The “internet of value” and the ecosystem known as Web3, built on blockchain technology, enable the creation of communities and organizations that are self-governed in a public, transparent, and secure manner.
This is made possible by blockchain technology and the use of Governance Tokens—a type of crypto asset issued with the purpose of democratizing and governing organizations known as DAOs (Decentralized Autonomous Organizations).
As a result, decision-making authority rests with platform users rather than with a small centralized group—as would be the case in a traditional company—which can lead to positive outcomes for participants.
In fact, this governance model has been evolving for several years, and many protocols have already adopted it to shape their future development.
Next, we will examine what a Governance Token is, its primary benefits, and the potential challenges associated with its use.
A Governance Token is a crypto asset that grants its holder the ability to participate in the governance processes of a given DAO.
As mentioned earlier, a DAO functions similarly to a traditional company, with the key difference being that it operates in a decentralized manner. Participants may be located in different parts of the world, yet they share a common objective.
But... how is it possible to reach agreement within a decentralized organization?
Thanks to the voting power granted by Governance Tokens.
These tokens enable holders to actively participate in building and improving the organization over time.
A user first creates a unique address that identifies them on a specific blockchain network. Through that address, they can acquire governance tokens associated with a DAO deployed on that blockchain.
Finally, by interacting with network programs (smart contracts), users can cast votes intended to approve changes within the organization based on proposals submitted by community members.
In a DAO, creators do not retain full control over the organization. Instead, decision-making authority is delegated to holders of the Governance Token, which may be distributed or sold in accordance with the protocol’s rules.
In conclusion, it is important to emphasize that this type of governance differs from the governance of the underlying blockchain itself. On the one hand, there are governance mechanisms at the blockchain network level (a topic we will explore in a future article).
Instead, a blockchain network can host multiple decentralized protocols, each with its own governance structure.
As discussed in previous articles, there are different types of tokens and multiple ways to classify them, including fungible and non-fungible tokens, cryptocurrencies, security tokens, platform tokens, and more.
In this context, the line between categories (Governance Token vs. Utility Token vs. Security Token) can become blurred. Due to their programmability, certain tokens may acquire characteristics that resemble securities, as they can share key features with traditional company shares.
On the other hand, unlike a utility token, a Governance Token grants holders the right to vote on decisions and propose changes.
But... can voting power itself be considered a form of utility?
If the token’s purpose is solely to grant voting rights, it could be considered a utility token and, at the same time, a governance token.
Furthermore, if token holders receive a monetary benefit—whether directly or indirectly—in addition to having voting rights, the token could potentially be classified as both a security token and a governance token.
This latter classification would imply that the issuance and registration of these tokens would fall under the supervision of the financial market regulatory authorities in each jurisdiction.
In a separate article, we will examine how to distinguish between a utility token and a security token.
Difficulties in properly classifying these tokens could create several legal and regulatory challenges for both holders and issuers, as the applicable legislation may vary depending on how the token is categorized.
However, since these are decentralized protocols, token holders—or even token issuers—may not be physically identifiable. As a result, they could potentially avoid certain regulatory consequences (except for those operating within jurisdictions that prohibit interaction with such protocols).
We already know that Governance Tokens are distributed and used for voting, but how are they used to reach agreements?
DAOs typically rely on specialized platforms for governance communication and voting.
Several protocols—including Uniswap, Aave, Compound, Decentraland, Optimism, and Arbitrum—use external platforms that streamline the governance process by providing spaces to debate proposals and suggest improvements.
One of the most widely used DAO governance DApps is Snapshot.
Platforms such as Snapshot function as decentralized API-based tools that allow users to cast votes and interact with the blockchain through smart contracts.
They enable communication among protocol participants without requiring high gas fees associated with on-chain network usage.
It is important to note that if protocols become “neutralized” intermediaries, they should implement mechanisms that allow on-chain communication and help prevent censorship.
Afterward, a voting period begins. The voting process itself typically involves the user signing a specific transaction that records their vote on-chain.
Once a majority is reached or the voting period concludes, the proposal that receives the most votes from the community will be implemented within the project.
As discussed throughout this article, one of the main advantages of Governance Tokens is their ability to empower users—granting them greater control and rights within the organization in which they participate.
Participants move from being passive observers to actively contributing to the protocol’s continuous improvement, as decentralized governance promotes greater fairness and transparency.
This fosters greater engagement among participants, and with more people involved, innovative and valuable ideas are more likely to emerge—ideas that might not have surfaced otherwise.
On the other hand, the programmability of tokens allows them to include additional features—such as dividend distribution or any other function we can design—enhancing the operational efficiency of a decentralized organization.
On the downside, the flexibility in how these tokens can be programmed—along with the evolving regulatory environment—can make it difficult to clearly determine the requirements for issuing and acquiring them.
This may increase advisory and consulting costs for protocols that aim to organize themselves through Governance Tokens.
Decentralization may also lead to uncertainty in the protocol’s direction and, in some cases, could result in a loss of user trust.
We should also keep in mind that decisions based on majority consensus often take longer to implement than those made centrally by a smaller group.
Finally, since these are open protocols, there is a possibility that a significant portion of the Governance Token supply could be acquired by a small group of users, potentially resulting in more centralized control of the protocol.
Let’s not forget that the impact of these disadvantages may vary depending on the economic models and governance rules of each protocol.
Governance Tokens have an uncertain regulatory future.
At present, Governance Tokens are generally not classified as financial instruments. However, in certain cases—such as MKR (MakerDAO)—they may be considered security tokens. In such situations, the MiCA Regulation, which governs crypto-assets that are not traditional financial instruments, may apply.
Although there is currently no specific law governing this type of token, DeFi projects (including DAOs) developed by companies within the European Union are subject to regulatory oversight and must comply with KYC/AML (Know Your Customer / Anti-Money Laundering) requirements.
It is therefore necessary to establish a clear taxonomy that allows these tokens to be properly classified and, consequently, appropriately regulated.
In short, Governance Tokens enable a paradigm shift in the organizational structure of many entities, making it possible to create entirely new business models.
Furthermore, the flexibility offered by this ecosystem allows these structures to adopt diverse characteristics that further enhance their potential.
While decentralized governance is not necessarily suitable for everyone, and many organizations should continue operating under traditional structures to remain competitive, those who understand how to leverage technology to bring users closer and transform them into active participants can build strong communities that grow exponentially as a result of widespread engagement and satisfaction.
However, it is crucial to build these organizations on sustainable economic and social models to avoid failures like the one experienced by the Terra protocol.
We must not overlook that, from both a legal perspective and a long-term sustainability standpoint, it is essential to seek proper guidance when working with Governance Tokens.
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Objective:
1.104.596,44 €
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