As the name suggests, governance tokens in the cryptocurrency space refer to those tokens that allow their holders to participate in the governance and key decision-making processes of the blockchain platform.
The governance token holders can thus participate in the future decision-making of the platform. They also form an important constituent of the working of the Decentralized Autonomous Organizations (DAOs).
Keep reading this article to get a thorough understanding of the governance tokens and their role in the working of the Decentralized Autonomous Organizations (DAOs).
What are Governance Tokens?
Governance tokens are special tokens used in Decentralized Finance (DeFi) and Decentralized Autonomous Organizations (DAOs) to decentralize decision-making. In the blockchain protocols that use governance tokens, the token holders decide on how the project should be run.
The token holders can accept or reject the changes made to the platform. Moreover, they can put forward decisions for voting.
Governance tokens can be used for both on-chain and off-chain governance of a native cryptocurrency platform.
On-chain governance refers to voting on proposals with governance tokens. Off-chain governance includes informal or formal discussions that do not reflect on the project’s on-chain.
Governance tokens can also be used for native staking on a dApp, adding to a liquidity pool on a decentralized platform, and trading in the cryptocurrency market.
Types of Governance Tokens
Governance tokens are divided into four types based on their roles, functionality, and prominence in the cryptocurrency ecosystem.
Foundational Governance Tokens
They serve as the foundation of a decentralized governance framework and play an integral part in the governance and working of the concerned platform. Maker (MKR) and Compound (COMP) are examples of foundational governance tokens.
DeFi Platform Governance Tokens
DeFi Platform governance tokens shape protocol enhancements, risk management strategies, and community-driven governance. Eg: UniSwap (UNI), Aave (AAVE).
Emerging and Niche Governance Tokens
These tokens grant governance rights to the players on new platforms or those belonging to specialized niches. Eg: Balancer (BAL), SynthetiX (SNX).
Cross-Protocol Governance Tokens
Cross-protocol governance tokens allow for interoperability among multiple protocols or blockchains. Examples of cross-protocol governance tokens are Polygon’s MATIC and Optimism’s OVM.
Features of Governance Tokens
The key features that distinguish a governance token from other utility tokens are listed in this section.
Voting and Decision-Making Power
Governance tokens provide users with the capability to vote for decision-making. Token holders can cast as many votes as the number of tokens they hold. The more tokens a user holds, the greater will be their say over the platform’s decisions.
Governance and Staking Participation
Staking is the process by which users lock their tokens for a specified period to participate in governance. Staking ensures active participation and commitment from token holders for a long-term interest in the platform’s success.
Token Holder Benefits
Governance token holders can enjoy additional perks such as extra rewards and access to exclusive platform features. Token holders will get actively involved in governance activities seeking incentives.
Transparency and Accountability
The activities powered by governance tokens are transparent and fall under the ambit of auditable services. The fairness in decision-making and the accountability of the platform are ensured with the use of governance tokens.
Major Governance Tokens Based on Market Capitalization
Here is the table that illustrates the top 10 governance tokens according to their market capitalization. This table will give you an idea of the importance of governance tokens in the larger cryptocurrency market.
| Name of the Token | Current Price | Market Capitalization | 24-hour Trading Volume |
| UniSwap (UNI) | $7.75 | $4,654,912,998 | 600,294,744 UNI |
| Aave (AAVE) | $162.47 | $2,429,254,964 | $181,682,929 |
| Maker (MKR) | $1,598.44 | $1,406,159,638 | $52,131,882 |
| Beam (BEAM) | $0.02046 | $1,008,989,765 | $25,052,970 |
| Worldcoin (WLD) | $1.92 | $941,976,194 | $181,297,350 |
| Wormhole (W) | $0.3123 | $805,049,200 | $60,891,626 |
| Ethereum Name Service (ENS) | $19.05 | $630,512,122 | $52,528,494 |
| PancakeSwap (CAKE) | $2.06 | $561,165,079 | $23,307,903 |
| Synthetic (SNX) | $1.60 | $525,585,577 | $18,599,167 |
| ApeCoin (APE) | $0.8037 | $486,128,439 | $56,461,024 |
Governance Tokens and DAOs
Decentralized Governance Protocols (DAOs) are transparent governance models powered by decentralization. The protocol is not governed by any centralized authorities.
DAO governance tokens facilitate the users to govern the activities of a DAO. DAO governance tokens can influence the operational workflows, incentive structures, and governance systems. Governance token holders can also influence treasury management.
It is highly beneficial to hold the DAO governance tokens. The token holders can arrive at a consensus on major decisions, unlike the conflict of interests prevalent in centralized finances.
Each token carries equal weight in terms of voting power; thus DAO governance tokens power equitable decision-making without any frauds.
Benefits of Participating in DAO Governance
Several reasons dictate your governance participation in a DAO space.
- Decentralization: Decision-making in a DAO is made by a collection of individuals who hold DAO governance tokens.
- Participation: The token holders feel empowered and connected to the organization due to their voting power. DAO encourages token holders to cast votes, burn tokens, or use them for the organization’s benefit.
- Publicity: The publicity of the DAO tokens helps the voters make responsible decisions. This increases the voters’ reputations on the platform and discourages all actions against the community.
- Community: The DAO governance tokens encourage people to build a strong community with a single vision. Interactions between token holders are now possible irrespective of geographical differences.
The Bottom Line
Governance tokens are the keystone to the governance of all decentralized financial systems. It powers equity in the governance decisions of the platform. You can invest in a governance token to take part in the governance of a blockchain platform.
However, you should take note of widening your portfolio with other tokens that power various utility cases. Keep a watch on the movements in the market to get a wholesome idea about the investment prospects.
