The Blockchain Treasury Governance Dilemma
TITLE: The Blockchain Treasury Governance Dilemma
AUTHORS: Darcy W. E. Allen; Chris Berg; Aaron M. Lane; Jason Potts
YEAR: 2025
JOURNAL: Regulation & Governance
DOI: https://doi.org/10.1111/rego.12659
FIELDS: institutional economics; blockchain governance; digital institutions; DAO governance; public choice
KEYWORDS: blockchain governance; DAO treasuries; institutional design; dictatorship costs; disorder costs; digital governance; token governance
Summary
This paper studies the governance problem of blockchain treasuries. Many blockchain protocols accumulate large treasuries of digital assets that are intended to fund ecosystem development, grant programs, infrastructure, and public goods within the network.
These treasuries create a governance challenge: who should control the funds and how should decisions about allocation be made?
The paper frames this challenge as a trade-off between dictatorship costs and disorder costs.
Highly centralized control of a treasury can reduce coordination problems but creates the risk that powerful actors misuse funds or act opportunistically. Decentralized governance distributes decision-making across a wider community of stakeholders but introduces coordination problems, voting manipulation, and security risks.
The authors apply the Institutional Possibility Frontier (IPF) to blockchain treasury governance. The IPF framework shows that governance systems must balance these two categories of institutional costs. Different governance structures represent different points along this frontier.
Through theoretical analysis and case studies, the paper shows that blockchain communities experiment with a wide range of governance mechanisms in order to balance these competing risks and maintain trust in the ecosystem.
Core Research Question
How should blockchain ecosystems design governance institutions that manage large protocol treasuries while minimizing both centralized opportunism and decentralized disorder?
The paper examines:
- The institutional trade-offs involved in treasury governance.
- How different blockchain projects structure treasury control.
- How governance systems evolve as blockchain ecosystems grow.
The Blockchain Treasury Problem
Many blockchain protocols generate significant financial resources through token issuance, transaction fees, or protocol reserves.
These funds are often placed in a protocol treasury that finances development, grants, research, infrastructure, or ecosystem incentives.
However, the governance of these treasuries creates institutional problems.
If treasury control is concentrated in a small group, the community risks corruption, self-dealing, or misappropriation of funds.
If governance is distributed across a large decentralized community, decision-making can become slow, fragmented, or vulnerable to manipulation.
These tensions create what the paper describes as the blockchain treasury governance dilemma.
Institutional Possibility Frontier
The paper analyzes treasury governance using the Institutional Possibility Frontier (IPF).
The IPF describes the trade-off between two institutional costs:
Dictatorship Costs
These arise when a small group of actors has concentrated authority over resources.
Examples include:
- founders controlling treasury keys
- foundation boards allocating funds
- multisig committees making allocation decisions
Such arrangements allow quick decisions but create risks of corruption or opportunism. If treasury controllers misallocate funds or act in their own interests, the broader community bears the cost. :contentReference[oaicite:0]{index=0}
Disorder Costs
These arise when governance becomes highly decentralized.
Examples include:
- token-holder voting
- DAO proposal systems
- open community governance
While decentralization reduces dictatorship risks, it can introduce new problems such as coordination failure, voting manipulation, or attacks on governance processes. :contentReference[oaicite:1]{index=1}
The institutional challenge is to find governance structures that balance these two costs.
Trust and Blockchain Governance
The governance of treasuries ultimately concerns the problem of trust.
Traditional organizations rely on legal institutions such as fiduciary duties and corporate governance to reduce opportunism. Blockchain ecosystems instead rely on institutional mechanisms embedded in code, governance rules, and community processes.
Trust emerges when governance systems reduce the perceived risk of opportunistic behaviour by those controlling resources. :contentReference[oaicite:2]{index=2}
Blockchain governance systems therefore attempt to create trustworthy institutional arrangements that constrain opportunism while still allowing effective decision-making.
Case Studies of Treasury Governance
The paper examines several blockchain ecosystems to illustrate how different governance arrangements balance dictatorship and disorder costs.
Examples include:
SushiSwap
Governance crises and internal conflicts revealed vulnerabilities in decentralized governance structures and forced the community to redesign governance mechanisms.
Gitcoin
Grant allocation systems and community voting illustrate attempts to coordinate large communities while maintaining transparency and legitimacy.
MakerDAO
MakerDAO has experimented with governance reforms, including plans to restructure governance into smaller subDAOs. These reforms attempt to reduce governance paralysis while maintaining decentralization. :contentReference[oaicite:3]{index=3}
These examples demonstrate how blockchain communities continuously experiment with governance institutions.
Dynamic Governance Evolution
Treasury governance structures often evolve as blockchain ecosystems grow.
Early-stage networks may rely on trusted founders or multisig wallets because communities are small and coordination must be fast.
As networks grow and treasuries increase in value, stakeholders demand greater decentralization to reduce dictatorship risks. Governance may then shift toward DAO voting systems or more distributed decision-making structures. :contentReference[oaicite:4]{index=4}
This process illustrates how governance institutions change over time in response to new stakeholders, incentives, and risks.
Policy and Regulatory Implications
The paper argues that blockchain governance systems exhibit substantial institutional diversity.
Different communities experiment with different combinations of voting systems, committees, grant programs, and governance tools.
Because of this diversity, regulatory approaches that attempt to impose uniform governance rules may be ineffective. Instead, regulation should recognize the evolving and experimental nature of blockchain governance systems. :contentReference[oaicite:5]{index=5}
Contribution
The paper contributes to research on blockchain governance and institutional economics by:
- applying the Institutional Possibility Frontier framework to blockchain treasuries
- explaining governance trade-offs between centralized authority and decentralized coordination
- documenting institutional diversity in DAO treasury governance
- showing how blockchain communities experiment with governance structures to generate trust
The analysis demonstrates that blockchain governance is an evolving process of institutional experimentation.
Citation
Allen, Darcy W. E.; Berg, Chris; Lane, Aaron M.; Potts, Jason.
2025.
The Blockchain Treasury Governance Dilemma.
Regulation & Governance.
DOI: https://doi.org/10.1111/rego.12659
Source
Publisher page:
Darcy Allen 