What is DeFi governance?
DeFi governance is the mechanism by which a decentralised protocol makes collective decisions. Instead of a CEO or board deciding, token holders vote on proposals — and the outcome is automatically executed by smart contracts.
How governance works
- A community member submits a governance proposal
- Token holders vote (1 token = 1 vote, typically)
- If the proposal passes the quorum and approval threshold, it is executed
- The smart contract automatically implements the change
Types of governance decisions
- Fee changes — adjusting protocol fees
- New features — adding new yield strategies or products
- Treasury spending — allocating protocol-owned funds
- Emergency actions — pausing the protocol if a vulnerability is found
- Parameter changes — adjusting risk parameters in lending protocols
Governance tokens
Governance tokens give holders voting rights. They are typically distributed to early users, liquidity providers, and community contributors. Examples: UNI (Uniswap), AAVE (Aave), CAKE (PancakeSwap).
Governance risks
- Whale dominance — large holders can outvote the community
- Voter apathy — low participation can allow bad proposals to pass
- Governance attacks — acquiring tokens to pass malicious proposals