What is a Governance Token?

Updated: Oct 27, 2021

Governance tokens are tokens that developers create to allow token holders to help shape the future of a protocol. Governance token holders can influence decisions concerning the project such as proposing or deciding on new feature proposals and even changing the governance system itself.

In many cases, the changes proposed, vetted and then voted on through on-chain governance accessed by using governance tokens are applied automatically due to smart contracts. In other cases, the team maintaining the project is tasked with applying the changes or hiring someone who will.

Proponents of systems that use governance tokens believe that they allow for user control, which holds true to the original cryptocurrency ideals of decentralization and democratization. In most cases, organizations who let users control the development of their systems are called decentralized autonomous organizations (DAOs).

One well-known example of a governance token is Maker (MKR). This token allows its holders to vote on decisions pertaining to the decentralized finance (DeFi) protocol that the decentralized stablecoin DAI runs on.

For example, MKR holders can vote to change the complex economic rules that govern the decentralized lending that allows DAI to keep its price stable. At the time that the text you are reading was being written, MKR holders were voting on whether the protocol’s debt ceiling should be raised.

29 views0 comments

Recent Posts

See All

A decentralized exchange (DEX) is a peer-to-peer (P2P) marketplace that connects cryptocurrency buyers and sellers. In contrast to centralized exchanges (CEXs), decentralized platforms are non-custodi

The funding rate is how the price of a perpetual swap is kept close to the price of the underlying asset. It works by sending periodic payments between long and short traders. This is critical: a poor

Impermanent loss happens when you provide liquidity to a liquidity pool, and the price of your deposited assets changes compared to when you deposited them. The bigger this change is, the more you are