Traditional Web2 companies function as centralized entities, with a core group of individuals controlling the direction, features and policies that drive the organization. The vision for Web3 is to put power back in the hands of users, content creators, and other contributors. But how can that be done in a fair and equitable way when users can be anyone, anywhere? Governance tokens provide a simple and elegant solution.

What are governance tokens?

Governance tokens are instruments used to vote on proposals to introduce changes to a decentralized organization, by giving users voting power proportional to the amount of tokens held for a particular project.

In DeFi, many of the apps you use every day use a decentralized governance structure, in order to separate the development team from the core product. This helps protect from malicious upgrades which might otherwise compromise the assets you entrust to the app or protocol.

Instead, proposals are generally suggested and discussed on project forums, and then voted for using onchain signatures from token holders. To avoid spam and ensure only users with financial stake in the product can vote, your voting power depends on the amount of tokens you hold or have been delegated. You can also delegate your tokens to other accounts who can then vote on your behalf.

Decentralized governance is enacted through smart contracts, where proposed changes are adapted into code and the result of the onchain vote will automatically be carried out based on consensus, once voting concludes. This can be used in many ways, such as: pushing a new upgrade; burning tokens; buying, selling, or dispensing grants from the treasury; and so on. 

Bridged governance tokens may not have voting rights

Governance usually takes place on one or two primary networks, where the smart contracts that process the votes have been deployed. That means that you are likely to find governance tokens that have been bridged to other networks but cannot be used for voting, even if they were converted using an official bridge! Learn more about the different utility of bridged and native tokens on Matcha Blog. 

Before you decide to participate in governance, make sure you know which network voting takes place on, and that any governance tokens you intend to vote with are on that network. If you find yourself holding tokens on the wrong network, you can use a cross chain swap on Matcha to exchange them for native governance tokens on the correct network.

Governance token standards

ERC-20 is the most common token standard used for governance tokens. This standard is widely adopted across Web3, making it easy for a new project to issue governance tokens and quickly achieve a liquid market where users can acquire or sell their tokens, as needed. 

Governance tokens may also be issued as NFTs using ERC-721 or ERC-1155 token standards. NFT-based governance is common in NFT projects such as Nouns DAO, and have the added benefit of providing an immutable record of votes cast by the NFT holder. 

How to vote in a DAO using governance tokens

Each decentralized organization has slightly different rules in place for governance. Below we’ll cover an example from Arbitrum, but each network and organization has different approaches so it is important to take time to look up and review the specific process for any DAO or protocol you plan to invest in.  

Voting on Arbitrum

ARB token holders can vote using tokens held in their wallet, or delegate their votes to other holders.

If you have a new idea you would like to turn into a proposal, you will need to first post it in the Arbitrum DAO governance forum where it can be discussed. 

You will then submit your idea for a ‘temperature check’ using Snapshot, an offchain poll that is used to gauge interest. There is a 500,000 ARB requirement for this stage. 

If your proposal passes the temperature check, you can then submit a formal proposal for an onchain vote using Tally. There is a 1,000,000 ARB threshold to do this.

If your onchain vote succeeds, the proposal will be acted upon by the smart contracts. If you don’t have enough ARB in your wallet to subit a proposal, other users may delegate their tokens to you to allow the proposal to be created.

Trading governance tokens

To ensure participation is kept decentralized and permissionless, most governance tokens are available to trade on DEXs like Matcha. You can search for the project you want tokens for using the search bar, and pick which chain you want them on. Alternatively, you can copy the token contract address from the official project website and paste it into the search bar, ensuring you get the correct token with full voting rights. 

On Matcha, you can trade for free, so you end up with the most voting power for your money. And, if you have a governance token you wish to sell, but don’t have any ETH for gas, you can still complete a swap using Matcha Auto which provides gasless transactions!

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