Why Your Governance Token is a Terrible National Currency

Governance tokens derive value from speculative protocol fees, not monetary policy. This creates wild price swings incompatible with stable unit-of-account functions.

• Example: UNI governance token price can swing ±20%+ on a major proposal vote.
• Contrast: A currency needs predictable value for salaries and contracts, not governance-driven speculation.

Deep liquidity exists only on centralized exchanges (CEXs) like Binance, not in the real economy. This creates a fragile monetary base.

• On-chain reality: Slippage for a $1M sale of a top-20 governance token can exceed 5-10% on DEXs.
• Systemic risk: Reliance on CEX custodians reintroduces the single points of failure that crypto aims to eliminate.

Monetary policy controlled by token voters is inherently unstable and prone to manipulation, unlike independent central banks.

• Attack surface: A well-funded entity can acquire >51% of circulating supply to vote for inflationary minting, destroying currency value.
• Precedent: Early MakerDAO MKR governance battles show how critical parameters become political footballs, not sound policy.

The Problem: A single token for governance and backing a stable asset creates reflexive risk. The Solution: DAI is the stable, censorship-resistant currency. MKR is the volatile governance token that absorbs system risk. This separation allowed DAI to become a $5B+ decentralized reserve asset while MKR governs risk parameters.

The Problem: UNI token had zero cashflow rights, making it a pure governance token with speculative value. The Solution: The fee switch governance vote activated protocol revenue sharing. This creates a direct, sustainable value accrual mechanism for UNI holders, moving it towards a productive asset rather than a pretend currency.

The Problem: COMP and AAVE tokens lack the stability or scalability to be currencies. The Solution: Their value is derived from governing multi-billion dollar lending markets. Token utility is hyper-specific: adjusting risk parameters, listing assets, and directing treasury funds. This creates real, defensible utility without monetary pretensions.

The Problem: Creating a scalable, decentralized stablecoin requires a flexible but disciplined monetary policy. The Solution: FRAX is the stablecoin, backed by a hybrid collateral-algorithmic design. FXS is the governance and value-accrual token. The protocol uses on-chain metrics (like the CR) to autonomously adjust policy, preventing governance from making hyper-political monetary decisions.

Governance tokens exhibit extreme price volatility (often 50-80% monthly swings) driven by speculation and governance events. This makes them useless as a unit of account or stable store of value, the core functions of money.\n- Unit of Account: No merchant prices goods in UNI or COMP.\n- Store of Value: Speculative asset ≠ reliable savings instrument.

Even major governance tokens lack the deep, stable liquidity of established currencies or stablecoins. Large transactions incur massive slippage, destroying their utility as a medium of exchange.\n- Concentrated Liquidity: TVL is often in farming pools, not payment rails.\n- Slippage Cost: A $1M swap can easily see 5-15%+ price impact versus <0.1% for ETH/USDC.

Monetary policy must be predictable and credibly neutral. A token whose supply and utility can be altered by a multisig or token vote introduces catastrophic political risk. This is the opposite of hard money.\n- Political Risk: DAO can vote to mint more tokens or change staking rewards.\n- Lack of Neutrality: The governing body is a known, targetable entity.

Using a volatile governance token as collateral in DeFi (e.g., MakerDAO, Aave) creates systemic risk. Price oracles become critical attack vectors for protocol insolvency, as seen with MKR in 2020.\n- Reflexive Loops: Price drop → forced liquidations → further price drop.\n- Oracle Delay: Even Chainlink has latency, enabling flash loan attacks.

UNI and COMP are prime examples. Their primary utility is fee capture and voting—equity functions. Their transaction volume is negligible versus their trading volume, proving they are not used for payments.\n- UNI: <0.1% of volume is for goods/services.\n- COMP: Value tied to protocol revenue, not monetary network effects.

Money is a separate protocol layer. Successful examples are Ethereum (ETH) for base-layer security/settlement and stablecoins (USDC, DAI) for daily transactions. Governance tokens should optimize for protocol equity, not monetary fantasy.\n- ETH: Credibly neutral, high liquidity, predictable issuance.\n- Stablecoins: Solve unit of account and store of value problems.