement in voting. Aave, a major lending platform, wasn’t far behind at 28%. Even in these massive organizations, insiders still maintain outsized influence.

The research team built what amounts to a social network map of voting behaviors, showing who tends to vote with whom. These maps revealed that insiders typically occupy central positions and tend to cluster together in voting communities.

This means insiders stick together and maintain positions of influence, forming what looks like inner circles within these supposedly democratic organizations.

The Regulatory Reckoning

These findings blow a hole in the narrative that DAOs represent true decentralized governance. If a small group of insiders can effectively control outcomes, are these organizations really any different from traditional companies with a democratic veneer?

Financial regulators are increasingly looking to identify who controls these supposedly “decentralized” protocols. After incidents like the Tornado Cash sanctions, where developers allegedly manipulated governance to avoid anti-money laundering controls, understanding who really pulls the strings has become crucial.

For anyone who thought DAOs represented a revolutionary alternative to traditional governance systems, this study delivers a sobering reality check. The promise of decentralization appears significantly compromised, raising fundamental questions about whether truly democratic digital organizations are possible or merely clever marketing.