Governance Token
A cryptocurrency token that grants holders voting rights over the rules and direction of a DeFi protocol or DAO.
What is Governance Token?
A governance token is a type of cryptocurrency that confers voting rights in a decentralized protocol or DAO, giving holders the ability to propose and vote on changes to the protocol's parameters, fee structures, treasury allocations, new features, and other governance decisions. Holding more governance tokens typically equals more voting weight, though some protocols use quadratic voting or delegation to counteract plutocracy. Governance tokens were popularized by Compound, which distributed COMP tokens to users in 2020 — one of the earliest examples of 'liquidity mining' for governance participation. Notable governance tokens include UNI (Uniswap), AAVE (Aave), MKR (MakerDAO), and CRV (Curve Finance). Governance tokens often carry financial value in addition to voting utility, though their value is uncertain and depends on the health and revenue of the underlying protocol.
Example
MakerDAO's MKR token is both a governance token and a recapitalization mechanism. MKR holders vote on risk parameters for the DAI stablecoin — which collateral types to accept, at what ratios. If the system becomes undercollateralized due to bad debt, new MKR is minted and sold to recapitalize the protocol, diluting existing MKR holders.