What are Governance Tokens? Here’s All You Need To Know

What are the governance tokens?

In a decentralised protocol, governance tokens represent ownership. Governance tokens are tokens created by developers to empower token holders to influence the future of a protocol. The token holders have the ability to influence project choices, such as by proposing or voting on new feature proposals and even modifying the governance system itself.

Governance tokens are intended to provide holders with ownership rights in a completely decentralised protocol. Anyone who owns a governance token has the ability to affect the protocol’s future direction.

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What is the purpose of a governance token?

Governance tokens are an essential part of decision-making in DAOs (or Decentralised Autonomous Organisations) that lack a clearly defined leadership.

Owners of governance tokens have total control over a protocol’s future direction. When it comes to voting on proposals, having a larger number of tokens equals having more voting power.

Governance token holders can vote on different proposals, such as spending budgets, new partnerships, or the introduction of brand-new features. 

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How do governance tokens work?

DAOs are different from conventional organisations in the sense that there is no central group of decision-makers; nonetheless, they need to make decisions that will shape the organization’s future.

These decisions are made by DAOs through a properly defined governance procedure that includes proposals and community votes. When a DAO proposal is put to a vote, governance token holders can cast their own vote on-chain.

The weight of a token holder’s vote is usually proportional to the number of tokens they own. For example, if Ali has 1000 tokens and Johnny has 100 tokens, Ali has ten times the voting power of Johnny.

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