Decentralization illusion in DeFi: Evidence from MakerDAO

35 Pages Posted: 28 Nov 2021 Last revised: 1 Mar 2022

See all articles by Xiaotong Sun

Xiaotong Sun

University of Glasgow

Charalampos Stasinakis

University of Glasgow

Date Written: November 25, 2021

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

Suggested Citation

Sun, Xiaotong and Stasinakis, Charalampos, Decentralization illusion in DeFi: Evidence from MakerDAO (November 25, 2021). Available at SSRN: https://ssrn.com/abstract=3971791 or http://dx.doi.org/10.2139/ssrn.3971791

Xiaotong Sun (Contact Author)

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

Charalampos Stasinakis

University of Glasgow ( email )

University Avenue
Adam Smith Business School
Glasgow, Scotland G128QQ
United Kingdom

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