Crypto glossary
Governance token
A governance token is a cryptocurrency that gives holders voting rights over a protocol's decisions, such as fees, upgrades and treasury spending.
Governance tokens are usually ERC-20 tokens issued by DeFi protocols and DAOs, such as UNI (Uniswap), AAVE, ARB (Arbitrum) and COMP (Compound). Voting power is generally proportional to the number of tokens held or delegated, so one token counts as one vote.
Many governance tokens were distributed through airdrops or liquidity mining to spread ownership among users. Holders can vote directly or delegate their votes to representatives who follow proposals closely.
Critics note that voting power often concentrates among founders, venture investors and exchanges, and that turnout tends to be low. Many of these tokens historically gave no claim on protocol revenue, which made their value hard to justify; some protocols have since added fee switches or token buybacks. US regulators have at times examined whether such tokens should be treated as securities.
Example
Holders of ARB vote on proposals to spend the Arbitrum DAO treasury, with each token, whether held or delegated, counting as one vote.
Related terms
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