DAO Governance Hits Scaling Wall: Major Protocols Embrace Partial Centralization

Decentralized governance is hitting its breaking point. As protocols balloon in size and complexity, the dream of pure on-chain democracy is giving way to a new reality: hybrid models that blend community input with streamlined execution.

The Scaling Paradox

It's the classic crypto conundrum—what works for a nimble startup often fails for a multi-billion-dollar ecosystem. DAO voting, once hailed as the ultimate governance mechanism, now grinds to a halt under the weight of thousands of proposals and voter apathy. Decision-making timelines stretch from days to months, creating critical vulnerabilities in fast-moving markets.

The Efficiency Pivot

Leading protocols aren't abandoning decentralization; they're engineering around its bottlenecks. We're seeing a rise in delegated councils, expert subcommittees, and time-bound emergency powers. These structures cut through the noise, allowing for rapid protocol upgrades and strategic pivots without sacrificing core community oversight—think of it as constitutional democracy with an accelerator pedal.

The New Governance Stack

This isn't a retreat—it's an evolution. The focus shifts from pure token-weighted voting to layered systems: community sentiment gauges, professional risk assessment panels, and on-chain execution triggers. The goal remains credible neutrality, but the path now acknowledges that not every decision needs a full-chain referendum, much like not every corporate decision requires a shareholder vote (though try telling that to the activist hedge funds).

The move toward partial centralization reveals crypto's pragmatic streak. It turns out that building the future of finance sometimes requires bypassing the very systems you created—a delicious irony that would make any traditional finance cynic smirk. The revolution won't be fully decentralized, but it might just be efficient enough to work.

DAO shifted to partially centralized governance

The past year was dynamic for some projects that used a DAO structure as part of their development. Based on DAO analysis by one of the active voter organizations, decentralized governance had reached capacity. 

As a result, several large-scale DAOs abandoned their voting process in whole or in part. Arbitrum consolidated all DAO operations in its new OpCo structure. Jupiter paused governance for six months to reassess upgrades and rebuild the process and incentives. Uniswap also concentrated operational authority into the DUNI framework. 

Gnosis introduced hard forks with limited community input, while Scroll transitioned to a CEO-led structure. 

Most DAOs linked to a working protocol have noted their governance process does not scale, and voting is often slow or causes conflicts. Not all voters understood technical nuance, and some proposals caused panic. As a result, governance shifted to specialized groups aware of context, while the broader community shifted to oversight. 

Participation in DAO declined in 2025

Governance also declined in 2025 as participation reached new lows. The lack of incentives and airdrops meant some DAOs could not find enough voters. Others saw voting taken over by whales to push a specific result. Lido Finance adopted a dual governance mode and saw engagement rise. 

While Uniswap and Arbitrum had the highest DAO participation, their communities still declined in the past year. 

As a result, most projects switched to small, focused groups with less frequent governance calls. Token burns and fee switches were the main issues in 2025, linked to profit sharing and support for tokens. 

DAO ownership is still a legal gray zone, despite the proposals for DAO LLC registration formats in some jurisdictions. DAOs exist in a gray zone, leading to uncertainties on who owns the protocol, brand, or has the right to payouts, as in the case of Aave DAO versus Aave Labs. 

DAO tokens may also switch from pure governance to some FORM of ownership or revenue sharing, as token holders may demand some form of compensation.

The smartest crypto minds already read our newsletter. Want in? Join them.