By Manoj Kumar Desai
Web3 Governance Researcher | MconnectDAO.eth
DAOs were built on a powerful idea.
Instead of one company, founder, or board controlling decisions, a global community could hold tokens, discuss proposals, vote, and guide the future of a protocol.
This idea gave Web3 a new governance promise.
Community ownership.
Transparent rules.
Open participation.
Shared treasury control.
But in 2026, many DAOs face a difficult reality.
A governance token is not enough.
A Snapshot vote is not enough.
A public treasury wallet is not enough.
A DAO can look decentralized on the surface while real power remains concentrated in a small group of whales, delegates, multisig signers, foundation members, core developers, risk providers, or forum administrators.
This is not a small problem.
If DAOs do not change important governance rules, many may not collapse overnight, but they can slowly lose community trust, active contributors, users, revenue, and legitimacy.
Balancer is a recent reminder. After a major exploit in November 2025, the protocol struggled to recover revenue. In September 2026, a proposal was published to begin an orderly wind down, pause pools over time, and distribute at least 9 million dollars of DAO managed treasury assets to eligible BAL holders.
Every DAO should study this carefully.
DAO collapse is not always one dramatic event. It can be a slow process where people stop voting, good contributors leave, treasury reporting becomes unclear, power becomes concentrated, security incidents damage trust, and the community no longer believes that it has meaningful control.
The question is not whether DAOs need fast teams, multisigs, security councils, and working groups.
They do.
The question is whether those groups remain accountable to the community.
Snapshot is useful. It allows token holders to vote without paying gas fees. It helps communities measure sentiment and test ideas. It supports delegation and flexible voting rules.
But Snapshot voting is often off chain.
That means a Snapshot result may not execute automatically. After the vote, a foundation, multisig, core team, or governance executor may need to submit the real on chain transaction.
This creates a serious gap.
The community approves the direction.
A smaller group controls the execution.
For a low risk community poll, this can be fine.
For a large treasury transfer, contract upgrade, collateral listing, or token emissions change, it is not enough.
A 2026 research sample found that the three largest voters held an average of 67.6 percent of voting power. This does not describe every DAO, but it shows why a proposal that looks community approved may be driven by a very small number of powerful wallets.
DAOs should publish more than a For and Against result. Every high risk proposal should show total eligible voting power, unique voter count, turnout, delegated voting power, top voter concentration, and late vote changes.
The new rule should be simple.
Snapshot can show sentiment. High risk decisions should use on chain execution, a public transaction payload, and a timelock before funds move or code changes.
DAO governance often follows a token weighted model.
The more tokens a person holds, the more voting power they have.
This can align power with financial exposure. But it can also create token plutocracy.
Whales, early investors, exchanges, funds, founders, and professional delegates can hold more practical voting power than thousands of smaller community members.
Academic research identifies token concentration, delegated voting, and low participation as central DAO governance challenges. In one 2026 research sample, the top three voters controlled an average 67.6 percent of voting power. Other governance research has found that participation decisions and concentration can allow minority groups to dominate results even when the wider holder base is large.
This does not mean large holders should be excluded. It means their influence should be visible.
Every DAO should display:
Total eligible voting power
Unique voter turnout
Top five and top ten voter share
Delegated voting power share
Delegate voting records
Delegate conflicts of interest
Late voting changes
Wallet links to proposal authors, service providers, or treasury recipients where publicly provable
No DAO should announce that the community has reached consensus without showing who participated and how concentrated the vote was.
The goal is not to shame large holders. The goal is honest governance reporting.
Multisigs are necessary in many DAOs.
They can protect the treasury from a single stolen private key. They can require multiple approvals before funds move. They can provide a fast response during a critical incident.
But multisigs can also become hidden governments.
If the same small group controls treasury transfers, contract upgrades, emergency pauses, grant payments, and proposal execution, then real power is not distributed.
Security Alliance guidance makes the point clearly. A multisig only improves security when signers, thresholds, devices, and verification procedures are genuinely independent. A poorly designed multisig can be security theater.
A strong DAO should use separate roles.
One multisig for treasury execution.
One multisig for contract upgrades.
One multisig for limited emergency actions.
These groups should not have identical signers.
The community should know:
Who the signers are
What role they hold
Whether they are independent from the core team
Their conflicts of interest
Their signing threshold
Their term length
Their rotation policy
Their transaction history
How the community can remove or replace them
The new rule should be clear.
No small group should control treasury, upgrades, and emergency powers at the same time.
A DAO treasury is not only a wallet full of tokens.
It is community capital.
It can fund security, grants, public goods, protocol development, liquidity, research, events, legal costs, contributor compensation, and user recovery.
But treasury money can also disappear through vague budgets, poor grant management, insider conflicts, weak controls, and risky positions.
The Balancer wind down proposal shows why closure rules matter. After a 128 million dollar exploit and a major revenue decline, Balancer proposed a phased shutdown and a distribution of at least 9 million dollars in DAO managed treasury assets to BAL holders who meet the proposed redemption process.
The core question is not only how much treasury remains.
It is who has the right to it.
Token holders.
Liquidity providers.
Users affected by incidents.
Developers and contractors.
Creditors.
Security and legal reserves.
Every DAO needs rules for these questions before a crisis happens.
Treasury transparency should include:
Public wallet addresses
Asset allocation
Stablecoin, native token, ETH, and LP exposure
Debt and liabilities
Multisig signers and thresholds
Grant recipient wallets
Spending categories
Payment schedules
Milestone status
Unused funds
Returned funds
Monthly and quarterly financial reports
Independent review for major spending
Arbitrum Watchdog activity in September 2026 showed why this matters. High severity grant misuse cases involving Good Entry, Limitless, and APX Finance raised questions about fund tracking, incentive eligibility, recovery, and accountability after grants are approved.
A DAO must not stop its work after grant approval.
The new rule should be simple.
If the community cannot follow the money, the DAO should not release the money.
DAOs need small teams to work quickly.
A community cannot vote on every developer task, security alert, grant application, legal document, event budget, or treasury transaction.
Working groups are useful.
A grants council can review applicants.
A security council can respond to incidents.
A risk steward can monitor markets.
A treasury group can manage operational payments.
A development team can ship code.
The problem begins when these groups receive vague and unlimited authority.
A mandate such as “use funds to grow the ecosystem” is too broad.
It allows too much discretion and gives the community too little ability to measure success.
Every working group should publish:
A specific purpose
Member names and roles
Selection process
Term duration
Budget cap
Wallet authority
Allowed actions
Prohibited actions
Key performance indicators
Reporting schedule
Conflict disclosures
Renewal process
Removal process
Failure and loss response process
A good mandate might say that a group can spend up to 500,000 USDC over six months on approved developer tools, audits, and education. Payments above 50,000 USDC need another DAO vote. The group must report every month. It must publish recipient wallets, milestones, results, remaining budget, and conflicts.
This model lets a team move fast without making the community powerless.
The new rule should be this.
Authority without a time limit, public reporting, and removal process is not delegation. It is unaccountable control.
Emergency powers are necessary in DeFi.
An oracle may fail.
A stablecoin may depeg.
A bridge may be exploited.
A smart contract bug may be discovered.
A governance attack may begin.
A normal governance vote can take days. An exploit can take minutes.
This is why emergency councils and pause functions exist.
But emergency power is also one of the clearest signs of practical control.
FATF's 2026 DeFi report said that decentralization should be assessed through a functional and risk based approach. It highlighted indicators such as upgrade or shutdown powers, control of fees and collateral parameters, oracle control, protocol fee flows, and concentrated voting power.
This is important.
A DAO cannot simply say it is decentralized while a private group can indefinitely pause the protocol, change rules, or move funds.
A better emergency design includes:
Pause only authority for defined functions
No direct treasury withdrawal power
Multiple independent signer approvals
A fixed duration, such as 24, 48, or 72 hours
Public action logs
Public incident reports
DAO review after the emergency
Community power to replace council members
Separate emergency and treasury multisigs
The new rule should be clear.
Emergency powers should stop harm, not create permanent ruler power.
A DAO forum should not be only a place for announcements.
It should be a place where community members can ask difficult questions.
Who controls the treasury?
Why was this provider selected?
Where will the grant money go?
Who holds upgrade keys?
Why was this proposal rushed?
What happens if the target is missed?
What conflict of interest exists?
These are governance questions, not attacks.
A DAO must moderate spam, scams, threats, doxxing, personal abuse, and harassment. But it must not silence respectful and evidence based criticism.
When forum administrators block, mute, or ban members for asking about multisig authority, fund flow, security risks, or team conflicts, the DAO removes its own warning system.
Community silence does not always mean agreement.
It may mean fear of a ban, lack of information, low voting power, language barriers, technical complexity, or the belief that powerful insiders have already decided the result.
Every DAO should have:
A written moderation policy
Clear moderation reasons
A ban appeal process
A public governance question period
A duty for proposal authors to answer material questions
An independent moderation review mechanism
Archived governance records, except where safety or legal obligations require removal
The new rule should be simple.
A DAO without dissent is not always healthy. It may simply be afraid to speak.
A DAO cannot survive forever by selling treasury tokens or issuing more tokens.
It needs sustainable value creation.
If a protocol has no clear revenue, no responsible treasury plan, no user retention, and no connection between protocol success and governance token value, then governance can become a fight over a shrinking treasury.
This is one reason Balancer is important. It was once a major DeFi protocol, but after the exploit and declining revenue, a wind down became a governance option.
Every DAO should publish:
Protocol revenue
Operating expenses
Treasury runway
Token emissions
Investor and insider unlocks
Token utility
Fee allocation
Insurance and emergency reserves
Risk adjusted yield
Long term financial scenarios
The new rule should be this.
A DAO without sustainable revenue eventually becomes a governance fight over a shrinking treasury.
Security is not only a technical task. It is governance.
ESMA reported hack related losses of around 1 billion dollars in the first half of 2026. Its report referenced an estimated 285 million dollar Drift Protocol drain after attackers gained administrative control over governance and risk systems following a long social engineering operation.
The lesson is clear.
A code audit is not enough.
DAOs must review admin rights, private key management, multisig independence, third party integrations, oracle risk, risk parameter changes, emergency response, and incident communication.
Every DAO should require:
Independent contract and integration audits
Regular admin access reviews
Hardware based and distributed key management
Least privilege permissions
A public emergency response plan
Security incident disclosure standards
Bug bounty programs
Risk parameter stress tests
Incident postmortems
Community review of major security changes
The new rule should be clear.
Security controls must be fast enough to protect users and transparent enough for the community to review.
Most DAOs have rules for launching a project.
Few have rules for closing one.
This is dangerous.
Failure can happen because of an exploit, falling revenue, loss of users, governance conflict, legal cost, depleted treasury, or technical obsolescence.
Without closure rules, the final stage of a DAO can become chaotic.
Who decides to shut down?
What quorum is required?
Who gets treasury assets first?
How long do users have to exit?
What happens to unclaimed funds?
Who manages contracts, domains, documentation, social accounts, and intellectual property?
Balancer's proposed wind down includes a phased protocol sunset, user exit period, wind down budget, and treasury distribution process. It shows why every DAO needs an exit plan before a crisis forces one.
A closure policy should include:
Wind down proposal process
Higher quorum and supermajority requirements
User and LP exit rights
Independent treasury audit
Distribution priority rules
Legal and operational reserve
Unclaimed asset policy
Contract admin handover or renunciation
Code, domain, brand, and intellectual property rules
Public archive of governance history
Final multisig closure process
The new rule should be remembered.
Every DAO needs a launch plan, an operating plan, and an exit plan.
There are positive signs.
Research and policy attention are moving from DAO labels toward actual control.
FATF now highlights functional evidence of control, including upgrade rights, governance concentration, operational powers, fee flows, and interface control. This pushes DAOs to show who can materially influence a protocol.
Academic research is also focusing on separation of powers, voting concentration, participation rate, and delegation design. These topics are moving from theory into real governance practice.
More communities are discussing:
On chain execution for major decisions
Timelocks for upgrades and treasury transfers
Public control maps
Multisig signer transparency
Independent risk providers
Delegate reporting
Treasury dashboards
Milestone based grants
Security council limits
Community removal rights
Quadratic voting and other anti concentration experiments
Quadratic voting may reduce the direct power of large token holders, but it brings tradeoffs. It can face Sybil risk, privacy concerns, identity challenges, and new forms of manipulation. It is not a magic solution.
The real answer is not one voting system.
The real answer is a governance system with transparency, separation of powers, review rights, and accountability.
DAOs do not fail because communities ask difficult questions.
DAOs fail when power becomes concentrated, reporting becomes optional, criticism becomes risky, security is ignored, revenue declines, and the community cannot replace the people who control money, code, and emergency decisions.
No credible research can say exactly how many DAOs will collapse if they do not change. Every protocol has different users, treasury size, technology, and governance structure.
But the risk signals are clear.
High risk DAOs often have low turnout, concentrated voting power, opaque multisigs, no timelocks, broad emergency powers, vague working group mandates, weak treasury reporting, poor security controls, forum censorship, and no closure plan.
The DAOs most likely to survive will make decentralization a daily practice.
They will publish control maps.
They will disclose signer powers.
They will protect treasury funds.
They will connect votes to real execution.
They will let community members ask hard questions.
They will limit emergency authority.
They will report failures honestly.
They will allow the community to review, challenge, and replace the groups that control code, money, and risk.
The strongest DAO is not the one that passes the most proposals.
It is the one that can answer the hardest questions before the community loses trust.
FATF Targeted Report on Regulatory Challenges from Decentralised Finance, July 2026
Research on DAO voting power concentration, participation, and delegated voting, 2026
Security Alliance guidance on independent multisig signers, thresholds, devices, and verification procedures
Arbitrum Watchdog Program discussions on grant misuse, fund tracking, and future program eligibility
Balancer governance proposal on orderly wind down and DAO treasury distribution, September 2026
ESMA Trends, Risks and Vulnerabilities Risk Monitor, September 2026
Research on DAO governance, separation of powers, voting design, transparency, and accountability
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