Governance tokens

In brief

Governance tokens are units of token-weighted voice. Compound’s COMP is a documented example: delegate, propose above a threshold, vote, then use a timelock. Many systems mix that with off-chain Snapshot polls and a council that can pause. Authority can be partial, advisory, or empty. Empirical studies document concentrated voting power and low participation in prominent systems. Bribery, vote buying, and temporarily acquired voting power are known attack vectors. This article does not say whether any token is a security.

What the token is

On Ethereum, a governance token is typically an ERC-20 (or similar) whose balance — or delegated balance — is read by a Governor contract. Compound’s v2 docs show the sequence: COMP holders delegate to themselves or someone else; an address above the proposal threshold can propose; voting uses balances recorded at the proposal snapshot; a successful proposal is queued and later executed through a Timelock.

Proposal threshold, quorum, voting delay, voting period, and timelock delay are protocol parameters, not a universal constitution. Compound’s docs expose accessors for these values and state that several can be changed through governance. Read the deployed contracts or a current interface before quoting live numbers.

Solana and other chains use different token programs and different governors. The economic idea — token-weighted votes — transfers; the interfaces do not.

Voting rights are whatever the contracts say

Typical knobs:

• Proposal threshold — how much delegated voting power, if any, is needed to start a vote.
• Quorum — the minimum participation or support required for a result to count; the exact definition differs by system. Compound Governor Bravo defines it as minimum votes in support.
• Majority rule — more for than against, among those who voted.
• Voting delay / period — time to discuss and vote.
• Timelock — delay after success before code runs, so people can exit or rally a cancel.
• Cancel rules — Compound: proposer or anyone if the proposer drops below the threshold.

Delegation is first-class. Compound: you delegate to one address; transfers adjust that delegate’s votes. ENS, in Batch C’s DAO article, is ethereum.org’s example of delegating to engaged members. Delegation raises turnout and can crown a few professional delegates.

Token-weighted voting is not one-person-one-vote. Temporarily acquired tokens have been used to pass a malicious proposal (EEA’s Beanstalk example). Compound records votes as of the proposal’s start (getPriorVotes), preventing the same tokens from being moved between accounts and counted repeatedly during the vote. That does not stop borrowing before the snapshot.

On-chain, off-chain, hybrid

On-chain. The vote is a transaction. If it passes, the same system can queue and execute calls. Compound Bravo is a widely copied on-chain template.

Off-chain. Snapshot describes itself as a voting platform for DAOs and protocols: strategies, no gas on the vote, off-chain and open source. A successful Snapshot proposal may still need a multisig or team to push the transaction. The token signaled; humans executed.

Hybrid. Off-chain temperature check, on-chain spend. Or on-chain vote plus a Pause Guardian. Compound’s v2 docs describe a community multisig that can disable selected actions but cannot disable repayment or redemption. That is a documented v2 design, not a claim about every deployment or its current signers. Emergency powers are governance too.

Vitalik’s 2022 essay argued DAOs are not corporations and that decentralization matters for some jobs (neutrality, censorship resistance) more than others. A token that only advises a foundation is doing a different job from protocol votes that authorize parameter changes.

Execution: code, timelocks, multisigs

Passing a vote is not spending the treasury unless something executes:

• the Governor calls the Timelock, which later calls the protocol;
• a Safe/multisig copies the outcome;
• nobody does anything (advisory).

If execution is a 3-of-5 multisig, the token is a signaling device. If execution is the Governor, the token is closer to an on-chain legislature — still limited by what the contracts allow those calls to change. An admin key sitting outside the Governor can veto the whole theater.

What holding a token is not

It is not automatically:

• legal ownership of the protocol or the company;
• a residual claim on profits or protocol assets unless separate rights explicitly provide one;
• a right to the team’s trademark, domain, or employment contracts;
• protection from a hard fork that ignores you;
• the same bundle of rights as a registered share.

Uniswap v2’s paper says a factory key can turn on a protocol fee. That key-gated switch does not itself establish any fee entitlement for UNI holders or any shareholder right.

Batch C’s DAOs article: a Wyoming statute does not make every Discord a company. Same here: a ticker does not make every holder a stockholder.

Concentration, apathy, markets for votes

Token-weighted systems give large holders or delegates more formal power. An empirical study of Compound, Uniswap, and ENS found voting rights concentrated among relatively few delegates and low participation in the observed Compound and Uniswap votes. That evidence describes those systems and dates, not every governance token.

Participation can be discouraged by transaction cost, attention cost, or a belief that one vote cannot change the result. Delegation and off-chain voting lower some of those costs, while also concentrating effective power in active delegates.

Votes can also be bought. Feichtinger et al. distinguish direct bribes to holders or delegates from protocols that rent voting rights without transferring the underlying tokens. Public bribery markets, private agreements, and borrowed voting power have different mechanics, but all require the governance design to consider who controls votes at the snapshot and for how long.

Sky, Uniswap, ENS — different jobs

• Compound / Bravo clones — on-chain parameter and market-listing votes with a timelock (this article’s detailed example).
• Sky (formerly MakerDAO) — Sky’s current executive-spell library uses the Sky name while still exposing both SKY- and MKR-labelled components. It identifies a SKY governance authority, parameter-changing spells, a pause authority, and a governance-security delay. Older materials may still say MakerDAO or MKR; check the component and date before treating either name as current.
• Uniswap — the v2 fee switch was optional and key-gated; the v2 paper does not create a fee right for UNI holders.
• ENS — delegation-heavy name-system governance (ethereum.org DAO page).

Powers differ. Always read that governor.

What this article is not saying

No token is recommended. No token is labeled a security or not a security. “Community owned” is a slogan until you map threshold, quorum, execution, and admin keys.