What Is Governance Token?
Also known as: Voting Token, Protocol Governance Token
In short
A governance token is a type of token that gives holders the right to make proposals and vote on the future of a protocol or DAO. Decisions such as fee rates, treasury spending and software updates are made through these votes.
With governance tokens, voting power is usually proportional to the amount of tokens held. Uniswap's UNI, Aave's AAVE and Compound's COMP are well-known examples of this type. In a typical process, a proposal is first discussed on a forum, then sentiment is gauged off-chain with tools such as Snapshot; a proposal that gains enough support is put to a formal on-chain vote. Approved changes are usually applied automatically after a timelock period.
Because many users are not interested in taking part in votes, these tokens generally come with a feature that allows delegating voting power to another address. This way, representatives who follow the protocol closely take part in decision-making with the votes delegated to them. Some protocols use vote-escrow models that give more voting power to those who lock their tokens for longer.
Governance tokens are subject to various criticisms. The concentration of tokens among early investors and the team can lead to decisions being made by a small number of people; low participation deepens this problem. Governance attacks carried out by briefly accumulating tokens are also possible. In addition, whether the token provides an economic right beyond voting rights is decisive for both its value and its legal nature.
Last updated: · This content is for information purposes only and is not investment advice.