Governance token
Also called: voting token
Definition
A governance token is a crypto token that gives holders the right to vote on a protocol's decisions, such as fee changes, upgrades and treasury spending, in proportion to the tokens they hold or delegate.
How governance token works
Examples include UNI for Uniswap, AAVE for Aave and ARB for Arbitrum. Holders can vote directly or delegate their votes to someone else. Some protocols use vote-escrow models, where locking the token for longer gives more voting power.
Voting rights do not automatically mean a claim on revenue. Some governance tokens have no direct fee share, so their market value rests on expected future decisions, token demand and speculation. Others have staking or fee-sharing features approved by governance.
Governance tokens are often distributed through airdrops, liquidity mining and allocations to teams and investors. Check the tokenomics: how many tokens exist, when locked allocations unlock, and how concentrated voting power is.
Example
Say a protocol has 1 billion governance tokens, with 40 percent held by the team and investors and 60 percent spread among users. You hold 20,000 tokens, or 0.002 percent of the supply. On a vote where 50 million tokens participate, your 20,000 tokens are 0.04 percent of the votes cast. If the team and investors vote together with even 10 percent of the supply, 100 million tokens, they would outweigh every other participant in that vote.
Common mistakes
- Buying a governance token expecting dividends that the token does not provide.
- Ignoring upcoming unlocks of team and investor tokens.
- Assuming one token always equals one vote, when delegation and locking can change voting power.
Learn and practise
FAQ
Do governance tokens pay rewards?
Some do, through staking or fee sharing voted in by governance, but many give only voting rights.
Can I vote with tokens held on an exchange?
Usually not. Most on-chain votes need the tokens in your own wallet, or delegated from it.