Compound is a crypto lending protocol ruled by holders who delegate their COMP tokens, a setup referred to as a decentralized autonomous group, or DAO. It really works like a web based republic, with token holders debating proposals, voting, and letting software program perform the outcome.
In July 2024, that republic almost despatched a fortune to a small group of voters. Proposal 289 requested Compound to switch 499,000 COMP, then value about $24 million, right into a yield-bearing car they managed. Two earlier variations had failed, and the third appeared headed the identical means.
Then, through the closing 34 minutes, supporting addresses solid 563,591 votes, equal to 82% of all help for the proposal. The final huge block landed eight minutes earlier than the deadline, and the measure handed by 682,191 votes to 633,636.
Whereas this was extraordinarily controversial and stays extremely contested, there was no difficulty with the code, because it labored precisely as meant.
However that was the issue: the wallets had gathered sufficient COMP and delegated their voting energy earlier than the interval closed, however Compound lacked an emergency authority that would pause the software program. A number of cheap guidelines had mixed right into a handy path for a treasury raid.
Compound reached a settlement that canceled the allocation and later added a veto function, putting a brake within the system constructed round computerized token-holder rule.
That captures the central DAO dilemma, as a result of most defenses in opposition to rushed or hostile votes give anyone extra management over participation or the ultimate outcome.
Two 2026 research from the Max Planck Institute for Software program Methods and Vrije Universiteit Amsterdam traced an identical drawback throughout 48 massive Ethereum DAOs. One examined how registration, staking, and delegation focus voting energy, whereas the opposite mapped assaults that use legitimate governance guidelines.
The poll has a velvet rope
Calling a governance token a vote isn't actually appropriate. Relying on the DAO, a holder might must register a pockets, lock tokens, delegate them, keep a minimal steadiness, or pay for an on-chain transaction earlier than they’ll really solid that vote.
Proposals face obstacles of their very own, as a result of somebody wants sufficient tokens or delegated help to introduce them within the first place, and the concept might move by a discussion board and casual ballot earlier than a binding vote on the blockchain or by an off-chain service similar to Snapshot.
As soon as the tally clears the quorum and approval system, a sensible contract, multisignature pockets, or named particular person carries the outcome into impact.
Whereas every of those gates solves an actual drawback, it additionally favors a specific participant or kind of participant.
Proposal thresholds discourage spam and malicious code, however they inadvertently reserve authorship for rich holders and established delegates. On-chain voting makes these outcomes enforceable, however transaction charges favor folks with sufficient cash and conviction to make use of it. Free off-chain polls draw a wider crowd, then rely upon a smaller group for execution.
The researchers discovered a good break up: 24 DAOs used on-chain voting and 24 used off-chain programs.
Uniswap confirmed how totally different electorates can type inside the identical group: extra wallets joined its free off-chain polls, whereas a lot bigger blocks of voting energy appeared through the paid on-chain part that would make a proposal binding.
Turnout is just one small a part of this, as a result of a protocol might have hundreds of token holders whereas a number of addresses management proposals, votes, and execution. By the point the general public tally seems, the foundations have already picked the citizens.
The safety guidelines choose the ruling class
DAOs typically maintain tokens in treasury contracts, and founding groups or traders might maintain allocations which have but to vest, so registration separates circulating tokens from balances that at present carry voting rights.
Among the many 48 DAOs, 36 required some type of registration, and solely 4 had registered greater than half of their excellent provide. Throughout these 36 organizations, the common registered share was 21%, which means the sensible citizens often lined a small fraction of all tokens.
A lot of the lacking provide belonged to customers whose cash have been held by exchanges or deposited into DeFi protocols. Centralized exchanges held greater than 10% of excellent tokens on common throughout the pattern, and DeFi contracts held one other 3.5%.
In 14 registration-based DAOs, these middleman wallets managed extra tokens than the complete registered citizens.
Compound introduces new staking product after controversial $24M token allocation
That creates a really unusual and reasonably distinctive custody drawback, as a result of an trade pockets can symbolize hundreds of shoppers regardless that the blockchain sees one deal with with one big steadiness.
Letting the trade vote turns a custodian right into a political heavyweight, whereas excluding it strips clients of governance rights connected to tokens they paid for. Most DAOs additionally let one pockets ship all its energy to a single delegate, which makes splitting votes among the many underlying house owners tough.
Staking tackles a special vulnerability by making voting energy costly to construct and sluggish to unwind. A would-be attacker should purchase or borrow a big place, approve a positive proposal, and promote as soon as the vote ends, whereas a lock retains that voter financially uncovered to the outcome for longer.
Fifteen DAOs required staking, with a median of 27.4% of tokens locked. Some imposed a one- or two-week withdrawal wait, whereas Curve, Angle, and Frax supplied stronger voting energy for locks lasting as much as 4 years. The system rewards persistence and turns liquid wealth right into a prerequisite for political affect.
Crypto quickly produced middlemen for individuals who wished affect and the liberty to commerce. These companies keep lengthy locks, difficulty tradable substitutes, and maintain the unique voting rights. The association concentrated monumental voting blocs inside a number of companies, in line with the researchers’ measurements:
| DAO | Service controlling the votes | Share of voting energy | Most native lock |
|---|---|---|---|
| Curve | Convex | 53% | 4 years |
| Frax | Convex | 46% | 4 years |
| Angle | StakeDAO | 57% | 4 years |
| Balancer | Aura | 65% | 1 12 months |
Delegation works the identical as a result of most holders have restricted urge for food for discussion board arguments about collateral ratios. Handing votes to knowledgeable participant is smart, and repeated delegation builds sturdy political blocs.
The ten largest holders managed greater than half of voting energy in 39 of the 48 DAOs, whereas delegated voting was often extra concentrated than direct voting.
Registration protects treasury balances, staking makes a fast assault costlier, and delegation offers passive holders a voice by somebody who pays consideration. Put them collectively, and the folks with probably the most capital, time, technical fluency, or management over buyer belongings are inclined to run the place.
A authorized DAO vote can nonetheless be a raid
The second paper defines a governance assault as an actor utilizing the licensed course of to win an consequence that harms the broader group.
Amongst 28 DAO incidents, researchers categorised 16 as assaults {that a} totally different mechanism may have prevented. Six concerned contract bugs, whereas ten trusted shopping for or borrowing sufficient tokens to affect a vote.
Compound is the most effective instance as a result of the wallets related to Proposal 289 gathered greater than 680,000 COMP over 4 months.
Researchers traced 563,790 tokens by 4 centralized exchanges and one other 118,089 borrowed by Compound itself, regardless that these addresses had held solely 853 COMP earlier than the buildup and had little historical past within the protocol's politics.
The late burst took benefit of a neighborhood that anticipated the third proposal to fail. Compound may have prolonged the vote when a big bloc appeared close to the deadline, required longer staking, or allowed a trusted council to pause execution.
Each possibility would have moved energy towards reactive voters, dedicated holders, locking companies, or a small emergency physique.
However Compound selected the emergency brake, and within the 2024 configurations researchers reviewed, seven different DAOs shared its publicity to available voting energy and late vote accumulation: Uniswap, Radicle, Gitcoin, Silo, Ampleforth, Hop, and Cryptex.
These programs can evolve by governance, so the record data a second in 2024, whereas a present safety score would require a contemporary assessment.
Decentralization wants a richer accounting than token distribution alone. A great governance report would present how a lot provide can vote, how a lot energy the most important delegates management, which intermediaries maintain staked tokens, and who can introduce, execute, or veto proposals.
Sensible contract audits already ask whether or not governance code follows its specification, whereas a constitutional audit would ask the place that specification sends authority.
DAOs can unfold possession throughout hundreds of wallets and nonetheless funnel sensible management towards a number of dozen professionals, custodians, and enormous holders, with software program that performs flawlessly all through.
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