Decentralization illusion in DeFi: Evidence from MakerDAO

Abstract

Decentralized Autonomous Organization (DAO) is very popular in Decentralized Finance (DeFi) applications as it provides a decentralized governance solution through blockchain. We analyze the governance characteristics in the relevant Maker protocol and its stablecoin Dai (DAI) and governance token Maker (MKR). To achieve that, we establish several measurements of centralized governance. Our empirical analysis investigates the effect of centralized governance over a series of factors related to MKR, DAI and Ethereum, such as financial, transaction, exchange, network and twitter sentiment indicators. Our results show that governance centralization influences both Maker protocol and Ethereum blockchain. The main implication of this study is that centralized governance in MakerDAO very much exists, while DeFi investors face a trade-off between efficiency and decentralization. This further contribute in the contemporary debate on whether DeFi can be truly decentralized.

Keywords: Blockchain, decentralized finance, governance, centralization

JEL Classification: G32, G34