A new working paper from the European Central Bank (ECB) finds that governance across a handful of major decentralized finance protocols is much more concentrated than previously suspected, saying the results could influence how policymakers build frameworks to bring "relevant entities under the regulatory umbrella."

That's a task easier said than done, as the paper's title suggests: "Who to regulate? Identifying actors within DeFi’s governance."

The headline statistic from the paper claims that the top 100 governance token holders account for over 80% of all token holdings in the Aave, MakerDAO (now part of the rebranded Sky Protocol), Ampleforth, and Uniswap ecosystems. That means that a relatively small group has an outsized influence on how these protocols operate.

In many cases, those holdings are "linked to the protocols themselves or exchanges," though it isn't always clear who controls the tokens, especially with large balances held on exchanges on behalf of many users.

The paper also notes that "top voters are mostly delegates," many of whom "could not be identified nor linked to token holders," making it difficult to pin down who exactly has the most sway in protocol governance.

This makes it difficult to rely on common regulatory anchor points used in other crypto sectors, like token holders, developers, or exchanges, which may not hold up in practice, the authors suggest.

The researchers also challenge common claims that DeFi protocols become more decentralized over time and that the level of concentration seen with these protocol tokens isn't just a byproduct of early distribution, especially when considering Aave, Uniswap, and MakerDAO are approaching a decade in operation.

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Several of the issues being raised in the ECB paper have also been flagged by some of DeFi's biggest developers, who are already experimenting with ways to balance decentralization and streamline governance.

At Aave, the top DeFi protocol in terms of total value locked according to The Block data, founder Stani Kulechov recently described DAO governance as "extraordinarily difficult" to operate, citing slow decision-making, multiple rounds of voting, and internal politics that bog down progress.