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Regulatory Considerations on Centralized Aspects of DeFi Managed by DAOs

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Financial Cryptography and Data Security. FC 2021 International Workshops (FC 2021)

Part of the book series: Lecture Notes in Computer Science ((LNSC,volume 12676))

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Abstract

This paper focuses on the centralized governance mechanisms of decentralized finance (DeFi) projects managed by Distributed Autonomous Organizations (DAOs) and discusses regulatory considerations. Unlike highly decentralized ecosystems such as Bitcoin, the degree of decentralization varies among DeFi projects. Centralized aspects such as concentrated ownership of governance tokens and admin keys have significant implications on their governance. Concerns include decision-making concentration risk and poor alignment of interests among stakeholders. From a regulatory viewpoint, centralized aspects could make it easier for regulators to impose requirements and therefore increase compliance costs. This might drive the DeFi community to seek further decentralization to avoid regulatory burdens. We conclude that the DeFi ecosystem should learn from the experience of both Internet governance as a partially decentralized system and from traditional corporate governance.

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Notes

  1. 1.

    https://medium.com/compound-finance/expanding-compound-governance-ce13fcd4fe36.

  2. 2.

    https://uniswap.org/blog/uni/.

  3. 3.

    Maker has a dark fix mechanism for handling critical vulnerabilities in the protocol where the trust to its specialist team is required, which has never happened as of the end of 2021 [Source: Presentation at BGIN https://www.youtube.com/watch?v=cD717AuLLJo].

  4. 4.

    SEC charged the founder of EtherDelta with operating an unregistered exchange in November 2018. SEC points out the concentration of power to the founder exampled by his exclusive access to the private key for the “administrator account”.

  5. 5.

    https://nexusmutual.gitbook.io/docs/welcome/use-cases.

  6. 6.

    https://medium.com/openlawofficial/the-lao-a-for-profit-limited-liability-autonomous-organization-9eae89c9669c.

  7. 7.

    https://1inch-exchange.medium.com/.

  8. 8.

    https://blog.coinbase.com/around-the-block-analysis-on-the-bzx-attack-defi-vulnerabilities-the-state-of-debit-cards-in-1289f7f77137.

  9. 9.

    https://media.consensys.net/introducing-openlaw-7a2ea410138b.

  10. 10.

    https://blog.makerdao.com/the-market-collapse-of-march-12-2020-how-it-impacted-makerdao/.

  11. 11.

    https://www.sec.gov/news/press-release/2020-338.

  12. 12.

    https://forum.makerdao.com/t/proposal-for-collateral-onboarding-of-usdc/1588.

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Author information

Authors and Affiliations

  1. Financial Services Agency Japan, Tokyo, Japan

    Ryosuke Ushida

  2. Georgetown University, Washington, D.C., USA

    Ryosuke Ushida & James Angel

Authors
  1. Ryosuke Ushida
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  2. James Angel
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Corresponding author

Correspondence to James Angel .

Editor information

Editors and Affiliations

  1. University of Michigan–Ann Arbor, Ann Arbor, MI, USA

    Matthew Bernhard

  2. Computer Science and Mathematics, Stirling University, Stirling, UK

    Andrea Bracciali

  3. Imperial College London, London, UK

    Lewis Gudgeon

  4. Norwegian University of Science and Technology, Trondheim, Norway

    Thomas Haines

  5. Ithaca College, Ithaca, USA

    Ariah Klages-Mundt

  6. Department of Computer Science, Georgetown University, Washington, WA, USA

    Shin'ichiro Matsuo

  7. Imperial College London, London, UK

    Daniel Perez

  8. Dipartimento di Matematica, University of Trento, Trento, Trento, Italy

    Massimiliano Sala

  9. Imperial College London, London, UK

    Sam Werner

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Ushida, R., Angel, J. (2021). Regulatory Considerations on Centralized Aspects of DeFi Managed by DAOs. In: Bernhard, M., et al. Financial Cryptography and Data Security. FC 2021 International Workshops. FC 2021. Lecture Notes in Computer Science(), vol 12676. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-63958-0_2

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  • DOI: https://doi.org/10.1007/978-3-662-63958-0_2

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  • Publisher Name: Springer, Berlin, Heidelberg

  • Print ISBN: 978-3-662-63957-3

  • Online ISBN: 978-3-662-63958-0

  • eBook Packages: Computer ScienceComputer Science (R0)

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