{"id":102820,"date":"2023-09-20T06:34:00","date_gmt":"2023-09-20T06:34:00","guid":{"rendered":"https:\/\/www.techopedia.com\/?post_type=definition&p=102820"},"modified":"2023-09-23T20:33:50","modified_gmt":"2023-09-23T20:33:50","slug":"governance-token","status":"publish","type":"definition","link":"https:\/\/www.techopedia.com\/definition\/governance-token","title":{"rendered":"Governance Token"},"content":{"rendered":"

What is a Governance Token?<\/span><\/h2>\n

A governance token is a\u00a0<\/span>cryptocurrency<\/span><\/a>\u00a0that grants holders the right to participate in the governance of a\u00a0<\/span>protocol<\/span><\/a>. These tokens are built on\u00a0<\/span>blockchain<\/span><\/a>\u00a0platforms like\u00a0<\/span>Ethereum<\/span><\/a>, enabling holders to participate in the decision-making processes of a project through voting.\u00a0<\/span><\/p>\n

There are a number of\u00a0<\/span>different governance models<\/span>. However, in most cases, the\u00a0<\/span>voting power<\/span>\u00a0of each token holder is proportionate to the number of tokens they hold. Therefore, the more governance tokens a user holds, the more they can influence the future of the project.\u00a0<\/span><\/p>\n

The primary reason behind handing over the control of a project to the community is to move toward\u00a0<\/span>decentralization<\/span><\/a>, which is one of the core tenets of the crypto market. This puts the community in charge of key decisions, such as how treasury funds should be spent and what new protocol features should be implemented.<\/span><\/p>\n

How Do Governance Tokens Work?<\/span><\/h2>\n

Decentralized finance<\/span><\/a>\u00a0(DeFi) projects typically launch their governance tokens on a\u00a0<\/span>smart contract<\/span><\/a> blockchain. Each project outlines its token issuance policy in a whitepaper<\/a>, which may include rewarding community members with governance tokens for their contributions to the project’s liquidity pools<\/a>.\u00a0<\/span><\/p>\n

Voting with such tokens usually takes place on a platform-specific portal, where token holders can connect their wallets and participate in active and pending proposals. <\/span>Decentralized autonomous organizations<\/span><\/a>\u00a0(DAOs) play a crucial role in this process, allowing users to both submit proposals and tally votes.\u00a0<\/span><\/p>\n

A DAO is an entity with no central leadership. It includes all the stakeholders in a project, such as\u00a0<\/span>developers<\/span><\/a>,\u00a0<\/span>validators<\/span><\/a>, and investors. <\/span><\/p>\n

DAOs also rely on smart contracts to tally votes and execute orders to avoid human\u00a0<\/span>manipulation<\/span>.<\/span><\/p>\n

How to Vote with Governance Tokens<\/span><\/h2>\n

While the specifics may vary across platforms, the voting process generally involves three main steps:\u00a0<\/span><\/p>\n