Cartel Formation

Governance cartels are defined by a high concentration of voting power held by a small, coordinated group. This is often achieved through:

• Token pooling in a single address or smart contract (e.g., a multi-sig wallet).
• Delegation of votes from many small holders to a single representative entity.
• Sybil resistance failure, where one entity controls multiple voting identities. This concentration allows the cartel to pass or veto proposals without needing broad community consensus.

Cartels coordinate through explicit agreements or implicit understanding. Formal coordination involves written pacts, shared multi-sig control, or binding smart contracts that pool votes. Informal coordination occurs through off-chain communication channels (e.g., private chats, forums) where members signal voting intentions and align strategies. The key is sustained collaboration to achieve common financial or ideological goals, distinguishing it from one-off voting blocs.

The primary motive is often to extract value from the protocol in a way that benefits the cartel at the potential expense of other stakeholders. Common methods include:

• Directing treasury grants or subsidies to cartel-associated projects.
• Adjusting protocol parameters (like fees or rewards) to favor the cartel's financial positions.
• Blocking proposals that threaten the cartel's influence or economic advantage. This turns governance from a public good into a private revenue stream.

To maintain power, cartels employ strategies that make them difficult to dislodge. These entrenchment mechanisms include:

• Proposal gatekeeping: Controlling the proposal submission process or spam-filtering mechanisms to suppress opposition.
• Increasing the cost of opposition: Raising the token quorum or vote threshold required to pass proposals.
• Creating dependency: Directing protocol resources to build infrastructure or services that the ecosystem relies on, making their removal disruptive. This creates a feedback loop that solidifies control.

Cartels often operate with a degree of opacity to avoid backlash. While votes are on-chain and transparent, the off-chain coordination and true motives are not. This creates a legitimacy crisis for the protocol, as decisions appear decentralized but are made by a hidden cabal. The gap between the ideal of decentralized governance and the reality of cartel control can erode community trust and participation, leading to voter apathy among non-cartel members.

Real-world manifestations help identify cartel behavior. Historical analysis points to patterns in major DeFi protocols where a handful of addresses consistently vote together to control outcomes. For instance, a coalition of venture capital funds and large delegates with aligned incentives can form a de facto cartel. Another example is liquidity provider (LP) cartels in Automated Market Maker (AMM) governance, where large LPs coordinate to vote for fee changes that maximize their returns.

While not a malicious cartel, the Lido DAO's control over ~30% of all staked Ethereum has raised centralization concerns, creating a potential single point of failure. This dominance illustrates how a cooperative of stakers can achieve a super-majority influence over network consensus, prompting debates about the social slashing of large staking pools to preserve decentralization.

Etherean validators using MEV-Boost rely on a small set of relays to receive blocks from searchers. This created a risk of relay-level cartelization, where a few dominant relays could:

• Censor transactions by excluding certain blocks.
• Extract maximum extractable value (MEV) for themselves.
• Control the flow of block proposals, threatening validator neutrality. This led to efforts to diversify and decentralize the relay landscape.

Historical Bitcoin and Ethereum mining pools like GHash.io briefly exceeded 51% of the network hash rate, demonstrating a clear cartel formation risk. This concentration allowed the pool operator to theoretically:

• Execute double-spend attacks.
• Censor transactions.
• Destabilize network trust. The community response often involved miners voluntarily leaving the pool to defend network security, a form of decentralized anti-cartel action.

In protocols like Curve Finance and Compound, large token holders ("whales") can form governance cartels to pass proposals that benefit themselves at the expense of smaller holders. This includes:

• Directing emission rewards (CRV, COMP) to their own liquidity pools.
• Adjusting fee parameters to their advantage.
• The defense against this is often vote-locking mechanisms (e.g., veTokenomics) that align long-term incentives.

Many cross-chain bridges rely on a small, permissioned set of validators or multisig signers to attest to asset transfers. These sets are inherently centralized and can collude as a cartel to:

• Halt withdrawals, freezing user funds.
• Mint unauthorized assets on the destination chain, leading to insolvency.
• Steal all bridged assets. High-profile bridge hacks like the Wormhole and Ronin Bridge exploits exploited this validator set weakness.

While competitive, MEV searchers sometimes engage in tacit collusion or form temporary cartels (e.g., via off-chain communication) for complex, multi-block arbitrage opportunities. This coordination allows them to:

• Share profits on large, risky trades.
• Avoid bidding wars that would erode their margins.
• Execute time-bandit attacks or sandwich attacks more efficiently, extracting value from regular users.

Imposing severe financial penalties on validators who exhibit provable, coordinated malicious behavior. This is a primary defense in Proof-of-Stake networks.

• Slashing Conditions: Penalties are triggered for actions like double-signing blocks or voting for conflicting checkpoints, which are hallmarks of cartel attacks.
• Example: Ethereum's consensus layer slashes a validator's entire stake for attestation violations, making collusion economically irrational.

Using randomized, unpredictable mechanisms to select block proposers and committee members, preventing cartels from reliably controlling the chain.

• Randao & VDFs: Ethereum uses RANDAO for pseudorandomness, with future plans for Verifiable Delay Functions (VDFs) to increase unpredictability.
• Tendermint's Proposer Rotation: A round-robin style that, while deterministic, limits any single validator's consecutive control.

Designing consensus rules that are resilient to coordinated voting blocs. The Gasper protocol (Ethereum 2.0) uses LMD-GHOST and Casper FFG to finalize chains based on attestation weight, making it costly for a cartel to attack without controlling a supermajority (>2/3) of stake.

Implementing governance mechanisms resistant to vote-buying and collusion in DAOs and DeFi protocols.

• Conviction Voting: Allocates voting power based on the duration tokens are locked, reducing the impact of short-term cartel raids.
• Holographic Consensus: Uses futarchy and prediction markets to reach decisions, separating economic interest from direct voting power.
• Example: MolochDAO uses rage-quit mechanisms, allowing dissenting members to exit with funds if a malicious proposal passes.

Reducing the profitability of Miner/Validator Extractable Value (MEV), a key incentive for validator cartels to form and manipulate transaction ordering.

• Proposer-Builder Separation (PBS): Separates the role of block building from proposing, distributing power and reducing single-entity control.
• Encrypted Mempools & Fair Sequencing Services: Protocols like Shutter Network use threshold encryption to prevent frontrunning, a common cartel tactic.