Decentralized Governance and Digital Asset Prices
68 Pages Posted: 28 Feb 2023
Date Written: August 14, 2024
Abstract
For digital assets, is traditional corporate governance still ideal? We explore the governance of hundreds of prominent Decentralized Autonomous Organizations (DAOs), classifying 28 distinct characteristics related to aspects of governance such as token holder's privileges to bring improvement proposals, the voting process, consensus mechanisms, and security features. Our findings reveal that governance practices fostering inclusive participation or heightened security are linked with positive abnormal returns, while barriers to proposal adoption correspond to negative returns. This outperformance is also evident in non-financial metrics like higher DEX volume and lack of security breaches. Evidence from a regression discontinuity design using close-call votes on proposals suggests these novel governance features, distinctive to DAOs, significantly change value. Overall, our research suggests that governance responds to the production process. For digital assets, the process differs enough that solely concentrating on traditional corporate concerns, such as reducing agency costs, is inadequate.
Keywords: JEL classification: G32, G24, G28 DAOs, cryptocurrency, blockchain, tokens, digital assets, decentralization, digital governance, Web3, FinTech, decentralized finance, DeFi, protocols, voting rights, cybersecurity, compliance, board of directors, delegates, cooperatives
JEL Classification: O30, G34, M10, M50
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