Who Really Rules Web3?

Who Really Rules Web3?  That’s the question that defines the grand exit from traditional, centralized control. However, despite this vision of community-driven governance, the reality is that influence can be concentrated among key players who shape the decision-making process within DAOs, and in the end, we’ll see which is the most important aspect of all

Understanding DAO Governance in Web3

While DAOs aim for autonomy, founders, developers, large token holders, and regulators wield significant influence on the final decisions. Participation requires holding governance tokens, voting on proposals, delegating votes, or submitting governance proposals. 

The vision is bold, promising a system where governance is open, transparent, and dictated by collective input rather than corporate hierarchies. Of course, translating that vision into reality comes with its fair share of challenges, unexpected twists, and moments that remind us that decentralization, while powerful, is anything but simple.So when it comes to actual decision-making, who’s truly in charge of DAOs?

Let’s delve into the roles we can take on and how each one engages, in order to find effective strategies to persuade each agent and increase mutual benefit.

Web3 represents a shift from centralized internet governance (Web2) to decentralized, blockchain-powered ecosystems, emphasizing transparency, self-sovereignty, and smart contracts. 

Explicitly at the core of Web3 governance are Decentralized Autonomous Organizations (DAOs), which facilitate community-driven decision-making without centralized control. There are a lot of studies that explore how these models are shaping digital institutions. 

While DAOs are revolutionizing industries, they face challenges such as voter apathy, plutocracy risks, and smart contract vulnerabilities. The internet’s governance has evolved from Web1 (static web) to Web2 (centralized platforms) and now Web3 (decentralized governance). 

Concerns over privacy, censorship, and unilateral control have fueled the demand for trustless, blockchain-based decision-making. Decentralized Governance in Web3 provides real-world examples of how DAOs tackle these governance challenges.

Despite scalability and legal uncertainties, Web3 governance continues to evolve. Frameworks like The Constitutions of Web3 propose resilient governance models that enhance efficiency and decentralization.

Core Principles of DAO Governance

DAO governance is based on three fundamental principles:

1. Decentralization – Instead of central leadership, token holders collectively decide governance matters through on-chain voting, reducing single points of failure but introducing coordination challenges.
2. Transparency – Unlike traditional organizations, DAOs operate on public ledgers, ensuring open decision-making processes but raising concerns about privacy and governance manipulation.
3. Autonomy – Smart contracts enforce DAO governance, automating fund allocation and policy enforcement. However, their immutability makes adaptation difficult in cases of unforeseen vulnerabilities.

These principles aim to create more democratic governance, though balancing decentralization with efficiency remains a challenge.

DAO Voting Models and Challenges

We’ve previously explored DAO governance in depth, but here’s a concise recap of key voting models. Token-based governance grants decision-making power proportional to token holdings, aligning financial incentives but risking plutocracy. Quadratic voting mitigates dominance by large stakeholders, though it introduces complexity and Sybil attack risks. Delegated voting allows users to assign their votes to trusted representatives, increasing participation but potentially centralizing influence. Each model balances efficiency, fairness, and security, shaping the evolution of DAO governance.

Despite these models, DAOs still face significant governance hurdles:

1. Low Participation Rates – Many DAOs suffer voter apathy, with participation often below 10%, limiting representational legitimacy.
2. Plutocracy Risks – Wealthier participants can concentrate voting power, contradicting the ethos of decentralization.
3. Smart Contract Vulnerabilities – DAO smart contracts are immutable, making them vulnerable to exploits, as seen in The DAO hack of 2016.

Without addressing these challenges, DAOs risk replicating centralized inefficiencies.

Case Studies in DAO Governance

Real-world DAOs offer insights into governance effectiveness and risks:

1. Ethereum’s EIP Process – Ethereum’s Ethereum Improvement Proposal (EIP) system allows the community to debate and implement protocol changes. However, reaching consensus can be slow, as seen in Ethereum’s shift from Proof-of-Work to Proof-of-Stake (EIP-1559). (Ethereum.org)
2. Uniswap’s Governance – Uniswap, a leading decentralized exchange (DEX), operates a token-based governance system, where UNI token holders vote on protocol changes. However, concerns persist about early investors concentrating power.
3. The DAO Hack – In 2016, the first large-scale DAO was hacked for $60 million, leading to Ethereum’s controversial hard fork, splitting the network into Ethereum (ETH) and Ethereum Classic (ETC).

Usually behind every supposedly leaderless DAO, there’s a group of founders and developers quietly pulling the strings. These participants lay down the governance rules, decide on voting mechanisms, and shape the very code that dictates how the organization will function. The idea is that over time, these key figures should fade into the background, allowing the community to take full control. But founders often retain substantial influence through governance tokens and by, well, being the ones who know exactly how everything works.

Developers, wield technical gatekeeping power. Want to change a protocol? That requires code updates, which means developers play a massive role in deciding what gets implemented and when. Take Ethereum’s Ethereum Improvement Proposal (EIP) system—theoretically open to everyone, but practically speaking, if you’re not a developer or deeply embedded in the community, It will be a great challenge for your proposal to compete technically with theirs. It raises the uncomfortable but necessary question: who actually governs Web3 protocols?

The same dynamic plays out in DAOs, where core teams act as stewards of upgrades and protocol adjustments. So while decentralization remains the goal, the reality is a mix of autonomy and behind-the-scenes guidance.

And then, of course, there are the external forces that shape DAO governance. Traditional financial institutions and big tech firms have noticed the potential (and profitability) of DAOs and want a piece of the action. MakerDAO, for instance, has flirted with banks, integrating real-world assets into DeFi lending. Meanwhile, Aave launched Aave Arc, which lets institutional investors join DeFi while staying compliant with existing financial regulations. 

Sounds like a win-win, right? More adoption, more legitimacy. But here’s the catch—when TradFi enters the chat, decentralization tends to take a hit. Suddenly, DAOs have to answer to regulators and fit within existing legal structures, introducing bureaucracy and centralization risks that many in Web3 were trying to escape in the first place.With traditional institutions entering the space, the question becomes more urgent: who now controls Web3 governance?

Speaking of regulators, they’re still figuring out how to deal with DAOs. In some places, DAOs are being granted legal entity status (like in Wyoming, USA), while others impose strict crypto regulations like China and India. 

This inconsistency leads to what’s called regulatory arbitrage—where DAOs register in favorable jurisdictions while operating globally. It’s a clever workaround, but hardly sustainable in the long run. If DAOs want to interact with the traditional world (banks, governments, institutions), they’ll have to grapple with taxation, compliance, and liability issues—things that aren’t exactly synonymous with decentralization.

And as if regulatory uncertainty wasn’t enough, DAOs also face technological challenges. Take smart contracts—they make governance automated, trustless, and efficient. But they’re also immutable, meaning once they’re deployed, they can’t be easily changed. Sounds great for security, except when there’s a bug—like in The DAO hack of 2016, where $60 million vanished overnight because of an exploit in the code. Immutable contracts are fantastic until they aren’t, which is why more DAOs are experimenting with modular governance frameworks that allow for controlled upgrades.

Another important subject to consider is Cross-chain governance. Most DAOs run on Ethereum, but as the multi-chain ecosystem expands, governance becomes fragmented. How do you make decisions across multiple blockchains? How do you ensure consistent governance rules across different platforms? There’s no easy answer, but projects like LayerZero are working on cross-chain messaging protocols to make governance more interoperable. Still, it’s an uphill battle.

Security is another major concern—because where there’s money, hackers will follow. DAOs frequently face governance attacks, where bad actors manipulate voting mechanisms as in flash loan attacks. 

All of this leads us to the most important aspect of all: smart contract vulnerabilities, which have resulted in millions in lost funds. The solution? More security audits, on-chain governance safeguards, and emergency response mechanisms.  They have prevented immeasurable losses over the past 10 years—amounts that can be verified through each auditing firm.Of course, security measures cost time and money, and not every DAO is willing (or able) to invest in them, which means the cycle of exploits continues.

Despite all these challenges, DAO governance is evolving, and some exciting trends are emerging. AI-powered governance is gaining traction, promising to automate proposal analysis, detect governance manipulation, and even assist in decision-making. 

Sounds futuristic, but it could help address voter apathy and inefficiencies. Meanwhile, cross-chain governance tools are being developed to facilitate multi-network decision-making, making DAOs more adaptable to a fragmented blockchain landscape. 

And because voter apathy is a persistent problem, gamification and social media integration are being explored to boost engagement—because if people won’t vote to improve protocol efficiency, maybe they’ll do it for on-chain clout.

So, at the end of the day, we have to ask: who really rules Web3? DAO governance is messy, complex, and far from perfect—but that’s part of the fun. It’s an experiment in decentralized coordination, and like all experiments, some parts will fail spectacularly while others redefine how organizations are run. Whether DAOs truly succeed in overcoming centralization, security risks, and regulatory challenges remains to be seen, but one thing is certain: they are pushing the boundaries of what governance looks like in a digital-first world.