Regulatory Considerations on Centralized Aspects of DeFi Managed by DAOs

This paper focuses on the centralized governance mechanisms of decentralized finance (DeFi) projects managed by Distributed Autonomous Organizations (DAOs) and discusses regulatory considerations. Unlike highly decentralized ecosystems such as Bitcoin, the degree of decentralization varies among DeFi projects. Centralized aspects such as concentrated ownership of governance tokens and admin keys have significant implications on their governance. Concerns include decision-making concentration risk and poor alignment of interests among stakeholders. From a regulatory viewpoint, centralized aspects could make it easier for regulators to impose requirements and therefore increase compliance costs. This might drive the DeFi community to seek further decentralization to avoid regulatory burdens. We conclude that the DeFi ecosystem should learn from the experience of both Internet governance as a partially decentralized system and from traditional corporate governance.