Decentralised Finance's Unregulated Governance: Minority Rule in the Digital Wild West

Decentralised finance (DeFi) is a category of unlicensed, unregulated, and non-custodial financial services that utilise public, distributed ledgers like Ethereum. The Bloomberg Galaxy DeFi Index, launched in August 2021, includes nine Ethereum-based projects – non-custodial exchanges as well as lending and derivatives platforms. Each project is governed, at least in part, by a community of unregistered individuals that hold tradable voting rights tokens (also known as governance tokens). Voting rights tokens allow holders to vote on proposed changes to a DeFi project’s features, parameters, or rules. DeFi’s governance power is thus linked to the distribution and exercise of tokenised voting rights. Since DeFi projects are typically not managed by companies or public institutions, not much is known about DeFi’s governance. Regulators and law-makers from the United States recently asked if DeFi’s governance entails a new class of “shadowy” elites. In response, we conducted an exploratory, multiple-case study that focuses on the voting rights tokens issued by the nine projects from Bloomberg’s Galaxy DeFi index. Our mixed methods approach draws on Ethereum-based data about the distribution, trading, and staking of voting rights tokens, as well as project documentation and archival records. Our findings contribute knowledge about the entitlements of DeFi’s voting rights tokens, the initial distribution strategies, and the actual voting and delegation activity. Our principal finding is that DeFi’s voting rights are highly concentrated, and the exercise of these rights is very low. Our theoretical contribution is descriptive: minority rule is the probable consequence of tradable voting rights plus the lack of applicable anti-concentration or anti-monopoly laws. We interpret DeFi’s minority rule as timocratic and acknowledge its possible transition to oligarchy.