Collusion-Proof Decentralized Autonomous Organizations
44 Pages Posted: 19 Jan 2021 Last revised: 17 Sep 2022
Date Written: April 22, 2022
We develop a model of decentralized autonomous organizations and examine when these new institutional arrangements are both incentive compatible and collusion proof. Incentive compatibility can be achieved through a staking mechanism. Participants are required to post stakes, a digital form of collateral that carries voting rights. Additional effort must be spurred by higher stakes, which increase the risk of collusion. To be inherently collusion proof, DAOs either require a high revenue or a sufficient degree of decentralization in combination with a large network size. If neither one of these conditions is fulfilled, collusion can be precluded by governing the DAO with stochastic voting and having voting power concentrated among a few key token holders.
Keywords: Decentralized Autonomous Organization, Blockchain, Incentives, Collusion
JEL Classification: D02, D23, D82, G22
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