Governance tokens: what they are and how they work

What is a governance token?

There are several types of tokens in the crypto industry:

Utility tokens;
Investment tokens;
Payment tokens;
Stablecoins pegged to the value of a currency or asset;
Governance tokens.

What is a governance token?

A governance token is a type of crypto asset that allows its holder to influence decisions concerning the development of a blockchain project.

As a rule, a governance token is part of the economy of a DAO* — a decentralized autonomous organization. This association with a DAO distinguishes a governance token from other types of digital assets, such as utility or payment tokens.

* DAO (Decentralized Autonomous Organization) is a decentralized autonomous organization whose participants jointly manage a project without a single centralized decision-making authority. The rules governing a DAO are typically encoded in smart contracts, while key decisions are made through participant voting. Voting rights and voting power may be determined by the number of governance tokens held by a participant.

Note: the same token can serve multiple functions simultaneously, including governance and utility. In other words, a governance token does not necessarily have to be limited solely to governance and may serve a wide range of purposes.

One of the first protocols to introduce a mechanism for creating governance tokens was Dash. MakerDAO was also one of the first platforms to implement the concept of a decentralized autonomous organization. In 2017, it launched one of the first governance tokens, MKR, designed specifically for protocol governance.

Governance tokens gained popularity during the rapid expansion of the decentralized finance (DeFi) market. Many well-known governance tokens, such as UNI, COMP, AAVE, SUSHI, CAKE, and others, were created during the DeFi boom.

How does a governance token work?

One of the main features of governance tokens is that they grant their holders the right to participate in ecosystem governance, but only within the specific project to which the token belongs.

Using governance tokens, holders can participate in voting on proposals put forward by the project team and thereby influence the future of the entire ecosystem.

Examples of such proposals may include:

Technical protocol upgrades;
Appointment of validators who process transactions and produce blocks;
Allocation of funds from the project's treasury;
Key protocol parameters, such as loan interest rates, collateral requirements, liquidation thresholds, transaction fees, and others;
Addition of new assets or liquidity pools;
Changes to the voting rules themselves.

Although a governance token grants its holders certain rights and privileges, at least two features should be taken into account:

Voting power generally depends on the number of governance tokens held by the holder. In addition, some protocols may only count governance tokens that are locked in staking*;
The powers of governance token holders may be limited by rules that vary from one protocol to another.

* Staking is a mechanism in which token holders lock their tokens for a certain period or deposit them into a special smart contract. In blockchains based on the Proof-of-Stake consensus mechanism, staking is used to participate in maintaining the operation and security of the network in exchange for rewards. In DeFi protocols, staking can also be used to generate income, obtain additional privileges, or gain the right to participate in project governance.

In addition, governance tokens are not without risks. One such risk is the significant influence that a small group of governance token holders may have over the development of a protocol due to a high concentration of crypto assets in their wallets.

Examples of governance tokens

According to CoinMarketCap, as of September 2026, there are more than 200 governance tokens, but only eight of them have a market capitalization exceeding $500 million.

1. Uniswap (UNI)

UNI is the leading governance token on the cryptocurrency market, with a market capitalization exceeding $5.5 billion as of September 2026. By this metric, UNI ranks among the twenty largest digital assets.

The UNI governance token was launched in September 2020 and was initially distributed through an airdrop to early users of the Uniswap exchange.

UNI is not limited to the functions of a governance token. In addition, holders can use the UNI governance token, for example, to create and maintain liquidity.

Over the past year, the price of the UNI governance token has risen by 17% to $8.9. However, this is still below UNI's all-time high (ATH) of around $45, recorded in May 2021.

2. Aave (AAVE)

AAVE is the governance token of Aave, a leading decentralized finance lending platform.

AAVE is the second-largest governance token, with a market capitalization of nearly $2.3 billion. The AAVE governance token gives its holders the right to:

Vote on AIPs (Aave Improvement Proposals);
Determine risk parameters (loan-to-value (LTV) ratios and liquidation thresholds) for new tokens on the lending platform;
Manage the protocol treasury.

Despite the popularity of both the platform and the governance token itself, AAVE has shown negative price dynamics: the asset's value has fallen by more than 44% over the past year to $148. Since reaching its ATH of $666 in May 2021, the AAVE governance token has lost more than 77% of its value.

3. Sky (SKY)

SKY, formerly known as MKR, was launched in 2017 and is one of the first governance tokens. The platform behind the SKY governance token was founded back in 2014 under the name MakerDAO. However, in 2024, the platform was renamed Sky Protocol.

One of the main functions of the SKY governance token is protocol governance, allowing its holders to vote on key issues such as:

Adding new collateral assets;
Changing risk parameters for collateral (LTV and liquidation thresholds);
Setting fees and rates for the protocol's native DAI stablecoin;
Selecting oracles* that provide price data to the Sky ecosystem;
Protocol upgrades.

* Oracle is a service that transmits information from external sources to a blockchain, since smart contracts cannot directly retrieve such data on their own. Oracles can, for example, provide up-to-date cryptocurrency exchange rates, prices of other assets, event outcomes, or other information.

As of September 2024, the price of the SKY governance token is $0.078, with a market capitalization of $1.84 billion. Over the past year, the asset's price has increased by more than 20%.

4. Worldcoin (WLD)

Even though WLD appeared only in 2024, the asset ranks among the five largest governance tokens by market capitalization, which exceeds $2 billion as of September 2026. However, unlike some of the governance tokens on this list, WLD has shown negative price dynamics: the asset has lost more than 55% of its value over the past year, falling to $0.54.

WLD is the native governance token of the Worldcoin ecosystem, which was the first to introduce a biometric user verification mechanism. The WLD governance token gives holders the right to participate in key decisions concerning the development of the protocol.

However, WLD is also a payment token, as it is used to pay network fees and distribute grants for identity verification.

5. Dash (DASH)

Dash is the only privacy cryptocurrency that also has governance token functions.

DASH is not a governance token in the conventional sense. Broadly speaking, DASH is a privacy-focused payment cryptocurrency that also performs the functions of a governance token.

As of September 2026, the market capitalization of the DASH cryptocurrency stands at $834 million, although it remains significantly below ZEC and XMR by this metric.

Nevertheless, DASH ranks among the five leading governance tokens, and amid the growing popularity and positive performance of privacy cryptocurrencies, the asset's value has increased by more than 200% over the past year alone, reaching $64.8.