What are Governance Tokens?

Dec 28, 2021 2 min read
What are Governance Tokens?

Blockchain-based tokens have many functions; some are simply digital money, others act as a claim to a share of a pool of assets, and others still represent digital ownership.

Many DAOs who wish for their community to participate in the project’s decision making process also issue tokens precisely for that purpose. These tokens are known as governance tokens.

Although their intended function is to be used for voting on proposed changes, many governance tokens also have significant monetary value. They can be bought and sold on exchanges and speculated on just like other tokens. Aside from the open market, governance tokens can be obtained in the following ways.

Often, when a project launches its governance token, it will distribute it via an airdrop model. This means that the project uses the historic blockchain data to view addresses that were early users of the Dapp, and assign them a certain amount of the token based on specific criteria.

Governance tokens can also be earned as a reward for staking the protocol’s native token or by bonding, and are often yield-bearing (they accumulate in value over time as a way of distributing the protocol’s earnings).

Once a project or community has created a governance proposal on which to vote, anyone who owns the governance token is able to vote with a weight according to the number of tokens they hold in their wallet.

This often leads to low “voter turnout” in terms of the number of individual addresses that hold a particular governance token. This may be because votes are often seen to be decided by a smaller number of holders who own large amounts of the token, for example project team members or “whales”. Also, many of those who own a governance token may simply be speculating on its value and not interested in the governance process whatsoever.

Another reason is that voting directly on-chain incurs gas fees, which may put off smaller holders who don’t want to pay gas if they feel their vote has comparatively little weight. To combat this, off-chain solutions such as Snapshot have become a popular way to increase engagement in the voting process.

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