Bridging Social Capital and Financial Incentives: Navigating Liability and Regulatory Challenges in DAO Governance

Abstract

Decentralized Autonomous Organizations (DAOs) promise to transform governance through blockchain-enabled transparency and communal decision-making. However, unresolved legal responsibilities and speculative governance token dynamics complicate their ability to maintain trust, encourage participation, and secure legitimacy. Drawing primarily on Social Capital Theory (SCT), this study shows how bonding, bridging, and linking social capital intersect with liability ambiguities and token concentration to undermine institutional confidence and grassroots engagement. Public Goods Theory (PGT) clarifies how free-rider tendencies can deter infrastructural support, while Principal-Agent Theory (PAT) highlights incentive misalignments when whales prioritize short-term gains over collective welfare. Through a theoretical lens, this study illuminates how token-based power asymmetries, a lack of regulatory clarity, and conflicting motivations strain the viability of DAOs in fulfilling the promise of decentralized governance. In synthesizing these frameworks, this study advocates tailored governance strategies, ranging from reputation-based voting models to legally compliant organizational wrappers, to mitigate power imbalances, foster inclusive decision-making, and ultimately strengthen DAOs’ resilience in an evolving blockchain ecosystem. By bridging the sociological, economic, and legal perspectives, this study illustrates the interplay of trust, accountability, and incentives that shape DAO sustainability.