Governing Decentralised Finance

ABSTRACT The decentralised finance (DeFi) industry hosts billions of dollars in cryptocurrency deposits across protocols that autonomously and independently execute financial transactions. However, little is known about how these protocols raise capital or conduct their governance. This paper examines the token distribution mechanisms of the top‐50 DeFi protocols and documents significant variation in how tokens are allocated to users, investors and developers. We find that several protocols distribute a greater share of tokens to insiders, such as through private sales and developer allocations, rather than to users via incentives and airdrops. We present evidence that protocols with greater insider control exhibit fewer deposits, lower token values, and increased risk. Using an event‐study analysis, we find significant increases in protocol deposits post‐airdrops. Our results suggest that DeFi users prefer user‐centric governance models and are sensitive to the risks of insider control. Lastly, this paper discusses the risks and challenges of DeFi governance.