A governance token is a digital asset that grants voting rights in a decentralized autonomous organization. Token holders can vote on protocol changes, treasury allocation, and strategic decisions. The idea is that those with the most stake in the system should have the most say in its direction.
A governance token is different from a utility token, which grants access to a service, or a currency token, which is used for transactions. Governance tokens are about control. Hold a governance token and you can vote on proposals. If a proposal passes, the smart contract executes it automatically. Examples include Compound's COMP token, Uniswap's UNI token, and Aave's AAVE token.
A governance token has value because it controls valuable assets and generates fee revenue. Voting power is often proportional to token holdings. Someone holding 1 percent of tokens gets 1 percent of voting power. This creates plutocracy. Wealthy holders have disproportionate influence.
Some DAOs attempt to address this with quadratic voting, where voting power increases with the square root of tokens held, not linearly. But plutocracy is the dominant pattern. Governance tokens are a genuine innovation in allowing decentralized control. They're also speculative assets that people buy hoping the governance protocol will succeed and generate revenue.