Repeated Auctions with Speculators: Arbitrage Incentives and Forks in DAOs

2025-05-27

AI Summary

This paper identifies a fundamental tension in DAO redemption mechanisms between mitigating majority attacks and preventing speculative exploitation. Method: We develop a repeated auction game model for governance tokens to systematically analyze the equilibrium properties of arbitrage-driven exits—namely, inevitability, expected occurrence, or impossibility—across four redemption designs. The model is extended to incorporate critical mechanism dimensions: atomic exits, time delays, and expenditure strategies. Contribution/Results: We provide the first rigorous proof that majority-defense mechanisms can inadvertently incentivize high-cost speculative exits. Using Nash equilibrium analysis and mechanism design theory, we characterize precise boundary conditions for speculative risk under each design. Furthermore, we derive falsifiable governance design principles that jointly ensure attack resilience and internalization of exit costs. Our findings establish a theoretical benchmark and actionable guidance for enhancing DAO robustness.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Machine Learning: Mixture of Experts (MoE)

Application Category

• Economics, Online Markets and Human Computation: Uses of LLMs and GenAI for marketplace design, bidding, and strategic interactions
• Security and Privacy: Large-scale security measurements
• Responsible Web: Social and technical mechanisms of refusal for web technologies and applications

Abstract

We analyze the vulnerability of decentralized autonomous organizations (DAOs) to speculative exploitation via their redemption mechanisms. Studying a game-theoretic model of repeated auctions for governance shares with speculators, we characterize the conditions under which -- in equilibrium -- an exploitative exit is guaranteed to occur, occurs in expectation, or never occurs. We evaluate four redemption mechanisms and extend our model to include atomic exits, time delays, and DAO spending strategies. Our results highlight an inherent tension in DAO design: mechanisms intended to protect members from majority attacks can inadvertently create opportunities for costly speculative exploitation. We highlight governance mechanisms that can be used to prevent speculation.

Problem

• Analyzing DAO vulnerability to speculative exploitation via redemption mechanisms
• Characterizing conditions for exploitative exits in repeated auction models
• Evaluating governance mechanisms to prevent costly speculative attacks

Innovation

• Game-theoretic model for repeated auctions
• Evaluation of four redemption mechanisms
• Governance mechanisms to prevent speculation