Crypto isn’t nearly shopping for, promoting, or investing. It’s additionally about collaborating within the ecosystems and platforms that you simply imagine in. On the planet of decentralized finance and blockchain-based initiatives typically, 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 flexibility to vote on proposals, affect protocol upgrades and modifications, and assist information the route of decentralized initiatives.On this information, we are going to 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 initiatives. As a substitute of centralizing the entire energy within the arms of some builders or staff members, governance tokens give the group a voice.
In easy phrases, a governance token is a kind of cryptocurrency that grants the holder voting rights. Governance token holders can vote on modifications to a protocol, resolve 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 initiatives that don’t have any central management. In a DAO, the foundations are enforced utilizing good contracts, and the members (token holders) steer the route of the challenge by casting votes.
Governance tokens are frequent in decentralized finance (DeFi), blockchain gaming, NFT initiatives, and even some metaverse worlds. They play a significant position to make sure that the platforms keep decentralized, giving customers a direct say in how platforms evolve.
What Makes Governance Tokens Worthwhile?
At first look, a governance token won’t appear particularly helpful. Not like utility tokens, they don’t at all times grant entry to providers, yield rewards, or different fast performance. So, why are they useful?
In a phrase: affect. Holding a governance token provides you the facility to assist form the way forward for a challenge. You may vote on integral protocol upgrades, payment modifications, and even vote on main treasury allocations. In some circumstances, this affect is tied to billions of {dollars} of belongings.
Take Uniswap’s UNI token for example. Uniswap gave UNI holders the flexibility to vote on how protocol’s treasury, which holds over $3 billion of {dollars} in belongings as of early 2025, is managed. This sort 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 group 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 the vast majority of governance token holders.
Even when tokens don’t generate direct earnings or utility, they will admire in worth if the protocol is profitable and group engagement is robust. Many crypto buyers like to take a position on these tokens after they count on the protocol to develop and succeed sooner or later, even when they don’t have any purpose to solid votes. That is very true for tokens in initiatives with giant treasuries and future money flows, like common DeFi protocols.
It’s essential to keep in mind that governance tokens, like all cryptocurrencies, are usually not with out danger. Their worth might be extraordinarily unstable 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.
In the long run, governance tokens are sometimes carefully tied to the well being, credibility, hype, and potential of the challenge they govern.
Governance Tokens vs. Utility Tokens Defined
Not each crypto token is designed to do the identical job. The 2 commonest sorts within the business are utility tokens and governance tokens. Whereas the 2 typically overlap, they really serve basically completely different core roles within the blockchain ecosystem.
A utility token is principally used to entry a services or products inside a blockchain-based platform. Consider it as a key that unlocks options. For example, the Primary Consideration Token (BAT) is used within the Courageous browser to reward customers for viewing adverts and supporting content material creators. Token holders don’t get voting rights – it’s all about performance.
Governance tokens, then again, are all about participation and management. Whenever you maintain a governance token, you assist information the challenge’s route by way of voting. You may vote on whether or not a brand new characteristic must be added, how charges are dealt with, and the way funds are distributed. The MakerDAO challenge, as an example, makes use of the MKR token to manipulate 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 is because some tokens do double obligation. For example, AAVE is a governance token that permits holders to vote on protocol selections, nevertheless 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 initiatives 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 completely 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 provides 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 initiatives make selections.
However how precisely do these tokens perform throughout the governance processes? Listed here are the principle fashions of governance that crypto initiatives use to form their future.
The Most important Fashions of Governance
There are a couple of foremost methods governance tokens are used throughout platforms (with some variations relying on the challenge’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 based mostly on the bulk vote of token holders.
Instance: Uniswap, the favored decentralized change, makes use of this mannequin. UNI token holders vote on governance proposals that have an effect on the route of the platform. The extra tokens you personal, the higher your affect in voting.
2. Quadratic Voting
Quadratic voting, popularized by Ethereum cofounder Vitalik Buterin, is a mannequin designed to cut back the dominance of enormous token holders. On this system, the price of further votes will increase quadratically. For instance, casting 4 votes may require 16 tokens, not simply 4.
Instance: Gitcoin makes use of quadratic voting to fund open-source initiatives. This technique provides smaller holders extra significant affect and prevents whales from taking up your entire course of.
3. Delegated Voting
Delegated voting, also referred to as liquid democracy, is a mannequin that permits token holders to delegate their votes to a trusted consultant, just like how a democratic republic capabilities. This manner, the holders don’t need to take the time to overview and vote on proposals themselves and may move 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 upon the challenge and its objectives. Extra centralized initiatives may use a easy one-token-one-vote system. Others may go for quadratic or delegated voting to cut back the centralization of energy.
Methods to Get Governance Tokens
Now that you know the way governance tokens work, it’s time to discover ways to truly get your arms on them. There are a couple of completely different strategies, every with its personal set of benefits.
1. Shopping for Them on an Alternate
Probably the most easy methods to accumulate governance tokens is by buying them on a crypto change. Main platforms like Binance, Coinbase, and Uniswap checklist tons of governance tokens for direct buy.
Centralized exchanges like Coinbase and Binance mean you can 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 utilize them.
2. Incomes Tokens By means of Staking
Some initiatives 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 can possible fluctuate over time).
3. Airdrops
Maybe among the best methods of getting governance tokens is thru token airdrops, although it’s hardly ever a straightforward process. They’ve turn out to be a extremely popular technique for initiatives to reward early adopters and distribute their tokens. In the event you meet sure standards like holding a particular token at a specific time or interacting with a particular protocol, the challenge will ship your pockets tackle free tokens.
For example, 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 a particularly profitable airdrop. Sadly, protocols by no means reveal the particular necessities earlier than the cutoff for eligibility, which might 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 initiatives will distribute governance tokens as rewards for participation in governance or group engagement. In the event you have interaction with group members, vote on proposals, and take part in boards, you could be rewarded with governance tokens.
By doing this, the initiatives encourage lively participation and governance involvement. DAOstack is one instance of this. It provides out governance tokens to customers who have interaction in group selections.
5. Liquidity Mining
One other technique to earn governance tokens is thru liquidity mining. On this setup, you present liquidity to a decentralized change (DEX) or lending platform in change for governance tokens.
The concept 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 technique as a result of it’s a good way to incentivize liquidity provision.
Methods to Vote With Governance Tokens
All (reliable) governance tokens give their holders some type 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 example. It is likely 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 should maintain MKR tokens in your pockets (and never an change). Keep in mind – the extra you maintain, the higher 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 embrace modifications to the DAI stability payment, changes to the danger parameters of sure collateral sorts, or selections about MakerDAO’s treasury. As a token holder, you possibly can vote by deciding on “approve” or “reject” on the proposals.
As soon as the proposal reaches the mandatory threshold of approval, the modifications shall be carried out 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 Execs and Cons of Governance Tokens
Governance tokens are essential in decentralized finance and blockchain initiatives. Nonetheless, like every other system, they arrive with a set of benefits and downsides.
Benefits
Disadvantages
Decentralized determination making: The group could make selections with out counting on a government.
Centralization dangers: Giant token holders (whales) can disproportionately affect selections.
Elevated group engagement: Holders usually tend to actively take part within the challenge’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 might be technical and hard for non-expert customers.
Incentives for participation: Many initiatives reward lively contributors with tokens.
Safety dangers: Voting methods and proposals might be exploited if the platform isn’t well-secured.
Revenue potential: If the challenge grows and succeeds, the worth of governance tokens might enhance.
Lack of utility: In lots of circumstances, governance tokens supply little fast utility past voting.
Most Fashionable Governance Tokens
Listed here are a few of the hottest governance tokens in use in the present day by market capitalization and common recognition:
Uniswap (UNI)
Market cap: $7.5 billion as of April 2025
Governance overview: UNI holders can vote on proposals similar 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 essential selections similar 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 entails varied 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 essential 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 collaborating 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 payment 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 position 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 possible turn out to be much more essential. Tasks are slowly leaning into transparency and decentralization, shifting increasingly more of their decision-making onto the blockchain, the place the whole lot is traceable and community-oriented. Nonetheless, it is very important keep in mind 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 much from good proper now. Now we have voter apathy, whale dominance, and quite a few technical boundaries that also pose main issues. A couple of supposedly decentralized initiatives even disregard their governance fashions completely after they disagree, rendering your entire system moot. Nonetheless, the concept of constructing a community-led ecosystem stays highly effective and, when it’s carried out nicely, it’ll 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 challenge.
Is Aave a governance token?
Sure, AAVE is a governance token that offers holders the best to vote on proposals. Nonetheless, it is usually a utility token with varied 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
DAOstack documentation
Shifting past coin voting governance – Vitalik Buterin’s weblog
MakerDAO Governance Portal
Compound Finance documentation
Uniswap Airdrop – Earnifi
