Decentralized Governance as an Open Platform Strategy: An Empirical Study of Devolving Control Through DAOs

Abstract: Striking a balance between openness and control is a fundamental challenge in platform governance. This paper explores the potential of Decentralized Autonomous Organizations (DAOs) as a new IT-enabled strategy for opening and decentralizing control at the ownership level and democratizing centrally governed platforms which have recently faced criticism for their lack of transparency in content moderation and decision-making processes. We argue that DAOs offer a novel approach to platform governance by providing two additional sources of transparency: transparency in decision-making and decision enforcement. This is made possible through the use of smart contracts that publicly document all votes and automatically enforce predefined outcomes after a successful vote. Yet, besides this potential, devolving control through a DAO can also have undesirable consequences including increased coordination cost, voter apathy, or opportunistic behavior. To harness the benefits of decentralization while mitigating these negative outcomes, platforms need to effectively design their DAOs. Drawing on a sample of 2423 blockchain-based applications, including 101 that transitioned from centralized governance to a DAO, we examine how four key design choices influence how the transition to a DAO influences the platform’s organizational performance. These findings contribute to our understanding of DAOs as an organizational phenomenon, their potential for platform governance, and the utilization of blockchain technology to democratize centralized platforms.

Keywords: Blockchain, decentralized governance, platform governance, decentralized autonomous organizations, decentralized applications\