A governance token is a token that gives holders defined rights to participate in the governance of a protocol, application, or ecosystem.

Governance systems may allow holders to vote on protocol parameters, fee structures, treasury spending, smart-contract upgrades, and other proposals. The exact powers depend on the system.

Voting

In some systems, voting power is related to the number of tokens held. Others use delegation, token locking, or additional mechanisms designed to reduce concentration of control.

A governance right should not automatically be interpreted as legal ownership. A governance token does not necessarily represent equity in a company or a right to receive its profits.

Governance risks

  • concentration of tokens among a small number of participants;
  • low voter participation;
  • economic influence of large holders;
  • vulnerabilities in voting and proposal-execution mechanisms.

A governance token is therefore a component of a governance system rather than a universal equivalent of a corporate share.