DAO Governance and Token Economics in the Web3 AI Ecosystem: Navigating Legal and Market Risks of Centralized Control

The Web3 AI ecosystem has long promised a future where decentralized autonomous organizations (DAOs) and tokenized governance models eliminate centralized control. Yet, as the sector matures, a paradox emerges: many projects claiming decentralization are grappling with governance failures, token volatility, and legal scrutiny. This article dissects the legal and market risks of centralized control in "decentralized" Web3 AI projects, drawing on recent case studies and regulatory actions to highlight the challenges investors must navigate.

The Illusion of Decentralization: Governance Failures in DAOs

DAOs were conceived to democratize decision-making through token-based voting. However, token-weighted voting systems often concentrate power in the hands of large stakeholders, creating plutocratic outcomes, according to a Frontiers in Blockchain study. For instance, Hypha, a DAO platform, transitioned from a classic DAO to a Decentralized Human Organization (DHO) and later to a DAO 3.0 model to address these flaws, as the Frontiers study notes. This evolution emphasized modular governance, nested decision-making, and real-time capital flows, aiming to balance technical automation with human agency, according to the Frontiers study.

Despite such innovations, rigid governance protocols persist. Many DAOs fail to adapt to community needs, leading to inflexibility and exclusion of participants with limited digital literacy or capital, the Frontiers study observes. The result is a governance structure that mirrors traditional hierarchies, undermining the ethos of decentralization.

Token Economics and Centralized Decisions: The NEAR Protocol Case

Token economics in Web3 AI projects are particularly vulnerable to centralized governance actions. A prime example is the NEAR Protocol's 2025 decision to reduce its annual token inflation rate from 5% to 2.4%, a move made by the core development team despite a failed community vote (45.06% support), according to an OKX analysis. This move triggered an immediate 8% drop in the price of NEAR, as noted in the OKX analysis. The lack of community consensus highlighted how centralized control over tokenomics can destabilize market confidence and erode trust.

Such volatility is not isolated. Web3 AI projects must balance economic incentives with decentralized governance to avoid similar outcomes. As one analyst notes, "Governance transparency is as critical as technical innovation in maintaining token value stability," according to the OKX analysis.

Legal Challenges: From C3.ai to Terraform Labs

Regulatory scrutiny has intensified as Web3 AI projects face allegations of centralized control. C3.ai, an enterprise AI software company, became the subject of a class-action lawsuit in 2025 over alleged securities fraud, according to a PR Newswire report. The lawsuit claims the company concealed leadership issues and misleading financial statements, contributing to a 5.3% weekly stock price drop, according to the PR Newswire report. Similarly, Do Kwon, co-founder of Terraform Labs, pleaded guilty to misleading investors about the decentralization of Terra's financial products, a case that underscores regulators' focus on operational transparency, as noted in a Datavault AI report.

These legal actions reflect a broader trend: regulators are targeting projects that misrepresent decentralization. As Bloomberg reports, "The DOJ and SEC are increasingly prioritizing enforcement against blockchain projects that operate under centralized governance despite public claims of decentralization," according to the Datavault AI report.

Market Impacts: Investor Confidence and Sector Volatility

The market consequences of centralized control are stark. C3.ai's stock, for instance, has lost nearly 50% of its value in 2025 due to missed sales targets, leadership uncertainty, and legal pressures, according to a Yahoo Finance report. Meanwhile, Datavault AI (DVLT), a Web3 AI infrastructure company, saw its stock surge 800% from a 52-week low in September 2025 but later retracted 50% of its gains amid investor skepticism, as noted in the Datavault AI report. These swings illustrate the sector's speculative nature and the fragility of investor trust when governance structures are opaque.

The AI sector as a whole has faced a sell-off, with investors reevaluating the sustainability of the recent boom, according to the Yahoo Finance report. As one report notes, "The convergence of AI and Web3 is reshaping industries, but regulatory and governance risks remain a drag on long-term value creation."

Conclusion: Balancing Innovation and Accountability

The Web3 AI ecosystem stands at a crossroads. While DAOs and tokenized governance offer transformative potential, centralized control-whether in tokenomics, leadership, or legal compliance-poses existential risks. Investors must scrutinize projects for genuine decentralization, not just marketing claims. Regulatory clarity, adaptive governance models, and transparent token economics will be critical in building resilient Web3 AI ecosystems.

As the sector evolves, the lessons from Hypha, NEAR, and C3.ai underscore a simple truth: decentralization is not a technical checkbox but a cultural and structural commitment.