Imagine owning a piece of a company and having a say in its future—deciding on new features, policies, or even how funds should be spent. In the traditional world, this power is reserved for stockholders. But in the world of crypto, governance tokens give this power to the token holders.
But do governance tokens truly make crypto more decentralized? Or do they just shift power from traditional CEOs to crypto whales? Let’s dive in and explore the real role, benefits, and risks of governance tokens.
What is a crypto governance token?
A governance token is a special type of cryptocurrency that lets holders vote on decisions that shape a crypto project. Governance token holders get to decide everything from protocol upgrades and fee structures to how treasury funds are used.
Unlike traditional voting systems where one person gets one vote, governance token voting is based on token ownership. If you hold 100 tokens, your vote carries 10x more weight than someone with just 10 tokens. This means:
- Large holders (often called whales) have more influence.
- Small investors may feel their votes don’t matter.
However, not all token holders actively participate in voting. Many projects allow delegation, where token holders assign their voting power to another trusted individual or organization.
Governance tokens allow holders to vote on:
- Protocol upgrades – Changes to smart contracts, transaction speeds, or network security.
- Fee structures – Adjusting trading fees or interest rates in DeFi protocols.
- Treasury allocations – Deciding how project funds are spent, whether on development, marketing, or community participation rewards.
- New asset listings – Approving which tokens can be added to a platform.
For Example: Wormhole (W) – Holders of Wormhole tokens vote on the protocol's future, such as contract upgrades, token utility, fee adjustments, etc.
How do crypto governance tokens work?
Governance tokens allow token holders to propose, discuss, and vote on important changes, ensuring that the project is decentralized. The governance process typically follows a structured proposal and voting mechanism.
- Creating a proposal
- Community discussion
- Voting
- Results and execution
1. Creating a proposal
Any token holder, a development team, or a community member can submit a proposal to change aspects of the project.
Proposals might include adjusting transaction fees, adding new features, updating smart contracts, or reallocating treasury funds.
Some projects require a minimum number of governance tokens to submit a proposal to prevent spam and ensure only serious suggestions are considered.
2. Community discussion
Before voting begins, proposals are publicly discussed on governance forums such as DAO Forum, Discord, Snapshot, or dedicated governance platforms.
Community members debate the pros and cons, ask for clarifications, and sometimes modify proposals before they go to a vote.
This step helps refine ideas and ensures informed decision-making rather than rushed or uninformed votes.
3. Voting
Token holders cast their votes, usually choosing to approve, reject, or abstain from a proposal. The voting power is typically proportional to the number of tokens owned. If someone holds 10% of the total supply, they usually have 10% of the total voting power. Voting can be open to all holders or limited to those who have staked or delegated their tokens.
4. Results and execution
If a proposal meets the required approval threshold (e.g., 51% majority or a supermajority), it moves to execution.
In on-chain governance, smart contracts automatically implement approved changes, removing human intervention.
In off-chain governance, the development team manually carries out the decisions.
What is the difference between on-chain and off-chain governance?
Governance tokens are used to make decisions in decentralized projects, but the way these decisions are executed can be different.
There are two main types of governance models: on-chain governance and off-chain governance. Both governance models have their strengths and weaknesses.
On-chain governance provides transparency and automation but can be rigid and vulnerable to low participation. Off-chain governance allows for more discussion and human oversight but relies on trusted parties to implement decisions. Understanding these differences is crucial when evaluating the decentralized nature of a project.
On-chain governance
On-chain governance happens directly on the blockchain. Token holders vote through smart contracts, and once a proposal is approved, the changes are automatically executed.
This model promote transparency and efficiency since all votes and decisions are recorded on the blockchain. However, it also comes with risks. If a smart contract has vulnerabilities, the system could be exploited. Additionally, low voter participation can lead to decisions being controlled by a small group of large token holders.
Many DeFi projects use on-chain governance to maintain decentralization while allowing continuous improvements.
Example 1 - Compound (COMP): Compound is a decentralized lending protocol where COMP token holders vote on proposals related to interest rate models, asset listings, and treasury management. Since its governance is on-chain, once a proposal reaches a certain level of support, it is executed automatically by the underlying protocol’s smart contracts.
Example 2 - Curve (CRV): Curve Finance uses an on-chain governance system where token holders decide how CRV rewards are distributed across different liquidity pools. This allows the community to directly influence incentives and liquidity flows within the platform.
Off-chain governance
Off-chain governance relies on discussions and decision-making outside the blockchain before any official action is taken. Governance token holders still vote, but the final implementation is handled by developers or a core team rather than being executed automatically by smart contracts.
This model is more flexible because it allows for deeper discussions and adjustments before changes are made. However, it is a little centralization since the final decision often depends on a group of core contributors or developers.
Example 1 - Uniswap (UNI): Uniswap, a leading decentralized exchange, allows UNI token holders to vote on governance proposals, such as changes to fee structures and treasury allocations. However, even if a proposal is approved, it still requires the development team to implement the change, making it an example of off-chain governance.
Example 2 - Ethereum Improvement Proposals (EIPs): Ethereum’s development follows an off-chain governance model where community members propose and discuss changes through Ethereum Improvement Proposals (EIPs). These proposals are reviewed and debated before developers implement them in an Ethereum network upgrade.
What benefits do governance token holders receive?
Governance tokens are not just about voting power. Many projects offer additional incentives to encourage active participation and long-term commitment from token holders. These other benefits are:
- Staking rewards
- Revenue sharing
- Exclusive access to new features
1. Staking rewards
Some governance tokens allow holders to stake their tokens in the protocol to earn rewards. Staking helps secure the network or demonstrate commitment to governance. In return, participants receive additional tokens or a share of network fees.
Example: Wormhole (W) token holders can lock their tokens to receive additional W as staking rewards, which grants boosted voting power.
2. Revenue sharing
Governance token holders may receive a portion of the protocol’s earnings, such as transaction fees, interest, or trading commissions. This provides an incentive to participate in governance since well-managed protocols generate more revenue for token holders.
Example: MakerDAO (MKR) – MKR token holders benefit when the protocol earns stability fees from DAI borrowers. These fees help maintain the DAI stablecoin's peg and contribute to the ecosystem’s sustainability.
3. Exclusive access
Projects may offer governance token holders early or exclusive access to new features, beta testing programs, or premium services. This gives active participants a competitive advantage in using the platform.
Example: Uniswap (UNI) – UNI holders have influence over liquidity mining programs, allowing them to determine which trading pairs receive rewards before they go live.
These incentives encourage governance token holders to stay engaged, contribute to decision-making, and support the project’s long-term success. However, they also raise questions about whether governance tokens are truly decentralized governance tools or just another form of investment asset.
What are the advantages of crypto governance tokens?
Governance tokens bring several key benefits to blockchain projects, making them more decentralized, transparent, and adaptable to user needs.
1. Decentralization
Crypto governance tokens allow the community to vote on protocol changes, funding allocations, and network upgrades. This ensures that no single entity has complete control over a project’s direction.
2. Transparency
Crypto governance proposals and votes happen on public forums. Unlike traditional finance, where decisions are made behind closed doors, decentralized finance allows anyone to review and participate in discussions.
Many projects use platforms like Snapshot, Aragon, or on-chain smart contracts to track votes, preventing manipulation or hidden agendas.
For example: Compound (COMP) – All governance decisions, including interest rate adjustments and new asset listings, are publicly recorded on the blockchain. Users can verify every decision and how votes were cast.
3. Innovation and adaptability
Governance tokens allow projects to adapt quickly to market conditions and implement new ideas through community proposals. If a protocol needs a change in fee structures, liquidity incentives, or security measures, governance token holders can propose and vote on updates without waiting for a centralized authority.
For example: Uniswap (UNI) – In 2023, a Uniswap governance vote determined whether the protocol should introduce a fee-switch mechanism to generate revenue for UNI holders.
What are the disadvantages of governance tokens?
While governance tokens offer decentralization and transparency, they are not without challenges. Many projects struggle with power concentration, low voter participation, and security vulnerabilities that can undermine the integrity of decentralized governance.
1. The risk of centralized power
In theory, governance tokens distribute power across a community, but in reality, a small number of large holders (whales) often dominate voting. Since voting power is proportional to the number of tokens owned, wealthy investors or institutions can significantly influence, or even control, decisions.
For example: Dan Reecer holds and has been delegated a large amount of Wormhole tokens. As a result, he has 15% voting power, nearly twice as much as the second-largest entity.
2. Low participation in governance
Despite having governance power, many token holders do not actively participate in voting. Some are unaware of governance proposals, while others find the process too complex or time-consuming. This low turnout often means that only a small, engaged minority makes decisions for the entire community.
For example: The recent Arbitrum proposal to increase the Stylus Sprint Committee’s budget, created on February 20, 2025, attracted only a 20% participation rate in two weeks. This low voter turnout allowed a few active participants, such as Wintermute, Olimpio, and Reverie, to greatly influence the community's decision.
3. Smart contract vulnerabilities
Governance mechanisms often rely on smart contracts to execute decisions automatically. However, if these contracts contain vulnerabilities, they can be exploited, leading to significant financial losses or unintended consequences.
For example: In 2021, a bug in Compound’s governance smart contract accidentally distributed $80 million worth of COMP tokens to users who weren’t supposed to receive them. Because Compound had a decentralized governance system, fixing the bug required a governance vote, which delayed the response and exposed the protocol to additional risk.
Are governance tokens worth buying?
Governance tokens can be valuable for those who want to influence a project’s future or earn rewards through staking and revenue-sharing. However, their potential for high returns on investment (ROI) depends on several key factors.
One major factor is ecosystem development—projects with strong developer activity, innovation, and adoption tend to see higher demand for their governance tokens.
Another factor is token utility beyond governance—some governance tokens also serve as transaction fee tokens, meaning that the more activity on the platform (trading, lending, borrowing), the higher the demand for the token. If a governance token plays a role in fee payments, staking, or liquidity incentives, it has a better chance of holding long-term value.
How to buy crypto governance tokens
There are several ways to acquire governance tokens, ranging from direct purchases to earning them through platform participation.
- Buying from exchanges – Governance tokens are often listed on major centralized and decentralized cryptocurrency exchanges like Binance, Coinbase, and Uniswap. Users can buy them just like any other cryptocurrency.
- Yield farming and liquidity mining – Many DeFi protocols reward users with governance tokens for providing liquidity to decentralized exchanges or lending platforms.
- Staking rewards – Some projects distribute governance tokens as staking rewards to those who lock their assets to help secure the network.
- Airdrops – New projects sometimes distribute governance tokens for free to early adopters or active users.
- Earning through protocol usage – Some platforms reward frequent users with governance tokens.
The future of governance tokens
While crypto governance tokens help decentralized decision-making, potential issues like whale dominance, low voter participation, and security risks raise questions about whether they truly deliver on their promise of community control.
1. Will governance tokens lead to true decentralization?
One of the biggest debates around governance tokens is whether they truly decentralize power or simply replace traditional authority with a few wealthy investors. Many governance votes are controlled by a small number of large token holders, leading to concerns that DeFi governance is just another form of centralization.
To solve this potential issue, some projects are exploring new voting mechanisms, such as quadratic voting, where smaller holders have more influence compared to whales. Others are working on governance models that distribute tokens more fairly to prevent a handful of entities from dominating decisions.
2. Expansion beyond DeFi: Governance for DAOs, gaming, and Web3
While governance tokens started as a tool for DeFi protocols, they are now being used in other sectors of Web3, including gaming, social media, and decentralized autonomous organizations (DAOs).
- Decentralized gaming – Some blockchain-based games allow players to vote on game updates, character designs, or in-game economy changes using governance tokens.
- Social platforms – Decentralized social networks use governance tokens to let users vote on content moderation and platform rules.
- DAOs – Many DAOs use governance tokens for treasury management, allowing members to decide on funding, grants, and strategic partnerships.
As blockchain adoption grows, governance tokens may evolve beyond decentralized finance to become tools for managing online communities, creative projects, and even real-world organizations.
3. The impact of regulation on crypto governance tokens
Regulation has always challenged governance tokens. Since they give holders voting power over key decisions and sometimes offer financial benefits, regulators argue they qualify as securities, which would impose strict legal oversight.
In recent years, the U.S. Securities and Exchange Commission (SEC) under Gary Gensler took a harsh stance against crypto, aggressively suing projects that issued governance tokens. His approach created uncertainty, forcing many DeFi platforms, DAOs, and exchanges to limit their operations or move offshore.
With Donald Trump’s election, the industry expects a friendlier regulatory environment. On January 20, 2025, Trump appointed former PayPal executive David Sacks as the AI and crypto czar. Sacks has a positive outlook on the crypto industry.
With pro-crypto leadership, governance tokens will likely avoid being classified as securities, allowing DeFi projects and DAOs to operate with greater confidence. Instead of fighting lawsuits, blockchain projects in the U.S. can focus on growth and adoption.
Conclusion
Governance tokens have changed how decentralized projects make decisions, giving power to the community instead of a central authority. Token holders can vote on protocol upgrades, treasury spending, and key changes, making governance more transparent, democratic, and adaptable.
Despite these benefits, governance tokens still face major challenges. Large holders often control votes, low participation weakens decentralization, and security risks threaten governance integrity. Many projects are working to fix these issues by rewarding active voters, improving security, and adopting fairer voting models.
FAQs
What is the difference between a utility token and a governance token?
A utility token provides access to a product or service within a blockchain ecosystem, such as paying for transaction fees or accessing premium features. A governance token, on the other hand, gives holders voting rights to influence protocol decisions, such as fee changes or protocol upgrades. Some tokens serve both roles, allowing users to pay for services while also participating in governance. Governance tokens are primarily used in DeFi protocols and DAOs, while utility tokens power various blockchain-based applications.
Is ETH a governance token?
Ethereum’s native token, ETH, is not a governance token in the traditional sense. It primarily functions as a utility token, used for paying gas fees, staking in Ethereum’s proof-of-stake system, and securing the network.
Is Uniswap a governance token?
Uniswap (UNI) is a governance token, allowing holders to vote on proposals that affect the Uniswap protocol, including changes to fee structures and treasury management. UNI does not serve as a utility token for paying transaction fees but primarily governs the protocol’s future development. Holders can also delegate their votes to others if they do not wish to participate directly.
Is MATIC a governance token?
MATIC, the native token of the Polygon network, primarily functions as a utility token used for transaction fees, staking, and securing the network. While Polygon has introduced governance mechanisms, MATIC does not currently function as a full governance token like UNI or AAVE. Governance proposals for Polygon improvements are often discussed off-chain rather than being decided through MATIC voting.
Is ADA a governance token?
ADA, the native token of Cardano, primarily serves as a utility token for staking, transaction fees, and securing the network. However, Cardano is implementing on-chain governance through Project Catalyst, where ADA holders can vote on funding proposals and network upgrades.
