DAO governance reduces risks for DeFi

According to the latest annual report from KuCoin Labs, “If DeFi aims to reduce regulatory risk, the form of DeFi governance will gradually become a DAO.”

The report further predicts that decentralized finance (DeFi) will still be a significant trend in the crypto industry in 2022. It points to the fact that the DeFi ecosystem has been “plagued by criminal whales” and that this has raised the prospect of increased risk. This situation has prompted calls for the regulation of decentralized finance; calls that come from inside the ecosystem in addition to pressure from external bodies.

With regulators more keenly scrutinizing DeFi, Kucoin predicts the industry may turn to DAO governance to reduce regulatory risks, and that is because “a DAO that puts community interest first can carry out “true governance decentralization.” It forecasts that the industry will see a shift in DeFi governance being coordinated using different mechanisms.

In relation to that, Kucoin’s report suggests, “the fundamental operational principles of DAOs are reasonable enough to be employed as foundations for the creation of legal entities.” However, this may not happen immediately. Rather, it is likely that we will not see a DAO expansion this year, but that there will be a refinement of the mechanisms instead, in preparation for adoption by companies and corporations.

To give a real life example of the use of DAOs in governance, we can look at the Marshall Islands in the Pacific. The islands now recognize DAOs as legal entities, meaning that they can register and operate legally within the island nation’s jurisdiction. It could be said that this represents proof that the DAO governance structure is indeed starting to become more prevalent in the blockchain world.