Blockholders and strategic voting in DeFi DAOs' governance

Decentralized Finance (DeFi) platforms mainly choose as a governance structure to be Decentralized Autonomous Organizations (DAOs). Because they rely on frequent governance decisions, and because granular data on these decisions are available, I show how DeFi DAOs offer an interesting laboratory to study corporate governance. I find that large voters strategically influence votes.

Relying on event studies, I put forward that the way in which they exercise their voting power signals whether their interests are aligned with those of minority token-holders. This information is then efficiently incorporated in the market valuation of the DeFi DAOs’ governance tokens. The first time a majority voter sways the decision against the votes of minority token-holders causes on average a -12.77% weekly abnormal return.

In line with corporate governance theory, the presence of blockholders in votes is positive. Their votes are associated with an average 1.7% weekly abnormal return. However, the first time a blockholder strategically votes in the last minutes of a proposal triggers on average a -9.65% weekly abnormal return.

Leveraging an NLP algorithm on governance texts, I distinguish DeFi DAOs which advertised decentralization and righteous management and show that negative effects on token returns following first strategic voting occurrences are exacerbated for those DeFi DAOs.