In the crypto world, different blockchain projects have tokens serving distinct purposes. While Bitcoin's original goal was value transfer (though it's primarily used as a store of value), PoS and PoS-like tokens represent the right to participate in network maintenance—requiring staking to validate blocks. Then there are tokens designed mainly for governance: governance tokens. Examples include MKR and the 0x Protocol, while some tokens combine fee capture with governance. But what exactly are governance tokens? Let’s break it down.
What Are Governance Tokens?
Unlike other tokens, governance tokens aren’t stores of value nor do they have direct utility. So how should they be valued? The answer lies in the cost of forking the network. For instance:
- If a participant earns rewards in a network but disagrees with an upgrade, they might attempt a hard fork to maintain the original system.
- The fork cost—the difference in net present value (NPV) before and after forking—determines the maximum price they’d pay for 51% of governance tokens.
A hot topic in crypto is governance in decentralized, open-source networks. These networks let developers test complex governance models rapidly. When experimenting with governance tokens, a key metric is the value participants assign to voting rights: How much would they pay for a vote?
Summary: The maximum price a network participant (e.g., a relayer) would pay for 51% governance tokens is tied to fork-related costs—specifically, the NPV gap between pre- and post-fork operations. This is the starting point for valuing the network.
How Governance Tokens Work
Governance tokens let holders vote on network changes. Typically:
- Voting power is proportional to token holdings.
- In a forkable system, governance derives value not just from code but from network effects (e.g., community, brand).
The Value of Governance Tokens
No governance token is truly valueless—only underutilized. The term "valueless governance token" often critiques tokens issued in grey regulatory zones or those lacking fee mechanisms. Yet, governance has clear worth:
- Traditional markets: Shareholders vote on executive pay, board seats, and corporate policies—decisions that shape companies.
- Crypto protocols: As protocols grow, governance becomes a tool to modify states, control assets, or adjust parameters.
In heavily governed protocols like Nexus Mutual, NXM stakeholders decide critical functions (e.g., claim assessments). Since payouts impact the community, governance directly affects all members. Protocols embedding governance into core functions amplify its significance.
Key Insight: Governance tokens derive value from the cost to fork their network. While exact valuations remain unclear, governance’s ability to influence networks is undeniable. As protocols attract more users and capital, battles over control will intensify.
FAQ: Governance Tokens Explained
Q1: Can governance tokens generate passive income?
A1: Not directly—unless the protocol distributes fees or rewards to holders (e.g., via staking).
Q2: What happens if a governance vote fails?
A2: The status quo remains. Some protocols allow repeated proposals or delegate voting to streamline decisions.
Q3: Are governance tokens securities?
A3: It depends on jurisdiction and token design. Tokens granting profit rights or centralized control risk being classified as securities.
Q4: How do DAOs use governance tokens?
A4: DAOs (Decentralized Autonomous Organizations) use them for collective decision-making, like fund allocation or protocol upgrades.
Q5: Can small holders influence governance?
A5: Yes—through delegate voting or pooling votes with others. Some protocols weight votes by stake duration.
👉 Learn how top DeFi projects leverage governance tokens
Governance tokens are reshaping how decentralized systems evolve. Whether you’re a holder or builder, understanding their mechanics is key to navigating crypto’s future.