The default definition of a governance token is a token that can be used to vote on decisions that affect an ecosystem.
Development teams create governance tokens to allow token holders to help shape a protocol’s future. Holders of governance tokens have the ability to influence project decisions, for example, proposing new features and changing the governance system.
Due to smart contracts, many of the changes proposed, vetted, and voted on through on-chain governance are automatically applied. Other times, the project team is responsible for applying the changes or hiring someone who will.
The advocates of governance token systems argue that the tokens allow for user control, which is true to the original cryptocurrency ideals of decentralization and democratization. Decentralized autonomous organizations (DAOs) are organizations that let their users control the development of their systems.
Among well-known governance tokens is Maker (MKR). Those who own this token can vote on issues relating to the decentralized finance protocol (DeFi) that the decentralized stablecoin DAI runs on.
Holders of MKR can vote to change the economic rules that govern the decentralized lending that keeps the price of DAI stable, for instance. As this text was being written, MKR holders were voting on raising the protocol’s debt ceiling.
Reference:
Baker, P. (2021, November 25). Governance Tokens, Do They Threaten Blockchain? BairesDev. https://www.bairesdev.com/blog/governance-tokens-they-threaten-blockchain/
