Who really governs DeFi protocols – token holders, core developers, or a limited group of appointed representatives? To understand this, one must unpack the architecture of token-based voting in DeFi, the differences between on-chain and off-chain governance, and the actual mechanisms of influence – from delegation to execution.
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What Are Governance Tokens?
Governance tokens are a specialized class of crypto assets primarily intended for participating in the governance of decentralized protocols. They allow holders to influence key decisions within the project, either directly or through delegation, from technical parameters of the protocol to resource allocation and strategic initiatives.
Unlike utility tokens that provide access to platform functionality or LP tokens that represent a share in liquidity pools – governance tokens do not grant access to services but rather grant voting rights. Essentially, they are a mechanism for participation in governance embedded in the protocol economy and structure, and owning a governance token means not so much usage as control. But wait, why would I want an asset that does not give me new user scenarios or income opportunities, you may ask. The answer is that the direction of a crypto project development direction shapes those very scenarios and opportunities – or the lack thereof. Quite often, the absence of a measurable and direct connection with the community has resulted in a project, along with its assets, going in the wrong direction, losing market position and asset value.
For a long time, you could not influence this in any way – most crypto projects were managed manually through centralized decisions of the core team or informal agreements between developers. In the early stage of DAO development, such decisions were often implemented through ad hoc multisig – temporary multi-signature schemes where several key participants jointly controlled changes and actions on behalf of the community. Unfortunately, this model brings obvious problems of scalability, transparency, and accountability.
But decentralized applications grew, DeFi ecosystems expanded, and modern DAOs emerged. So, it became necessary to formalize participation – to make it public, programmable, and token-governed. This is how governance tokens in crypto appeared: as a tool to quantify and distribute influence. They turned the abstract community into a set of specific addresses with specific voting rights and direct and measurable influence on the project. Governance tokens became the element that connects users to protocol governance at the level of rules and decisions. They are not just an asset but a structural component of the decision-making logic in decentralized systems.
💡What’s the difference between governance tokens and utility tokens? Utility tokens enable access to service features, pay fees, or participate in farming, while governance tokens provide the ability to influence the platform rules through participation in voting and protocol governance. These are different functions, even if a single token partially combines them.
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Sign Up to BloFin and Earn Up ToHow Crypto Governance Works
From a technical standpoint, the entire governance architecture is based on one or another decentralized decision mechanism with established logic. Thus, decentralized decision-making crypto involves an open group of users voting according to predefined rules, whether through on-chain or off-chain governance.
Let’s get on-chain governance explained. This is a governance model in which proposal, voting, and execution processes take place directly on the blockchain via smart contracts. In other words, all actions are recorded on-chain, and the voting outcome triggers automatic execution – whether it’s a protocol parameter change, a configuration update, or a resource reallocation. Major examples from several key players – Governor Alpha and Governor Bravo, both developed within the Compound ecosystem, as well as more recent versions like Compound Governance v3. These tools provide a structured flow from proposal creation to execution, incorporating quorum, timing mechanisms, and support thresholds.
In contrast, there’s off-chain governance. This is a model in which voting takes place off-chain, with the results optionally recorded or executed on-chain. Why use this model, and doesn’t it contradict the concept of decentralization itself? The answer lies in cost efficiency and accessibility. The primary example here is Snapshot, a platform that allows users to vote using signatures without incurring gas fees. It captures token balances at a specific block and tallies the results, but the actual execution of decisions falls outside its scope. Yes, it requires additional action from multi-sig groups, custodians, or other executors. However, this approach is common for DAOs where reducing participation costs is essential, but procedural transparency is still needed.
Both models incorporate fundamental mechanisms without which governance cannot function:
- Delegation. The ability to transfer voting power to another participant while retaining ownership. This is especially relevant in systems with high holder fragmentation, where only a small portion of users vote directly.
- Quorum and Thresholds. The minimum participation level and minimum “yes” votes required to pass a proposal. These parameters are critical to preventing low-engagement governance attacks, which will be discussed further below.
- Fee Rebates. A mechanism that compensates users for the cost of on-chain voting. Some protocols adopt this to incentivize participation, particularly when voting incurs gas fees on Ethereum.
Understanding how crypto governance works also requires examining variations in organizational models, whether on-chain or off-chain.
- DAO governance is based on open voting under predefined rules.
- Multisig governance involves a group of appointed signers who manage assets via multi-signature wallets.
- Council-based governance involves a group of representatives, a council, or a committee, making decisions on behalf of the community.
Do Governance Tokens Really Influence Blockchain Decisions?
Generally, yes. DeFi governance is structured so that any protocol logic change must be initiated and approved via a voting process. However, the actual influence depends on participation levels, vote concentration, and the effectiveness of delegation. The framework may be open and transparent, but if engagement is low or voting power is heavily concentrated, the impact of individual participants is limited. Therefore, the significance of governance depends not only on protocol design but also on actual community behavior.
Governance Token Utility and Use Cases
Under governance token utility, we consider the full range of governance capabilities that token ownership provides – such as initiating proposals, voting, delegating influence, changing protocol parameters, and participating in treasury management. All of these actions require not just holding the token but integrating it into the entire voting mechanism – either directly or through intermediary structures.
The simplest form is token-based voting in DeFi, where a user’s voting power corresponds to the number of tokens held at their address. This model was a common system where governance operates on balance-based logic: the vote is recorded as a function of token ownership at the time of voting. However, in practice, most protocols have moved away from this due to its vulnerability to manipulation and short-term behavior.
More advanced models include vote escrow – a mechanism in which tokens are locked for a set period, and token voting power depends on the lock duration. A user who locks tokens for 1 to 4 years gains maximum influence. This creates a more stable governance architecture: the higher the user’s commitment, the greater their significance in governance. Some vote escrow systems also implement negative utility: a user cannot participate in governance unless their tokens are locked. This limits asset liquidity but increases long-term engagement.
In some protocols, utility is implemented via staking with voting rights. Tokens are deposited into a special module where they simultaneously serve as economic collateral (e.g., protection against bad debt) and retain governance rights. This aligns incentives – the user earns yield while remaining active in decision-making. Moreover, some enable utility that extends beyond voting: token holders can cancel or veto decisions before execution, which is especially important in multi-stage systems with time delays and protected execution layers.
There is also a governance mining mechanism, in which users are rewarded for active participation in voting. This incentivizes engagement and helps mitigate the low participation problem without compromising architectural clarity. So, it’s not only about the influence of DAO tokens but economic return by being part of the DAO infrastructure. But it’s not classical mining that is based not on block production – this is political participation when the token’s utility becomes a means of accessing the DAO’s treasury.
Governance Token Use Cases
The practical application of governance token utility in scenarios where voting leads to actual changes in protocol parameters or DAO behavior.
One basic use case is configuring interest rate models. In lending protocols, users participate in decisions about how rates adjust based on demand and borrowing volume. This affects platform yields and behavioral incentives for both liquidity providers and borrowers.
Another important case is adding or removing collateral types. For instance, in MakerDAO, token holders decide which assets can be used as collateral. This directly impacts the protocol’s risk profile: approving a volatile asset can introduce systemic risks, while rejecting it may limit ecosystem growth.
A major category of decisions is DAO budget allocation. Voting determines which projects receive funding from the DAO treasury – including grants for R&D, integrations, audits, or community support. Through such votes, the token utility becomes a strategic management instrument.
Another key example is treasury management. Voting determines how assets are distributed, where they’re held (e.g., stablecoins or LP pairs), how reserves are structured, and what limits are allowed.
Risks of Governance Tokens
Despite formal decentralization, governance tokens carry some risks – both architectural and behavioral. Holding such tokens grants participation rights but does not guarantee equal influence or protection against manipulation. The most crucial here is that the risks of governance tokens don’t begin with technical vulnerabilities but with the very logic by which power is distributed and exercised in protocols.
One of the main challenges remains low participation. In most DAOs, fewer than 5% of token holders vote actively. The reasons vary – from lack of incentives to interface complexity and gas costs. It creates a governance fatigue effect – decision-making fatigue – and increases vulnerability to control by small groups of active participants.
Against this backdrop, a second risk becomes more pronounced – concentration of power. In systems without effective delegation or vote escrow models, large token holders can gain disproportionate influence. Therefore, they can determine voting outcomes regardless of the broader community’s input. Even when delegation is present, there remains a risk of delegate oligopoly – where most votes are concentrated in the hands of a narrow group, not always transparent in their motivations.
Another important class of threats is associated with vote manipulation mechanisms, including bribe attacks. In architectures without built-in incentive protection (such as Snapshot), participants may receive direct compensation for voting in favor of external actors. Particularly dangerous is the late bribing mechanism, in which a proposal is published without an apparent reward, but in the final hours of voting, third parties begin paying for a desired outcome. This can undermine the reputational and systemic balance of the governance process.
Some attacks do not rely on influence but on structure: quorum attacks exploit minimal participation levels to push through decisions benefiting a small group. In cases of low baseline participation, technical compliance with the vote threshold – not a true majority – may suffice. This leaves protocols especially vulnerable when a quorum is fixed, but there is no adaptive support mechanism.
This also includes the risk of vote buyout: the purchase of votes or temporary token ownership (in models without vote escrow) allows an attacker to intervene “for a day” in a critical vote. The consequences can be irreversible: changes to protocol parameters, fund transfers, or re-signing of multi-sig contracts.
Pros and Cons of Governance Tokens
Governance Tokens Pros
🟢 Formalized community participation. Governance tokens establish the rights and rules for decision-making for the community, turning interaction with the protocol from a consumer experience into a political one.
🟢 Architectural decentralization. These tokens provide a foundation for decentralized governance procedures without the need to trust a centralized team.
🟢 Protocol adaptability. Through voting mechanisms, parameters, upgrades, and policy can evolve without hard forks or manual intervention.
🟢 Engagement metrics. The presence of governance mechanisms allows protocols to publicly demonstrate community activity and maturity.
Governance Tokens Cons
🔴 Delegate oligopoly. In delegated models, key decisions are controlled by a limited number of delegates, often tied to venture capital firms.
🔴 Bribe attacks and vote buying. Voting outcomes can be distorted by external incentives, including bribes on vote markets or reward offers.
🔴 Quorum attacks and late bribing. The absence of a stable participation threshold leaves governance vulnerable to tactical influence in the final hours of voting.
🔴 Formal but not always actual control. In off-chain governance, the implementation of decisions remains in the hands of protocol operators (labs, foundations), reducing the token’s actual influence.
So, Are Governance Tokens a Good Investment?
Governance tokens cannot be unequivocally viewed as investment assets: they do not provide guaranteed yield and do not always grant access to profit. Their prime purpose is different, while their value depends on protocol architecture, actual community engagement, and the token’s political influence. Before investing, individually assess the governance structure, participation mechanics, and liquidity.
Best Governance Tokens 2025
UNI (Uniswap)
UNI remains the most widely held governance token in Web3 in terms of both participant count and platform significance. It enables participation in governing the Uniswap ecosystem, including approval of strategic initiatives (bridge selection, positions on the Ethereum Foundation, involvement in L2 alliances) and funding allocation through the Uniswap Grants Program.
Governance is implemented via Snapshot and remains off-chain – voting is accessible and active but not accompanied by automatic execution. This allows the community to express its position but leaves actual implementation under the control of Uniswap Labs and the Foundation. In recent years, none of the votes to activate the fee switch have been implemented despite clear community support. Additionally, the majority of votes are delegated to a small number of institutional actors, which limits the decision-making horizon.
Nevertheless, the size of the community, institutional involvement, and Uniswap’s crucial role in DeFi infrastructure make UNI one of the most important political tokens even despite the limitations of its current architecture.
COMP (Compound)
Compound remains a reference model for on-chain executable governance, implemented through the Governor Bravo framework. All proposals follow a full cycle – from initiation to voting, timelock, and automatic execution. COMP holders govern interest rate model parameters, market additions, collateral limits, and version upgrades (v2 to v3).
Compound Governance v3 also introduces delegation-aware quorum models and an extended modular voting structure. It is one of the few DAOs where holding a governance token provides full access to systemic management with a direct connection from the vote to code change.
At the same time, Compound governance faces limitations: most initiatives are driven top-down by the team or large delegates, while retail user participation remains low. Moreover, despite contractual rigor, governance activity declined after the launch of v3, raising questions about the long-term participation scalability.
MKR (MakerDAO)
MKR is the governance token with the greatest political and economic weight. It grants full control over risk parameters, internal treasury processes (Protocol-Owned Vaults, Strategic Reserve), and key system rates (including the DSR – Dai Savings Rate). Unlike other governance models, MKR includes feedback through dilution: if undercollateralized debt arises in the system, MKR tokens may be diluted, turning voting into a real stake-bearing mechanism.
In 2023–2024, MakerDAO also implemented its own governance stack, including a delegate verification process, executive votes, and time-delay modules for decisions (DSChief, Pause Proxy). This makes MKR one of the most binding governance tokens in the ecosystem.
Such architecture makes participation in governance both mandatory and dissuasive: the user assumes not only the right to vote but also the risk of loss. As a result, a significant portion of votes is delegated, and participating in votes increasingly requires a deep understanding of the financial model – which limits broader community involvement.
AAVE (Aave DAO)
Voting for AAVE is implemented under Aave Governance v2, which combines on-chain execution with cross-chain messaging. Decisions are made via delegated voting, and results are recorded on the Ethereum mainnet and then replicated to L2 and sidechain ecosystems through a special Cross-Chain Governance Bridge.
AAVE holders vote on new pool approvals, reserve parameter changes, liquidity configurations, and listing decisions. In addition, Aave introduced the Safety Module, allowing users to combine staking and governance–locked tokens to remain politically active. As a result, AAVE has become a benchmark for modular and scalable governance, capable of adapting to a multichain architecture.
At the same time, the multi-layered structure and cross-chain execution make the governance process less transparent to average participants. Some decisions may require engagement across multiple networks or an understanding of bridge architecture, creating a barrier to participation and limiting independent initiative.
📍Important: Frameworks such as Governor Bravo, Snapshot, and Compound Governance v3 are not tokens but architectural components. Examples of crypto governance tokens are assets like UNI, COMP, MKR, and AAVE, which use these frameworks to implement voting rights. The choice of framework determines accessibility, execution type, and governance security – but it is the token that determines who has the right to make decisions.
Conclusion
Governance in DeFi is not an abstract idea, but a concrete set of architectural choices, procedures, and mechanisms that define both the future of a protocol and the actual influence of its participants. Understanding the differences between on-chain and off-chain governance, the role of delegation, thresholds, and execution logic provides not just general awareness, but essential guidance for taking action. If you’re planning to take part in DeFi governance, the critical starting point lies at the intersection of a complete understanding of the architecture, mechanics, motivations, risks, and goals.
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Frequently Asked Questions
1. How do governance tokens give power to users?
Governance tokens enable users to participate in governance: to initiate proposals, vote on changes, control protocol updates, etc. Unlike traditional platforms where all decisions are made by a team or company, this approach enables measurable influence on the project development.
2. How does token voting work in DeFi?
In most decentralized protocols, voting is conducted through proposal submission, where participants can cast votes based on their voting power. In on-chain systems, votes are recorded via smart contracts, and if a quorum is reached, the decision is executed automatically. In off-chain systems like Snapshot, voting is done via signature, and the result implementation is manual. In both cases, the governance structure accounts for vote weight, quorum, and timing – from proposal submission to completion.
3. Which crypto tokens let me vote in DAOs?
You can vote in DAOs using tokens like UNI, COMP, MKR, and AAVE—but each has a different setup. UNI and AAVE use off-chain voting (with AAVE adding on-chain execution), while COMP and MKR offer full on-chain governance, though MKR is more complex and demands higher participation. The real question is not just if you can vote, but how much impact your vote actually has.
4. What are the risks of holding governance tokens?
The main risks include ineffective participation, loss of real influence, dependency on the decisions of small groups, and architectural vulnerability to manipulation. In systems lacking transparent delegation and execution processes, token holders may find that their vote has no impact on outcomes or is used in the interest of others without their knowledge.
5. Can I lose money with governance tokens?
Yes, you can lose money with governance tokens—both directly (e.g. if votes trigger price drops) and indirectly (e.g. through staking lockups, reduced liquidity, or missed opportunities). Governance also carries hidden costs like gas fees and time, often without compensation.
6. What are examples of popular governance tokens?
Popular governance tokens include UNI, COMP, MKR, and AAVE—each offering unique models of control and influence. UNI has broad community support but limited execution power, COMP enables strict on-chain changes, MKR oversees treasury and financial risk, and AAVE supports delegated, multichain governance. These tokens go beyond voting—they shape key decisions in DeFi.
