Why DAO Compensation Systems Inevitably Centralize Power

Meritocratic systems centralize power. DAOs use token-based voting and contributor rewards to distribute governance. This creates a feedback loop where early, well-compensated contributors accumulate more tokens, solidifying their influence over future proposals and payouts.

Active participation is a tax. The coordination overhead of evaluating work and managing multi-sig payouts, as seen in early MolochDAO and Aave Grants, demands full-time contributors. This professionalizes the core, creating a de facto executive team that controls the treasury and roadmap.

Delegation creates new oligarchies. To reduce voter apathy, DAOs like Uniswap and Compound promote token delegation. This concentrates voting power in a few large holders or delegate services, replicating the shareholder proxy system they aimed to disrupt.

Voting power follows capital. DAOs that compensate contributors with governance tokens create a permanent insider class. Early contributors and whales accumulate tokens, while later participants receive diluted rewards, centralizing decision-making over time.

Active work demands passive rewards. Full-time contributors require stable salaries, paid from the treasury. This creates a professional managerial layer with superior information and proposal-drafting power, akin to a traditional corporate structure.

Delegation becomes a service. Platforms like Snapshot and Tally enable lazy voting. This consolidates power with a few informed delegates or institutions like Coinbase Custody, replicating representative democracy's flaws.

Evidence: In MakerDAO, a 2023 analysis showed less than 10 addresses controlled over 50% of the voting power on critical executive spells, demonstrating the inevitability of plutocracy in token-weighted systems.

Salaried contributors become permanent fixtures. Full-time roles funded by the treasury create a professional managerial class whose livelihood depends on the DAO's continuation, incentivizing them to protect their position and influence over protocol direction.

Delegated voting power follows capital, not competence. Systems like Compound's delegation or Uniswap's representative governance see large token holders (VCs, whales) delegate to known entities, creating a feedback loop where the same core teams repeatedly receive outsized voting mandates.

Grant programs are centralized gatekeeping. Committees for developer grants or Ethereum Foundation-style funding act as de facto boards, deciding which projects and ideas receive resources, thereby shaping the ecosystem's evolution around their preferences.

Evidence: In MakerDAO, a core unit structure with multi-million dollar budgets has led to repeated governance crises, with MKR token holders routinely voting to fund units proposed by the same small group of established contributors.

Optimists argue for fluid meritocracy. They claim that continuous contributor elections and retroactive funding tools like SourceCred or Coordinape create dynamic, fair systems. This ignores the reality that reputation becomes capital.

The 'one-person-one-vote' model is a mirage. In practice, voter apathy and delegated voting on platforms like Snapshot or Tally centralize influence. Large token holders and their delegates control the treasury, replicating corporate boards.

Retroactive funding centralizes narrative power. Projects like Optimism's RetroPGF are gamed by insiders who control the eligibility criteria and voter committees. The result is funding for popular, not impactful, work.

Evidence: In major DAOs like Uniswap or Aave, fewer than 10 wallets consistently control over 60% of the voting power on key proposals, making 'decentralized' compensation a function of whale alignment.