The ECB believes that the leading DeFi protocols are essentially secretly centralized.

A newly published working paper, funded by the European Central Bank (ECB), is facing criticism from legal experts regarding its approach to measuring the level of decentralization in the crypto sector.

The report claims that leading decentralized financial (DeFi) protocols actually have a higher concentration of power than expected. However, according to lawyer Bill Hughes from Consensys, this conclusion is based on incomplete data and sets an almost unattainable legal standard for the entire industry.

Mr. Hughes noted that the study lacks an objective standard to assess the level of decentralization: the numbers are presented, but the authors’ subjective interpretation of the position of each protocol on the “scale” of centralized – decentralized is what matters.

Centralized Power in Major Protocols?

The research focuses on analyzing the governance structure of prominent DeFi protocols such as Aave, MakerDAO, Ampleforth, and Uniswap.

The results show that actual voting power tends to be highly concentrated, even though governance tokens are distributed across many wallet addresses. Specifically:

• The top 100 holders control over 80% of the total governance token supply of all four protocols
• The top 5 wallets control between 36% and 59% of the supply
• The majority of participants voting are proxy representatives, rather than end-users who can identify themselves

According to the research team, this structure creates a lack of transparency, where a few entities—often directly linked to the protocols—can concentrate power.

Controversy Over the “True Decentralization” Standard

Mr. Hughes strongly criticized the report’s subjective interpretation of the data. He argues that the study fails to provide an objective benchmark and merely reflects the personal views of the authors.

Notably, the report defines “true decentralization” as software that operates entirely automatically and is nearly immutable. According to Mr. Hughes, there are currently no projects that meet this standard, thereby inadvertently narrowing the scope that regulators might consider outside their control.

Data Limitations and Reliability

Additionally, the study has raised questions about the reliability of the data. The dataset was manually collected from public and anonymous sources, leading to significant “blind spots.”

Mr. Hughes remarked that the authors themselves acknowledge the possibility of data shortcomings or discrepancies, highlighting the risk of “poor input data leading to poor output results.”

Overall, the report has sparked a significant debate within the community about how to define and measure decentralization—an essential factor that still lacks a unified standard in the digital asset industry.