Governance Token

A governance token is a token whose main function is voting. Holders propose and vote on changes to the protocol that issued it. UNI governs Uniswap, AAVE governs Aave, and MKR governs the Maker protocol behind the DAI stablecoin. Voting power is usually proportional to the number of tokens held or delegated.

Governance tokens are often distributed through airdrops to early users and through ongoing rewards to liquidity providers. Some also capture value directly, for example by receiving a share of protocol fees, while others carry only voting rights. Whether a token has a claim on revenue is a key question when evaluating it, and it also affects how regulators view it.

In practice a small number of large holders, including venture funds and founding teams, often control a decisive share of votes. Delegation lets smaller holders assign their votes to active participants. Governance attacks, where someone acquires enough tokens to pass a proposal that drains the treasury, have occurred on smaller protocols.