Report: In 2022, DeFi may turn to DAO governance to reduce regulatory risk

KuCoin Labs, the investment and research arm of crypto exchange KuCoin, released its annual report predicting that decentralized finance (DeFi) will remain an important trend in the crypto industry in 2022, with governance run through decentralized autonomous organizations (DAOs).

As the DeFi ecosystem continues to be plagued by criminal whales, the risk of financial loss to the industry has become increasingly apparent. Because of this, calls to regulate decentralized finance are starting to pick up in 2021, with the industry beginning to face enforcement action over the past year.

As regulators focus on DeFi, KuCoin Labs predicts that the industry may turn to DAO governance to reduce regulatory risk:

“If DeFi aims to reduce regulatory risk, then the form of DeFi governance will gradually become DAO.”

According to KuCoin Labs, a DAO that puts the interests of the community first enables “true decentralization of governance.” This is why the exchange predicts that the industry will see a shift in using different mechanisms to coordinate DeFi governance.

KuCoin Labs also suggested that the basic operating principles of a DAO are sound enough to be used as the basis for creating a legal entity. While the industry may not witness a breakthrough in the scaling of DAOs in the coming year, the report notes that refining their mechanisms may also lay the groundwork for companies and enterprises to adopt them.

Meanwhile, blockchain-based protocol Syndicate recently announced the creation of 450 new DAOs within its platform within three weeks. It claims this accounts for 10% of all existing DAOs.

In addition to this, the Marshall Islands recently recognized DAOs as legal entities, meaning they can legally register and operate within the jurisdiction of the Pacific Island nation. Overall, this proves that DAO governance structures are indeed starting to become more commonplace in the blockchain world.