DAO’s Governance Paradox: Balancing Organizational Structures for Business and Communal Goals

Decentralized autonomous organizations (DAOs) are a modern digital organizational paradigm rooted in cryptocurrency and blockchain technology. Despite prevailing narratives of egalitarianism and democratic principles, several research gaps in understanding decentralization within their governance processes remain. Do DAOs show resilience against the oligarchy tendency and the dominance of formal authority? Are there trade-offs between the effects of decentralization on DAOs’ commercial and community performance? To shed light on these critical questions, we conduct empirical studies using cross-platform online panel data of 87 DAOs spanning six years. Contrary to popular narratives, we found that DAOs are inherently predisposed to centralization, exhibiting an oligarchy tendency in their initial stages, with this tendency significantly increasing within the first three weeks. A noteworthy observation reveals a dichotomy: DAOs with decentralized structures achieve superior community engagement outcomes but lag in commercial performance. Notably, formal authority centralization dominates informal influence centralization and exerts a greater impact on DAOs’ performances. Additionally, an intricate interplay exists between the two structures in influencing team efficiency: the involvement of opinion leaders in daily discussions and high-ranking members’ activity in proposal deliberations amplify the positive effect of status centralization on proposal production efficiency. Our study contributes to the academic discourse surrounding the promise of DAO as a future form of human collaboration. Particularly, balancing the degree of (de)centralization of organizational structures presents a governance paradox for DAOs. From a practical standpoint, it is recommended that DAO stakeholders and mechanism designers reconsider the prevailing challenge: the pursuit of community-centric governance to enhance communal benefits versus the prioritization of streamlined operations to maximize business profitability.