According to the passage, the "principal-agent problem" in traditional corporate hierarchies occurs when:

decision-making power is distributed too widely among retail token holders.

smart contracts execute malicious proposals without fiduciary oversight.

the goals of the executives managing a company do not align with the goals of its owners.

early adopters acquire a monopolistic share of governance tokens.

It can be inferred from the passage that the "immutability of smart contracts" (Paragraph 2) creates a vulnerability for DAOs primarily because it:

makes it impossible for developers to ever introduce quadratic voting mechanisms.

prevents the organization from dynamically intervening when a flaw in the system is being exploited.

requires early adopters to constantly liquidate the treasury to maintain their voting power.

forces all token holders to pay exponentially higher fees to cast their votes.

In the context of the passage, the primary function of "quadratic voting" is to:

permanently remove all venture capital syndicates from participating in decentralized finance.

increase the linear efficiency of cryptographic consensus protocols.

disproportionately increase the cost of voting for whales to prevent them from monopolizing decisions.

replace blockchain-based smart contracts with traditional centralized managerial oversight.

The author uses the phrase "on-chain oligarchy" in the final sentence most likely to describe a scenario in which:

a DAO successfully implements quadratic voting to balance its governance ecosystem.

a small group of heavily capitalized individuals effectively controls the decentralized network.

traditional corporate executives attempt to regulate decentralized autonomous organizations.

the broader, less-capitalized community mathematically amplifies its influence over early adopters.

Which of the following scenarios is most analogous to the vulnerability of the "linear one-token-one-vote system" described in the second paragraph?

A multiplayer video game where a player can permanently buy a weapon that guarantees victory regardless of the other players' skills.

A social media platform that bans users for posting content that violates its community guidelines.

A streaming service algorithm that suggests music based strictly on the genres a user has listened to in the past.

A democratic election where every citizen is issued one ballot regardless of their net worth.

←

The Economics of Decentralized Autonomous Organizations

PRACTICE

100:00+4 −1MCQ Single Answer

Reading Passage

Decentralized Autonomous Organizations (DAOs) represent a novel institutional framework where corporate governance is hardcoded into blockchain-based smart contracts, ostensibly eliminating the need for centralized managerial hierarchies. Proponents assert that DAOs solve the classic principal-agent problem—where the interests of corporate executives (agents) diverge from those of the shareholders (principals)—by distributing decision-making power directly to token holders. In this trustless ecosystem, organizational resources are allocated through cryptographic consensus protocols, theoretically ensuring transparent and democratic capital deployment without the friction of traditional fiduciary oversight. However, institutional economists argue that the purported democratization of DAOs frequently masks a reemergence of plutocratic centralization. Because voting power in most DAOs is directly proportional to token ownership, early adopters and venture capital syndicates can easily acquire a monopolistic share of governance tokens. This concentration of voting weight allows a minority of stakeholders to unilaterally force protocol upgrades or treasury liquidations, essentially recreating the very centralized power structures DAOs were designed to circumvent. Furthermore, the rigid immutability of smart contracts means that when these heavily capitalized actors exploit governance loopholes, the lack of a centralized administrative body makes it computationally and socially arduous to halt the execution of malicious proposals. To mitigate these governance vulnerabilities, developers are experimenting with "quadratic voting" mechanisms. Rather than a linear one-token-one-vote system, quadratic voting makes each additional vote exponentially more expensive to cast. This algorithmic friction prevents heavily capitalized entities from easily buying dictatorial control, mathematically amplifying the influence of the broader, less-capitalized community. By integrating these non-linear voting frameworks, DAOs can better align their operational reality with their egalitarian ethos, ensuring that decentralized governance does not inevitably devolve into on-chain oligarchy.

Which of the following best describes the organization of the passage?