Governance Token

What is Governance Token?

A governance token is a cryptocurrency that grants its holders the right to participate in the decision-making process of a blockchain project or DAO. Holders use these tokens to vote on proposals, effectively acting like digital "ballots."

How does Governance Token work?

1. Tokens are distributed to users, investors, and team members.
2. Holders can vote directly or delegate their voting power to someone else.
3. One token typically equals one vote in standard governance models.
4. Voting power is calculated using the following basic logic: Voting Power = Tokens Held + Tokens Delegated
5. Proposals pass or fail based on the total voting power cast for each option.

Why does Governance Token matter?

Governance tokens decentralize power, shifting control from a small group of founders to a global community of stakeholders. They align the interests of the users with the success of the protocol, as token holders benefit from good governance.

Key features of Governance Token

• Grants voting and proposal rights
• Tradable on secondary markets
• Can be delegated to experts
• Often used for treasury management
• May grant rights to protocol fees

Examples of Governance Token

UNI (Uniswap), AAVE (Aave), and COMP (Compound) are well-known governance tokens that allow their holders to control some of the largest protocols in DeFi.