DAOs, which are also known as Decentralized Autonomous Organizations, are established to have a voice to every person in the community. The principle is easy to follow: the decisions are not to be made by one individual or a few of them. In its place, individuals vote out the project proposals, changes, and future of the project using governance tokens.

However, having learned this subject matter, I became aware that once these governance tokens are centralized in the hands of a small group of individuals the system becomes less decentralized. It starts to resemble a centralized organization, despite the fact that it is called DAO.

Voting power imbalance is one of the greatest issues with token concentration. The principle of most DAOs is: the greater the number of tokens, the greater the voting power possessed. This implies that decisions can be made under the pressure of a few rich individuals, or the first to invest, despite the rest of the society having a different opinion.

Simply put, a small number of individuals can make the final decision. This is the very last thing that decentralization is expected to accomplish. I am also concerned as it decreases the level of trust, and it can lead to the feeling that the votes of the members are not significant.

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The other problem is the formation of silent leaders. These are individuals that are not publicly recognized but possess a vast number of governance tokens. They are able to block or pass proposals without the assistance of another person. There is the danger of this type of covert control. It may make a transparent DAO opaque and give way to shadows in which key decisions are not made in the best interest of the community but advantage a small number of people.

Problems are also encountered where token concentration is always a problem when making decisions when it comes to funding or in case of treasury decisions. An example is that, when a DAO wishes to use money towards development, partnerships, or rewards to the community, a small group of token holders can then advance the funds into their own agenda.

This may render the DAO weaker in the long-term as neither is the decision-making aimed at long-term growth. Rather, they are used to fulfill the short-term interests of the token holders.

In other cases, concentrating of tokens may even result in hostile takeovers. When a person or an external organization purchases a big quantity of governance tokens, they will be able to obtain control of the DAO in a short time. It implies that the outsiders are able to alter the rules, embezzle funds or steer the project off the track. In my opinion, this is one of the largest threats since it contradicts the community-posed concept that DAOs represent.

Finally, the centralization risk of governance is the concentration of tokens. It places power in the hands of select powerful individuals, undermines actual decentralization and opens the organization to manipulation. To ensure that DAOs are fair and effective, it is necessary to develop systems in order to avoid such an imbalance and promote the broad spread of voting power.