What is a governance token?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

By now, you know that there are many different kinds of tokens: for example regular cryptocurrency like Bitcoin, and stable coins like USD Coin.

But you’ve probably also heard the term “governance token”. So what’s up with that?

A governance token represents the right to vote on the future of the crypto project that it was created for. Think of it like a decision in your local sports club - everyone who is involved gets a say in key decisions.

Here’s how that works: A new wave of companies, called Web 3 organizations, are starting to democratize ownership and influence over their decisions. They mint a crypto token and give that away to whoever they feel like. Usually that is active or early users, collaborators, and the like. That token then allows the holder to propose changes, or vote in proposals from others. Any proposal that passes will be implemented.

But because the governance token is nothing other than a small computer program on the blockchain, this process is always going to work. Nothing can really interrupt it, and nobody can steal control. Unlike your local sports club, where the elected president can just decide to change the color of the building against the majority decision, here the code determines the rules.

An interesting example of this is AAVE. This blockchain based borrowing and lending system has over 100,000 governance token holders. They use a forum to exchange ideas, such as making a new crypto currency available for users to borrow or lend on their platform.

So, you see, decentralizing control actually happens in practice. There is more to crypto than just trading.

Disclaimer: This podcast references our opinion and is for information purposes only. It is not intended to be investment advice. Do your own research and seek a duly licensed professional for investment advice.