Governance Tokens and ProposalsDAO
Governance tokens give holders votes on a protocol’s decisions, such as fee changes or treasury spending, usually through formal proposals. Voting power is typically proportional to tokens held, so large holders can dominate.
Governance tokens let holders vote on how a crypto protocol changes, from fees to treasury spending. Votes usually scale with tokens held, which gives big holders a lot of say and can open the door to attacks.
- Category
- Cryptocurrency and Blockchain
- Reading time
- 3 min
- Also called
- Governance token, DAO voting, On-chain governance
- Updated
Governance tokens in plain words
In on-chain governance, proposed changes to a protocol are decided by a vote recorded on the blockchain, usually among governance-token holders.1
In many DAOs, the more tokens you hold, the more votes you get.2
Not every network works like this: Ethereum itself is governed off-chain, through a broad mix of stakeholders.1
How a governance proposal works
Draft
Someone writes a proposal, often with code attached.
Discuss
The community debates on forums before any vote.
Vote
Token holders vote on the blockchain.1
Count by tokens
Voting power often follows tokens held.2
Execute
Some systems implement approved code automatically.1
Watch for capture
Concentrated holders can dominate outcomes.3
Worked examples
Example 1 — Voting power
12% of the voteA hypothetical DAO has 100 million tokens voting. A fund holds 12 million.
| Fund share | 12M ÷ 100M = 12% |
| Needed for majority | > 50M tokens |
Because voting power is often tied to tokens held, a single large holder carries real weight.2
Example 2 — Low turnout
60% controlHypothetically only 20 million of 100 million tokens vote, and the fund votes all 12 million.
| Fund share of votes | 12M ÷ 20M = 60% |
| Result | Fund decides alone |
Low turnout gives the biggest token holders even more say.3
Example 3 — Governance attack
Proposal capturedHypothetically an attacker borrows 70 million tokens for one block when 100 million can vote.
| Attacker share | 70M ÷ 100M = 70% |
| Supermajority | 70% > two-thirds |
This is what happened at Beanstalk, where an attacker bought enough governance tokens to win a supermajority.3
On-chain vs off-chain governance
| Aspect | On-chain governance | Off-chain governance |
|---|---|---|
| Where votes happen | On the blockchain | Forums, calls, client releases |
| Who votes | Token holders | Developers, node runners, users |
| Execution | Can be automatic | Manual software upgrades |
| Main risk | Whale or flash-borrowed capture | Slow or unclear decisions |
Why traders watch governance
Fee changes
Votes can change Trading Fees and Commissions or revenue sharing.
Treasury news
Large treasury moves can affect Volatility.
Token value
Rights to vote feed Fundamental Analysis.
Risk checks
Concentration raises Counterparty Risk-like protocol risk.
Advantages and disadvantages
Advantages
- Gives users a direct say.
- Votes are transparent on chain.
- Can execute changes without a middleman.
Disadvantages
- Large holders can dominate.
- Turnout is often low.
- Flash-borrowed votes can capture proposals.
- Legal treatment of tokens differs by country.
Going deeper
Read as far as you need. Each level builds on the one before it.
Tokens as votes
Beginner
A governance token is a ballot: holders vote on protocol changes on the blockchain.1
Centralisation in practice
Intermediate
Even DAOs can be quite centralised in practice — a few large token holders, or reliance on founders and early investors, can dominate.3
Automatic execution cuts both ways
Advanced
Where approved code is implemented automatically, there may be no time to react to a bad vote; Beanstalk's attacker voted and immediately executed a proposal.3
Common mistakes
Assuming one person, one vote
Votes usually follow token balances.
Ignoring who holds the supply
A few wallets may control outcomes.
Skipping proposal text
Fee or treasury changes can hit value.
Forgetting local law
Rules on tokens differ by country.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Governance tokens are votes on protocol changes.
- Voting power usually follows tokens held.
- Low turnout magnifies big holders.
- Automatic execution speeds both good and bad changes.
- Token rules and status differ by country.
Frequently asked questions
Do governance tokens pay dividends?
Can I vote with tokens on an exchange?
Are governance tokens securities?
Further learning
- Fundamental Analysis
Valuing voting rights.
- Counterparty Risk
Protocol and holder risks.
- Trading Fees and Commissions
What fee votes change.
- Volatility
Market moves around votes.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- ethereum.org. Ethereum Governance (opens in a new tab) Checked .
- ethereum.org. Ethereum Glossary (opens in a new tab) Checked .
- European Securities and Markets Authority (ESMA). Decentralised Finance in the EU: Developments and risks (TRV, Oct 2023) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.