The Power of Governance: A Study on the Relationship between On-Chain DAO Governance and Token Performance

Decentralized autonomous organizations (DAOs) leverage blockchain technology to facilitate collaboration and decentralize decision-making through rules encoded in smart contracts. DAOs challenge traditional governance theory by combining ownership and management using governance tokens. A governance token’s performance is traceable based on token price changes and subject to influencing factors. Understanding these factors is essential to ensure DAOs’ long-term viability as a new organizational form. However, insights into the drivers of token performance are still limited, leaving both DAO founders and potential token holders in the dark about which on-chain governance design choices to adopt to attract potential token holders. We apply signaling theory to elucidate how on-chain governance design choices influence token performance and use a unique dataset of 204 DAOs. We find that a minimal token quorum positively relates to token performance, while embedding voting incentives, such as non-fungible tokens or additional governance tokens, can negatively relate to token performance. Moreover, we identify founders’ stake as a contingent factor moderating these signals.