Is There Wisdom Among the DAO Crowd? Evidence from Vote Delegation

Nearly half of decentralized autonomous organizations (DAOs) allow vote delegation to facilitate user participation in governance and decision making. Yet, how well this mechanism works is largely unknown. We evaluate the efficacy of the vote delegation scheme by examining token holders’ vote delegation decisions and delegates’ voting behavior in MakerDAO, a pioneering and foundational DAO protocol. We find that token holders are able to discern delegates’ actions and reward delegates acting in their best interest with more delegated votes. Delegates vary in their incentives and expertise, which influence how they vote on proposals. Delegates whose interests are more aligned with token holders and who possess more expertise related to the proposals are more likely to vote correctly, whereas those with potential conflicts of interest tend to vote against token holders’ interest. Finally, we find that how well the vote delegation scheme works is positively related to future performance of the governance tokens. Overall, our evidence suggests that vote delegation can contribute to the performance and growth of DAOs so long as delegates have the requisite incentives and expertise.