Governance Token

A governance token is a cryptocurrency that grants its holders voting power over a protocol's decisions — parameter changes, treasury spending, upgrades, and sometimes fee policies. One token typically equals one vote, so influence scales with holdings. Governance tokens are how DeFi protocols decentralize control: instead of a company's management deciding, token holders propose and vote on changes that are then executed on-chain.

A concrete example: holders of UNI, Uniswap's governance token, can vote on proposals such as deploying the protocol to new chains, funding grants from the treasury, or activating protocol fees. Similarly, AAVE holders govern the Aave lending protocol's risk parameters, like which assets can be collateral and at what ratios. Voting often happens through delegation — holders assign their voting power to active delegates rather than voting on everything themselves.

A common misconception is that a governance token entitles holders to a share of protocol revenue — most confer only voting rights unless governance explicitly votes to direct value to holders, and whether doing so creates regulatory problems is a live legal question in many jurisdictions. Practical criticisms are also worth knowing: turnout is often low, large holders and venture funds can dominate votes, and some 'governance' is symbolic while a core team retains real control. The token's market price reflects speculation about all of this, not a fixed claim on anything.