DAO Governance and Financial Accountability in Decentralized Protocols: Assessing the Risks of Centralization and Misalignment in DAO-Foundation Relationships

Decentralized Autonomous Organizations (DAOs) have emerged as a revolutionary governance model, promising to democratize decision-making and eliminate centralized control. However, as the blockchain ecosystem matures, critical challenges in governance and financial accountability are coming to the forefront. This article examines the risks of centralization and misalignment in DAO-foundation relationships, drawing on recent case studies and academic research to highlight systemic vulnerabilities and their implications for investors.

Centralization Risks in DAO Governance

Despite their decentralized ethos, DAOs are increasingly susceptible to centralization pressures. Token-based governance, while theoretically inclusive, often concentrates power among large token holders-commonly referred to as "whales." For instance, in the Compound DAO, a small number of addresses control a significant portion of voting power, enabling unilateral influence over governance decisions. Similarly, MakerDAO's MKR token holders dominate protocol outcomes, undermining the decentralization ideal.

The 2021 collapse of OlympusDAO further illustrates these risks. When anonymous whale holders triggered a bank run by selling large amounts of OHM tokens, the DAO's governance structure failed to respond effectively, exposing flaws in transparency and community engagement. In response, OlympusDAO introduced a new governance token (OLY) and a community council to address these gaps. Such cases underscore the tension between decentralized governance and the reality of power concentration.

Financial Accountability and Foundation Misalignment

DAO-foundation partnerships, while intended to stabilize governance, often introduce new layers of complexity. The Across Protocol controversy in 2025 exemplifies this. Onchain analysis revealed that a significant portion of voting power in DAO proposals originated from wallets linked to founders and affiliated entities, raising concerns about transparency and accountability. This led to a 10% price drop in the ACX token, reflecting the market's sensitivity to governance controversies.

Legal ambiguities further complicate financial accountability. The Samuels v. Lido DAO case in February 2025 classified DAO participants as legal partners, exposing them to personal liability. This ruling dismantled the myth of "entityless" DAOs and emphasized the need for structured legal frameworks to protect stakeholders. Foundations, while useful for long-term stewardship, often introduce control points like boards that conflict with decentralized governance.

Legal and Structural Misalignment

Structural misalignment between DAOs and traditional legal frameworks remains a persistent challenge. The Ooki DAO case demonstrated that courts increasingly treat DAO activity as akin to a business association, holding multisig signers and core contributors accountable for actions taken under the DAO. This trend highlights the need for modular legal structures, such as the Harmony Framework, which proposes a DAO-Specific Entity (DSE) to provide limited liability and clear legal identity.

Jurisdictional choices also play a critical role. Cayman Islands and Switzerland are popular for their offshore and credibility-driven frameworks, respectively. However, no jurisdiction is universally optimal, and a layered approach-using a DSE as a base layer and separate wrappers for operational activities-offers greater flexibility and legal resilience.

Implications for Investors

For investors, the risks of centralization and misalignment in DAO-foundation relationships are significant. Token concentration, governance manipulation, and legal uncertainties can erode trust and lead to financial losses. The Tornado Cash incident, for example, raised broader concerns about the legal and regulatory implications of prioritizing anonymity in DAO systems.

To mitigate these risks, investors should prioritize DAOs with transparent governance mechanisms, such as Quadratic Voting or Reputation-based Voting, which enhance fairness and representation. Additionally, projects adopting hybrid models-like the Centrifuge Network Foundation's shift to Foundation-led operations-demonstrate a commitment to balancing decentralization with accountability.

Conclusion

DAOs represent a paradigm shift in governance, but their success hinges on addressing centralization risks and aligning with robust legal frameworks. As the ecosystem evolves, investors must remain vigilant, favoring projects that prioritize transparency, equitable participation, and adaptive governance structures. The future of DAOs lies not in rigid decentralization but in the ability to harmonize technological innovation with human-centric governance.