A governance token is a kind of cryptocurrency that enables the holders to have a say in voting regarding the decisions of a blockchain project or decentralized application. The token holders’ community gets to determine the project’s future instead of a traditional company or an executive team dictating all the choices.
Normally, the holders of governance tokens can vote on things like software upgrades, fee policies, treasury spending, and how rewards are distributed. Voting in some projects is done through simple yes-or-no but in others, the votes are counted according to the number of tokens that a person has. In most cases, the tokens can be either staked or delegated to another person who will vote for the holder.
Governance tokens are widely used in DeFi, where communities have a say in the actions of the platforms without central control. The governance tokens of Uniswap, Aave, and Compound are probably the best-known ones. These projects allow users to have an ownership stake in the decision-making process, thus encouraging participation.
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Nevertheless, governance tokens do not, by themselves, promise fairness. The small group of people holding most of the tokens could turn the voting results in their favor, thus making it less democratic. However, governance tokens do offer a significant move toward decentralization by giving users the power to decide the fate of the platforms they depend on.