Crypto isn’t nearly shopping for, promoting, or investing. It’s additionally about collaborating within the ecosystems and platforms that you just imagine in. On this 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 flexibility to vote on proposals, affect protocol upgrades and modifications, and assist information the path 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 significant a part of how choices are made in lots of decentralized crypto tasks. As an alternative of centralizing the entire energy within the arms of some builders or staff members, governance tokens give the neighborhood 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 tasks that haven’t any central management. In a DAO, the principles are enforced utilizing sensible contracts, and the members (token holders) steer the path of the mission by casting votes.
Governance tokens are widespread in decentralized finance (DeFi), blockchain gaming, NFT tasks, and even some metaverse worlds. They play an important position 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 may not appear particularly helpful. Not like utility tokens, they don’t at all times grant entry to companies, yield rewards, or different instant performance. So, why are they invaluable?
In a phrase: affect. Holding a governance token provides you the ability to assist form the way forward for a mission. You possibly can 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 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’ll be able to 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 revenue or utility, they’ll admire in worth if the protocol is profitable and neighborhood engagement is powerful. Many crypto buyers like to invest on these tokens after they anticipate the protocol to develop and succeed sooner or later, even when they haven’t any motive to forged votes. That is very true for tokens in tasks with massive treasuries and future money flows, like fashionable DeFi protocols.
It’s necessary to do not forget that governance tokens, like all cryptocurrencies, are usually not with out threat. 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 shortly.
Ultimately, governance tokens are sometimes carefully tied to the well being, credibility, hype, and potential of the mission 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 trade are utility tokens and governance tokens. Whereas the 2 generally overlap, they really serve essentially completely 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 example, 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, however, are all about participation and management. If you maintain a governance token, you assist information the mission’s path by way of voting. You may vote on whether or not a brand new characteristic needs to be added, how charges are dealt with, and the way funds are distributed. The MakerDAO mission, for example, makes use of the MKR token to manipulate the DAI stablecoin protocol. Resolution-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. As an example, AAVE is a governance token that permits holders to vote on protocol choices, but it surely additionally features 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. Just 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 observe, many tokens will put on each hats. The necessary factor right here is to grasp how the token features 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 tasks make choices.
However how precisely do these tokens perform inside the governance processes? Listed below are the primary fashions of governance that crypto tasks use to form their future.
The Predominant Fashions of Governance
There are just a few predominant methods governance tokens are used throughout platforms (with some variations relying on the mission’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 may have. In direct democracy, choices like protocol upgrades are made primarily based on the bulk vote of token holders.
Instance: Uniswap, the favored decentralized alternate, makes use of this mannequin. UNI token holders vote on governance proposals that have an effect on the path 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 scale 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 tasks. This method provides smaller holders extra significant affect and prevents whales from taking on all the course of.
3. Delegated Voting
Delegated voting, often known as liquid democracy, is a mannequin that permits token holders to delegate their votes to a trusted consultant, much like how a democratic republic features. This manner, the holders don’t must take the time to overview 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 depend upon the mission and its objectives. Extra centralized tasks may use a easy one-token-one-vote system. Others may go for quadratic or delegated voting to scale back the centralization of energy.
The right way to Get Governance Tokens
Now that you know the way governance tokens work, it’s time to discover ways to really get your arms on them. There are just a few completely different strategies, every with its personal set of benefits.
1. Shopping for Them on an Change
One of the vital easy methods to amass governance tokens is by buying them on a crypto alternate. Main platforms like Binance, Coinbase, and Uniswap record tons of governance tokens for direct buy.
Centralized exchanges like Coinbase and Binance assist you to buy governance tokens with fiat currencies, although they could not provide smaller tokens. Decentralized exchanges like Uniswap and Raydium provide 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 means of Staking
Some tasks launch governance tokens as rewards for staking different tokens. On this mannequin, you’ll be able to lock up a certain quantity of cryptocurrency in a protocol for a interval, and in return, you’ll obtain governance tokens.
It is a widespread observe 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 it will seemingly range over time).
3. Airdrops
Maybe among the finest methods of getting governance tokens is thru token airdrops, although it’s hardly ever a straightforward job. They’ve turn out to be a extremely popular technique for tasks 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 mission will ship your pockets tackle free tokens.
As an 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 almost $18,000 on the token’s all-time excessive, making it a particularly profitable airdrop. Sadly, protocols by no means reveal the precise necessities earlier than the cutoff for eligibility, which might make securing airdrops tough. Most don’t even let it slip that they’re planning an airdrop earlier than the cutoff.
4. Taking part in DAO Voting
Some tasks will distribute governance tokens as rewards for participation in governance or neighborhood engagement. In the event 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 energetic participation and governance involvement. DAOstack is one instance of this. It provides out governance tokens to customers who interact in neighborhood choices.
5. Liquidity Mining
One other technique to earn governance tokens is thru liquidity mining. On this setup, you present liquidity to a decentralized alternate (DEX) or lending platform in alternate for governance tokens.
The concept right here is that, by including liquidity, you assist preserve 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.
The right way to Vote With Governance Tokens
All (reliable) governance tokens give their holders some sort of voting energy. Nonetheless, the voting course of can differ dramatically relying on which token or platform you’re utilizing. Let’s take MakerDAO for example. It is likely one of the most necessary platforms in DeFi that makes use of its MKR token for governance choices associated to its DAI stablecoin. Right here is how the method works:
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- First, you should maintain MKR tokens in your pockets (and never an alternate). Bear in mind – the extra you maintain, the higher your voting energy!
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- Entry the voting platform. MakerDAO makes use of Oasis, a platform the place you’ll be able to view ongoing proposals and vote on them.
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- Vote on proposals. These can embrace modifications to the DAI stability payment, changes to the chance parameters of sure collateral varieties, or choices about MakerDAO’s treasury. As a token holder, you’ll be able to vote by deciding on “approve” or “reject” on the proposals.
As soon as the proposal reaches the required threshold of approval, the modifications will probably be applied on the Maker protocol. For a extra in-depth clarification of tips on how to vote on MakerDAO, take a look at their step-by-step video information.
The Execs and Cons of Governance Tokens
Governance tokens are crucial in decentralized finance and blockchain tasks. Nonetheless, like another system, they arrive with a set of benefits and downsides.
| Benefits | Disadvantages |
| Decentralized determination making: The neighborhood could make choices with out counting on a government. | Centralization dangers: Giant token holders (whales) can disproportionately affect choices. |
| Elevated neighborhood engagement: Holders usually tend to actively take part within the mission’s future. | Voter apathy: Low voter turnout can result in choices being made by a small set of token holders. |
| Transparency: Proposals and votes are usually public. | Complexity: The voting course of might be technical and hard for non-expert customers. |
| Incentives for participation: Many tasks reward energetic members with tokens. | Safety dangers: Voting programs and proposals might be exploited if the platform isn’t well-secured. |
| Revenue potential: If the mission grows and succeeds, the worth of governance tokens might enhance. | Lack of utility: In lots of circumstances, governance tokens provide little instant utility past voting. |
Most Fashionable Governance Tokens
Listed below 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 reminiscent of 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 choices reminiscent of changes to the system’s threat parameters and updates to the DAI stablecoin. MakerDAO additionally makes use of a one-token, one-vote mannequin however includes 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 vital choices. They will additionally stake AAVE to assist safe the community. Aave has a liquidity mining program the place holders not solely govern however can even 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 significant position in shaping the way forward for cryptocurrency for a few years. They’re the muse of the decentralized governance mannequin, the place choices are made by the communities quite than CEOs or centralized groups.
Because the crypto market continues to evolve, on-chain governance will seemingly turn out to be much more necessary. Initiatives are slowly leaning into transparency and decentralization, transferring an increasing number of of their decision-making onto the blockchain, the place all the things is traceable and community-oriented. Nonetheless, it is very important 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 much from excellent proper now. Now we have voter apathy, whale dominance, and quite a few technical boundaries that also pose main issues. A number of supposedly decentralized tasks even disregard their governance fashions fully after they disagree, rendering all the system moot. Nonetheless, the concept of constructing a community-led ecosystem stays highly effective and, when it’s applied effectively, 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 selections and way forward for a decentralized mission.
Is Aave a governance token?
Sure, AAVE is a governance token that offers holders the precise 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