What is a governance token and what does it do?
A governance token lets holders vote on a protocol's rules, upgrades, and fees. It usually gives no legal ownership, dividends, or direct team control.
Vahe HakobyanEditor-in-chief
Updated Oct 5, 20263 min readFact-checked
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Projects issue them so that the people who hold the token decide how the protocol changes. The token can also be traded like other crypto assets, but its main job is voting.
How do governance tokens work?
Voting power is usually tied to how many tokens you hold. Some protocols also let you lock tokens for a period, which can raise your voting weight. Holders vote on protocol upgrades, changes to fees, and spending from the treasury.
What can holders do with them?
Token holders take part in the decisions that the protocol puts up for a vote. The exact steps depend on the project, but the choices are similar.
- Vote on open proposals using your tokens or a wallet that supports the protocol.
- Delegate your voting power to another holder or a group if you do not want to vote yourself.
- Submit a proposal if you meet the protocol's rules for doing so.
- Discuss ideas in forums before they become formal votes.
What are the main limits?
Voting power can be concentrated among large holders. A few wallets may hold enough tokens to decide an outcome. Turnout can also be low, so a small group decides for everyone.
Are they like stock?
A governance token is not stock. It usually gives you no legal ownership of the project, no claim on its assets, and no right to profits. What it can give you is a coded right to vote on some settings inside the project's smart contracts, if the protocol allows it. A stockholder owns a piece of a company; a governance token holder usually only gets a say in certain protocol decisions.
Frequently asked questions
Not automatically. US courts and the SEC look at how a token is sold and what buyers expect, using the Howey test, so a governance token can be a security in some cases. The word governance does not settle the question.
Usually they cannot fire the team. Token votes can direct treasury spending when the protocol's rules give the treasury to token holders, but many teams are separate companies and keep day-to-day control.
Usually no. Some protocols use revenue to buy back their token or burn it, as MakerDAO did with MKR using interest from DAI loans, but that is not a dividend or a legal profit share.
