Crypto isn’t nearly shopping for, promoting, or investing. It’s additionally about taking part within the ecosystems and platforms that you simply imagine in. On the planet of decentralized finance and blockchain-based tasks basically, customers can play main roles in shaping the way forward for protocols and platforms themselves. That’s the place governance tokens are available in.
These distinctive tokens give their holders the power to vote on proposals, affect protocol upgrades and modifications, and assist information the course of decentralized tasks.On this information, we’ll break down what governance tokens are, how they work, and why they matter.
What Is a Governance Token?
Governance tokens are a serious a part of how selections are made in lots of decentralized crypto tasks. As a substitute of centralizing the entire energy within the fingers of some builders or staff members, governance tokens give the neighborhood a voice.
In easy phrases, a governance token is a sort of cryptocurrency that grants the holder voting rights. Governance token holders can vote on modifications to a protocol, determine the place funds within the treasury are allotted, and even weigh in on new options or upgrades.
Governance tokens are sometimes linked to decentralized autonomous organizations (DAOs). Decentralized autonomous organizations are like community-run tasks that haven’t any central management. In a DAO, the principles are enforced utilizing good contracts, and the members (token holders) steer the course of the venture by casting votes.
Governance tokens are frequent in decentralized finance (DeFi), blockchain gaming, NFT tasks, and even some metaverse worlds. They play an important function to make sure that the platforms keep decentralized, giving customers a direct say in how platforms evolve.
What Makes Governance Tokens Priceless?
At first look, a governance token won’t appear particularly helpful. In contrast to utility tokens, they don’t at all times grant entry to providers, yield rewards, or different quick performance. So, why are they worthwhile?
In a phrase: affect. Holding a governance token offers you the ability to assist form the way forward for a venture. You’ll be able to vote on integral protocol upgrades, price modifications, and even vote on main treasury allocations. In some instances, this affect is tied to billions of {dollars} of belongings.
Take Uniswap’s UNI token for instance. Uniswap gave UNI holders the power to vote on how protocol’s treasury, which holds over $3 billion of {dollars} in belongings as of early 2025, is managed. This type of decision-making energy can carry main weight.
One other notable instance is Compound Finance’s governance token, COMP. Launched in 2020, COMP was one of many first main governance tokens, permitting the neighborhood to form rate of interest fashions, protocol upgrades, and supported belongings. The extra COMP you maintain, the extra affect you possibly can wield. Right here is an instance of a profitable, executed proposal on Compound, using the voting energy of nearly all of governance token holders.
Even when tokens don’t generate direct earnings or utility, they’ll respect in worth if the protocol is profitable and neighborhood engagement is powerful. Many crypto traders prefer to speculate on these tokens once they count on the protocol to develop and succeed sooner or later, even when they haven’t any cause to forged votes. That is very true for tokens in tasks with giant treasuries and future money flows, like fashionable DeFi protocols.
It’s essential to do not forget that governance tokens, like all cryptocurrencies, aren’t with out danger. Their worth will be extraordinarily risky and pushed extra by hype than fundamentals. If the governance system is taken over by a handful of whales or if voter turnout is low, the token’s worth can crash rapidly.
Ultimately, governance tokens are sometimes carefully tied to the well being, credibility, hype, and potential of the venture they govern.
Governance Tokens vs. Utility Tokens Defined
Not each crypto token is designed to do the identical job. The 2 commonest varieties within the business are utility tokens and governance tokens. Whereas the 2 typically overlap, they really serve essentially totally different core roles within the blockchain ecosystem.
A utility token is especially used to entry a services or products inside a blockchain-based platform. Consider it as a key that unlocks options. As an illustration, the Primary Consideration Token (BAT) is used within the Courageous browser to reward customers for viewing advertisements and supporting content material creators. Token holders don’t get voting rights – it’s all about performance.
Governance tokens, alternatively, are all about participation and management. Once you maintain a governance token, you assist information the venture’s course via voting. You would possibly vote on whether or not a brand new function ought to be added, how charges are dealt with, and the way funds are distributed. The MakerDAO venture, as an illustration, makes use of the MKR token to control the DAI stablecoin protocol. Choice-making is left to MKR token holders, who govern the DAI stablecoin protocols.
The road between governance and utility tokens can get blurry. It’s because some tokens do double responsibility. As an illustration, AAVE is a governance token that enables holders to vote on protocol selections, however it additionally capabilities as a utility token. Holders can stake AAVE to earn rewards and assist safe the lending system.
Within the early days of crypto, most tokens cleanly match into both the governance or utility field, however these days many new tasks give their tokens each governance rights and another type of utility or staking reward. Much like AAVE, Balancer’s BAL can be utilized for each liquidity and governance incentives.
So, whereas the phrases “governance” and “utility” describe totally different ideas, in apply, many tokens will put on each hats. The essential factor right here is to grasp how the token capabilities in context and whether or not it offers you energy, entry, or each.
How Governance Tokens Work
Governance tokens aren’t simply collectibles or speculative belongings. They’re central to decentralized governance and the way tasks make selections.
However how precisely do these tokens perform inside the governance processes? Listed below are the principle fashions of governance that crypto tasks use to form their future.
The Most important Fashions of Governance
There are a couple of major methods governance tokens are used throughout platforms (with some variations relying on the venture’s distinctive wants).
1. One Token, One Vote (Direct Democracy)
That is probably the most easy and customary mannequin. Every token represents one vote, so the extra tokens you maintain, the extra voting energy you have got. In direct democracy, selections like protocol upgrades are made primarily based on the bulk vote of token holders.
Instance: Uniswap, the favored decentralized trade, makes use of this mannequin. UNI token holders vote on governance proposals that have an effect on the course of the platform. The extra tokens you personal, the better your affect in voting.
2. Quadratic Voting
Quadratic voting, popularized by Ethereum cofounder Vitalik Buterin, is a mannequin designed to scale back the dominance of huge token holders. On this system, the price of extra votes will increase quadratically. For instance, casting 4 votes would possibly require 16 tokens, not simply 4.
Instance: Gitcoin makes use of quadratic voting to fund open-source tasks. This technique offers smaller holders extra significant affect and prevents whales from taking on all the course of.
3. Delegated Voting
Delegated voting, also called liquid democracy, is a mannequin that enables token holders to delegate their votes to a trusted consultant, just like how a democratic republic capabilities. This fashion, the holders don’t should take the time to assessment and vote on proposals themselves and may cross on their rights to somebody extra educated on the subject.
Instance: Aragon makes use of a delegated voting mannequin the place customers can delegate their votes to trusted brokers to vote on their behalf.
The selection of a governance mannequin will rely on the venture and its objectives. Extra centralized tasks would possibly use a easy one-token-one-vote system. Others would possibly go for quadratic or delegated voting to scale back the centralization of energy.
Get Governance Tokens
Now that you understand how governance tokens work, it’s time to discover ways to really get your fingers on them. There are a couple of totally different strategies, every with its personal set of benefits.
1. Shopping for Them on an Trade
One of the vital easy methods to accumulate governance tokens is by buying them on a crypto trade. Main platforms like Binance, Coinbase, and Uniswap record tons of governance tokens for direct buy.
Centralized exchanges like Coinbase and Binance help you buy governance tokens with fiat currencies, although they might not supply smaller tokens. Decentralized exchanges like Uniswap and Raydium supply many extra tokens, although you’ll have to buy some cryptocurrency and arrange a crypto pockets earlier than you should use them.
2. Incomes Tokens By way of Staking
Some tasks launch governance tokens as rewards for staking different tokens. On this mannequin, you possibly can lock up a certain quantity of cryptocurrency in a protocol for a interval, and in return, you’ll obtain governance tokens.
This can be a frequent apply in DeFi platforms the place customers can stake tokens like DAI or ETH and earn governance tokens like AAVE or SUSHI in return. For instance, AAVE staking returns simply over 4.5% on the time of writing (although this may doubtless range over time).
3. Airdrops
Maybe the most effective methods of getting governance tokens is thru token airdrops, although it’s not often a straightforward activity. They’ve develop into a very talked-about methodology for tasks to reward early adopters and distribute their tokens. When you meet sure standards like holding a selected token at a selected time or interacting with a selected protocol, the venture will ship your pockets tackle free tokens.
As an illustration, Uniswap famously airdropped 400 UNI tokens to anybody who had used the platform earlier than a sure date, even when they didn’t maintain any UNI tokens on the time. 400 UNI was value practically $18,000 on the token’s all-time excessive, making it an especially profitable airdrop. Sadly, protocols by no means reveal the precise necessities earlier than the cutoff for eligibility, which may make securing airdrops difficult. Most don’t even let it slip that they’re planning an airdrop earlier than the cutoff.
4. Collaborating in DAO Voting
Some tasks will distribute governance tokens as rewards for participation in governance or neighborhood engagement. When you interact with neighborhood members, vote on proposals, and take part in boards, you is likely to be rewarded with governance tokens.
By doing this, the tasks encourage lively participation and governance involvement. DAOstack is one instance of this. It offers out governance tokens to customers who interact in neighborhood selections.
5. Liquidity Mining
One other methodology to earn governance tokens is thru liquidity mining. On this setup, you present liquidity to a decentralized trade (DEX) or lending platform in trade for governance tokens.
The thought right here is that, by including liquidity, you assist keep the operations of the platform. In return, the platform rewards you with governance tokens. Numerous DeFi apps, together with Curve Finance and Balancer, use this methodology as a result of it’s an effective way to incentivize liquidity provision.
Vote With Governance Tokens
All (reliable) governance tokens give their holders some form of voting energy. Nonetheless, the voting course of can differ dramatically relying on which token or platform you might be utilizing. Let’s take MakerDAO for instance. It is without doubt one of the most essential platforms in DeFi that makes use of its MKR token for governance selections associated to its DAI stablecoin. Right here is how the method works:
-
- First, you have to maintain MKR tokens in your pockets (and never an trade). Keep in mind – the extra you maintain, the better your voting energy!
-
- Entry the voting platform. MakerDAO makes use of Oasis, a platform the place you possibly can view ongoing proposals and vote on them.
-
- Vote on proposals. These can embody modifications to the DAI stability price, changes to the chance parameters of sure collateral varieties, or selections about MakerDAO’s treasury. As a token holder, you possibly can vote by choosing “approve” or “reject” on the proposals.
As soon as the proposal reaches the required threshold of approval, the modifications might be applied on the Maker protocol. For a extra in-depth rationalization of how you can vote on MakerDAO, take a look at their step-by-step video information.
The Professionals and Cons of Governance Tokens
Governance tokens are crucial in decentralized finance and blockchain tasks. Nonetheless, like every other system, they arrive with a set of benefits and downsides.
| Benefits | Disadvantages |
| Decentralized choice making: The neighborhood could make selections with out counting on a government. | Centralization dangers: Giant token holders (whales) can disproportionately affect selections. |
| Elevated neighborhood engagement: Holders usually tend to actively take part within the venture’s future. | Voter apathy: Low voter turnout can result in selections being made by a small set of token holders. |
| Transparency: Proposals and votes are sometimes public. | Complexity: The voting course of will be technical and difficult for non-expert customers. |
| Incentives for participation: Many tasks reward lively contributors with tokens. | Safety dangers: Voting methods and proposals will be exploited if the platform isn’t well-secured. |
| Revenue potential: If the venture grows and succeeds, the worth of governance tokens could improve. | Lack of utility: In lots of instances, governance tokens supply little quick utility past voting. |
Most Common Governance Tokens
Listed below are a number of the hottest governance tokens in use at this time by market capitalization and normal recognition:
Uniswap (UNI)
Market cap: $7.5 billion as of April 2025
Governance overview: UNI holders can vote on proposals comparable to altering liquidity supplier charges or governance mannequin changes. Uniswap follows a one-token, one-vote mannequin.
MakerDAO (MKR)
Market cap: $5.4 billion as of April 2025
Governance overview: MKR holders can vote on vital selections comparable to changes to the system’s danger parameters and updates to the DAI stablecoin. MakerDAO additionally makes use of a one-token, one-vote mannequin however includes numerous ranges of governance.
Aave (AAVE)
Market cap: $6.9 billion as of April 2025
Governance overview: AAVE holders can vote on protocol upgrades, treasury administration, and different vital selections. They’ll additionally stake AAVE to assist safe the community. Aave has a liquidity mining program the place holders not solely govern however may also earn rewards by taking part within the platform.
SushiSwap (SUSHI)
Market cap: $2.1 billion as of April 2025
Governance overview: SUSHI holders vote on points like protocol upgrades and price distribution. The platform additionally has liquidity incentives.
Compound (COMP)
Market cap: $2.8 billion as of April 2025
Governance overview: COMP holders vote on protocol modifications, together with including and eradicating belongings from the platform. The protocol is ruled by liquidity suppliers who obtain tokens as rewards for his or her participation.
Conclusion
Governance tokens have performed a serious function in shaping the way forward for cryptocurrency for a few years. They’re the inspiration of the decentralized governance mannequin, the place selections are made by the communities slightly than CEOs or centralized groups.
Because the crypto market continues to evolve, on-chain governance will doubtless develop into much more essential. Initiatives are slowly leaning into transparency and decentralization, transferring increasingly of their decision-making onto the blockchain, the place all the things is traceable and community-oriented. Nonetheless, you will need to do not forget that not all tokens are created equal. Some are simply rewards or funds, whereas others are separate governance tokens – used strictly for voting.
In actuality, decentralized governance is way from good proper now. We’ve voter apathy, whale dominance, and quite a few technical obstacles that also pose main issues. A couple of supposedly decentralized tasks even disregard their governance fashions solely once they disagree, rendering all the system moot. Nonetheless, the thought of constructing a community-led ecosystem stays highly effective and, when it’s applied nicely, it’s going to assist create extra user-focused and resilient platforms sooner or later.
FAQs
What are governance tokens?
Governance tokens are a central a part of the decentralized finance ecosystem, giving holders voting rights to affect the choices and way forward for a decentralized venture.
Is Aave a governance token?
Sure, AAVE is a governance token that offers holders the precise to vote on proposals. Nonetheless, it’s also a utility token with numerous makes use of within the Aave platform.
Is Solana a governance token?
Sure, Solana is a governance token, permitting holders to vote on on-chain proposals that impression the blockchain’s future, although it’s primarily used for transaction charges, staking, and funds.
References
