What is a governance token?

Key takeaway:

A governance token is a utility cryptocurrency which — as well as being a “standard” token that can be bought and sold like any other crypto asset — gives its community of holders voting rights to decide on changes and the future development of the project.

How do governance tokens work?

If we think of a traditional business structure, there is an executive team and board that make the big decisions as a centralised authority. With governance tokens, decision-making is distributed to token holders who vote on proposals to direct the decision-making of the project. This is typically in the form of a DAO (decentralised autonomous organisation), where investors are rewarded with a proportional amount of governance tokens to how much they invest.

The more tokens a holder has, the larger vote share they have for deciding on proposals. This can lead to criticisms that wealthier people could dominate the direction of a given DAO, so some projects can choose to distribute their tokens in a “fairer” way, such as through airdrops.

Uniswap is an example of a governance token that allows holders to vote on proposals for changes to its DEX (decentralised exchange). This is done via its governance forum, where token holders can propose changes, give feedback on proposals and weigh up how much support they have. For the next step, proposals are formally made for Uniswap token holders to vote on to make changes to the platform.

Keep reading…

The different types of cryptocurrencies explained
What is the difference between Uniswap and Ethereum?
A beginner’s guide to stablecoins