The Evolution of Token-Based Governance: Innovations & Risks in 2025

One token, one vote. It’s the simple and powerful idea at the heart of token-based governance. But as the world of DAOs has grown more complex, this simple model is being pushed to its limits. How is token-based governance evolving to meet the challenge?

Token-based governance represents a system where holders of a project’s token have the right to vote on proposals affecting the future of that project, framed as a grand ongoing experiment in decentralized decision-making.

This article will explore the evolution of token-based governance, examining the limitations of the simple one-token-one-vote model, the key innovations emerging to address these limitations, and the persistent risks that all DAOs must navigate. After nearly a decade of experiments since the 2016 DAO, we have enough data and lived experience to judge the model on its behavior, not its intentions. For those looking to participate, managing your governance tokens securely in a secure crypto wallet is the first step.

The Problem with One Token, One Vote

Voter Apathy: The Participation Crisis

In most DAOs, voter participation averages around 17%, with many DAO governance token holders remaining passive and uninterested in day-to-day governance. Leading DAOs can achieve turnout rates above 22% during major governance votes, but typically less than 10% of token holders actively vote in many DAOs. Participation spikes are observed during crises or contentious issues but tend to revert to this low baseline, reflecting a natural structural equilibrium rather than community apathy.

This low turnout is linked to factors such as voting costs, voter incentives, and token distribution concentration, where the top 20% of stakeholders hold about 78% of tokens, often driving the majority of voting participation. During periods of high voting costs, larger token holders become nearly twice as likely to vote compared to smaller holders, demonstrating disparity in engagement levels among token holders.

The reasons for apathy are multifaceted. Small holders have little economic incentive to become informed, facing serious collective action problems where relatively few voters become well-informed. Portfolio investors holding large numbers of positions find it difficult and costly to participate in the governance of all projects.

Involved protocols produce scores of propositions per month. It’s not possible to read, understand, and vote on everything without investing significant time. This cognitive burden prevents even well-intentioned participants from engaging consistently.

The Innovations: A More Nuanced Approach

Innovation 1: The Rise of Delegation

Delegation allows token holders to delegate voting power to more active and informed community members, solving voter apathy and allowing the emergence of professional DAO representatives.

Delegated governance allows token holders to delegate their voting power to trusted representatives. This model is useful in large DAOs where not all members have the time or expertise to vote on every issue. It streamlines decision-making by concentrating votes among informed delegates.

DV in DAOs is typically implemented via smart contracts, allowing delegation to be programmable, conditional, and publicly auditable. This enables features like real-time revocability, delegation caps, or slashing mechanisms to respond to delegate misbehavior.

However, even in systems with delegation, a small group of delegates handles most votes. Delegation flows cluster around a handful of recognizable names. Delegating monopolies form unintentionally because most holders want someone else to handle the workload.

Innovation 2: The veToken Model (Vote-Escrowed Tokens)

Pioneered by Curve Finance, the veToken model rewards long-term alignment. Token holders can lock tokens for a period, receiving more voting power. The longer you lock, the more your vote is worth, incentivizing long-term thinking.

The veToken mechanism converts liquid governance tokens into vote-escrowed tokens that cannot be traded during the lock period. A holder who locks tokens for four years might receive four times the voting power of someone who locks for one year. This time-weighting ensures those making long-term commitments have proportionally greater influence.

The model effectively aligns incentives between protocols and committed stakeholders. Long-term lockers are less likely to vote for extractive or short-term proposals because they have capital locked and exposed to long-term consequences. However, the model introduces complexity and accessibility concerns, particularly around opportunity costs in volatile markets.

Innovation 3: The Emergence of Sub-DAOs and Committees

Large DAOs are breaking down into smaller, specialized sub-DAOs or committees. A DAO might have a grants committee for funding community projects or a treasury committee for managing finances, allowing more efficient and expert-led decision-making.

Arbitrum DAO was the first to implement multi-layered governance, forming subDAOs to discharge particular tasks like grants or infrastructure building. This decomposes complex decisions into smaller chunks. Pyth DAO employs a specialized agency plus community oversight model, with governance councils enabling token holders to participate indirectly.

The sub-DAO model recognizes that not all governance decisions require full DAO attention. Routine operational decisions can be delegated to specialized committees with relevant expertise, while major strategic decisions remain with the broader token holder base.

Decentraland DAO demonstrates this flexibility with governance flexible to various decision types. Token voting approves simple asset updates while complex smart contract updates require more reputation-based consent. This tiered approach ensures appropriate oversight levels for different risk categories.

Innovation 4: Quadratic Voting and Alternative Mechanisms

Quadratic voting challenges whale dominance. You may vote as many times as you wish, but voting more than once costs exponentially more tokens. This reduces the disproportionate influence of large holders by making additional votes increasingly expensive.

The elegance of quadratic voting lies in its square root relationship between tokens spent and votes cast. To cast one vote costs one token, two votes cost four tokens, and three votes cost nine tokens. This means a holder with 10,000 tokens can only cast 100 votes, while 100 holders with 100 tokens each can collectively cast 1,000 votes, dramatically amplifying smaller participants’ voices.

However, quadratic voting faces implementation challenges, particularly around Sybil resistance. Without robust identity verification, users can circumvent the mechanism by splitting holdings across multiple wallets, limiting pure quadratic voting adoption.

The Persistent Risks

Governance Attacks: The Security Threat

A malicious actor could acquire large amounts of a protocol’s governance token and use voting power to attempt stealing money from the DAO’s treasury. These governance attacks can yield short-term gains at the expense of minority token holders. Governance visibility makes attacks visible but not always preventable.

DAO Governance. Source: Solow

Governance attacks have taken various forms. Some attackers propose transferring treasury funds to their own wallets, relying on voter apathy. Others change protocol parameters to benefit their positions at others’ expense. The most sophisticated attacks combine flash loan-funded token acquisition with same-block proposal and voting.

Defenses include time locks delaying proposal execution, quorum requirements demanding minimum participation thresholds, multi-sig overrides allowing trusted parties to veto malicious proposals, and token lock requirements forcing proposers to commit capital.

Regulatory Risk: Legal Uncertainty

The legal and regulatory status of DAOs and governance tokens remains very unclear. There is a risk that regulators could crack down on DAOs and hold token holders liable for organizational actions. This uncertainty creates hesitation among institutional participants and limits DAO growth potential.

Some jurisdictions treat DAOs as unincorporated partnerships, potentially exposing all token holders to unlimited liability for DAO actions. This is particularly concerning when DAOs operate services that might run afoul of securities laws, money transmission regulations, or financial services rules.

The regulatory landscape evolves rapidly. Some jurisdictions, like Wyoming, have created legal wrappers for DAOs, while others take hostile stances. This jurisdictional arbitrage creates complexity where DAOs must navigate different legal regimes simultaneously. The ability for users to onramp crypto safely without breaching any laws is heavily dependent on regulatory clarity.

The Centralization Paradox

Perhaps the most ironic risk is that innovations meant to improve DAO governance often introduce new forms of centralization. Delegation concentrates power in professional delegates, sub-DAOs create governance hierarchies resembling traditional corporate structures, and vote locking favors those with capital to lock.

Research shows that DAOs naturally trend toward oligarchic patterns early on, with a small set of delegates or whales disproportionately shaping decisions due to low voter participation and governance complexity. The tension between efficiency and inclusivity remains unresolved, as fully decentralized governance often suffers from lethargy or slow decision-making, while more centralized models perform better commercially but reduce community engagement.

The inevitable paradox between efficiency and decentralization still exists. Ultimate decentralization is unlikely, but current advancements in voting systems, delegations, and AI support have allowed collective decision-making to be more effective and inclusive. This represents a fundamental tension that may never be fully resolved.

Conclusion

Token-based governance is evolving from simple coin voting to more nuanced and sophisticated systems of delegation, vote-locking, and sub-DAOs. The DAOs that exist in 2025 understand that good governance comes through active participation, clear communication, and ongoing response to member needs.

The future will likely see continued experimentation with hybrid models combining different mechanisms for different decision types. High-stakes treasury allocations might require broad token holder approval, routine operational decisions could be delegated to committees, and emergency responses might involve multi-sig coordination. This layered approach acknowledges that no single governance mechanism can optimize for all situations.

The future of organizations is being built with DAOs. Use Digitap to track governance proposals of your favorite protocols and learn from best practices of the most innovative DAOs in the space. As the ecosystem matures, projects creating governance systems that are both effective and truly decentralized will set the standard for the next generation of organizations.

FAQ

What is token-based governance?
Token-based governance is a decentralized decision-making system in which holders of a project’s governance tokens have voting rights to influence protocol upgrades, fund allocation, and other governance proposals. Each token typically represents one vote, allowing the community to collectively guide the project’s future through transparent on-chain voting.​

What is a governance attack?
A governance attack occurs when a malicious actor acquires sufficient governance tokens (sometimes through flash loans or market purchases) to manipulate voting outcomes for personal gain. This can include passing proposals that divert treasury funds, change protocol parameters to favor the attacker, or otherwise compromise the DAO’s integrity, often exploiting low voter turnout and governance visibility.​

What is a veToken?
A veToken (vote-escrowed token) is a type of governance token model where holders lock their tokens for a period to gain proportionally greater voting power. The longer the lock period, the more voting influence a holder receives, incentivizing long-term commitment and aligning governance decisions with sustainable protocol health. veTokens are non-transferable during the lock period.​

What is delegation in a DAO?
Delegation in a DAO allows token holders to assign their voting power to trusted representatives or delegates. This helps solve voter apathy and engagement costs by concentrating votes in informed, active participants. Delegation is often on-chain via smart contracts with features like revocability and conditional limits but can lead to power concentration among a few delegates.​

Are DAOs legal?
The legal status of DAOs remains uncertain and varies by jurisdiction. Some regions treat DAOs as unincorporated partnerships exposing token holders to liability, while others like Wyoming, USA, have created legal structures recognizing DAOs as formal entities offering liability protection. Regulatory ambiguity persists, affecting institutional participation and enforcing the need for DAOs to adopt legal wrappers to mitigate risks.