Understanding Blockchain Governance: Analyzing Decentralized Voting to Amend DeFi Smart Contracts

Decentralized Autonomous Organizations (DAOs) have emerged as a novel governance mechanism in blockchain ecosystems, particularly within Decentralized Finance (DeFi). By enabling token holders to propose and vote on protocol changes, these systems promise transparent and equitable decision-making without centralized control. In this paper, we present an in-depth empirical study of the governance protocols of Compound and Uniswap, two of the most widely used DAOs in DeFi. Analyzing over 370 governance proposals and millions of on-chain events from their inception until August 2024, we uncover significant centralization of voting power: as few as 3--5 voters were sufficient to sway the majority of proposals. We also find that the cost of voting disproportionately burdens smaller token holders, and that strategic voting behaviors, such as delayed participation and coalition formation, further distort governance outcomes. Our findings suggest that despite their decentralized ideals, current DAO governance mechanisms fall short in practice.