Plain English
A governance token gives its holders the right to vote on decisions about the protocol that issued it — fee changes, treasury spending, parameter updates, sometimes contract upgrades. UNI, AAVE, MKR, COMP, LDO are well-known examples.
How it actually works
Voting happens on-chain (via Snapshot or smart contract ballots) or in forums. Each token = one vote, sometimes weighted by time-lock (veToken model). Proposals pass if they hit a quorum and majority. In practice, most governance is dominated by a few large holders (whales, founding team, large LPs) — even when the token is widely distributed.
What it means for you
Governance tokens have two value drivers: (1) cash flow rights (some entitle holders to fee revenue), (2) influence rights (you can vote yourself benefits if you hold enough). For HNW positions, governance can matter — owning enough to influence collateral parameters on a lending protocol is real leverage. For small holders, governance tokens are usually a directional bet on the protocol’s usage growth.
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Educational content only. Not investment, tax, or legal advice.