Governance tokens are cryptocurrencies that give holders the right to participate in the decision-making process of a decentralized protocol or platform. They are a core part of decentralized governance in DeFi and Web3 projects

‎What they do:

  • Governance tokens typically allow holders to Propose changes or upgrades to the protocol.

  • Vote on proposals (e.g., protocol parameters, funding, partnerships)

  • Allocate funds from community treasuries.

  • Approve or reject new features or protocol rules. ‎

Examples:

  1. UNI (Uniswap): Lets users vote on changes to the Uniswap protocol.

  2. AAVE (Aave): Used to vote on proposals related to lending parameters, fees, etc.

  3. ‎COMP (Compound): Allows governance over interest rates and supported assets.

Why they matter:

  1. Community ownership: Governance tokens help shift control from a centralized team to the user community.

  2. Incentives: Many projects reward early users or liquidity providers with governance tokens.

  3. ‎Protocol evolution: They enable the protocol to evolve without relying on a centralized entity.

Governance models vary:

  • Some use one-token-one-vote systems.

  • Others may weigh votes by how long tokens are held or staked.

  • Voting can happen on-chain (via smart contracts) or off-chain (via platforms like Snapshot).

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