A governance derivative is a specialized financial instrument, typically a token or smart contract-based claim, that separates the voting rights associated with a governance token from its underlying economic value. This decoupling allows token holders to trade these rights independently. For example, a holder of a governance token like UNI or COMP could sell the future voting power of their tokens for a specified period while retaining ownership of the tokens themselves, effectively creating a market for influence within a decentralized autonomous organization (DAO).
LABS
Glossary
Governance Derivative
A governance derivative is a financial instrument, such as a tokenized vote or prediction market share, that derives its value from the outcome of a governance decision or process.
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definition
DEFINITION
What is a Governance Derivative?
A governance derivative is a financial instrument that decouples the voting power of a token from its economic value, allowing the two rights to be traded separately.
The primary mechanism involves locking the underlying governance tokens into a smart contract vault. This vault then issues two distinct derivative tokens: one representing the voting power (often a non-transferable or time-bound vote token) and another representing the economic stake (a tokenized claim on the locked assets). This structure enables sophisticated strategies such as vote lending, where passive holders can earn yield by renting out their voting rights to active participants, and vote delegation markets, where experts can amass voting power without the capital outlay of full token ownership.
Governance derivatives address critical issues in DAO governance, including voter apathy and low participation. By creating a financial market for votes, they incentivize informed participation from those with the greatest stake in specific outcomes. However, they also introduce risks such as vote buying, potential centralization of power among wealthy actors, and increased protocol complexity. Their design is a key topic in cryptoeconomics, balancing the need for robust, decentralized decision-making with efficient capital allocation.
how-it-works
MECHANICS
How Governance Derivatives Work
Governance derivatives are financial instruments that separate the economic rights of a governance token from its voting power, creating a market for influence and risk management.
A governance derivative is a financial instrument that decouples the voting rights of a governance token from its underlying economic value. This is achieved by creating a synthetic asset, often through a smart contract, that represents either the voting power or the economic stake of the original token. The most common forms are vote delegation tokens, which confer voting rights without ownership, and vote escrow tokens, which lock the underlying asset to mint a time-weighted voting token. This separation allows for the creation of markets where governance influence can be traded, hedged, or leveraged independently of the token's market price.
The primary mechanism involves a user depositing their governance tokens, such as UNI or COMP, into a specialized smart contract. In return, the contract issues a derivative token. For example, a vote delegation market might issue a vUNI token that grants voting rights while the original UNI remains locked. Alternatively, a vote-escrow model like Curve Finance's veCRV locks tokens for a set period, minting a derivative with voting power proportional to the lock duration. These derivative tokens can then be freely traded on secondary markets, allowing buyers to acquire governance influence without a long-term capital commitment and sellers to monetize their voting rights.
This financialization enables several key use cases: delegated voting for professional governance, vote lending for yield generation, and governance risk hedging. A protocol might use derivatives to ensure a stable, knowledgeable voter base by incentivizing long-term lock-ups. Conversely, a token holder concerned about a contentious vote could short a governance derivative to hedge against the political risk of an adverse outcome. However, it introduces complexities like vote fragmentation, where influence becomes concentrated among derivative holders rather than true stakeholders, and empty voting, where entities vote with borrowed influence without economic exposure to the consequences.
key-features
MECHANISM OVERVIEW
Key Features of Governance Derivatives
Governance derivatives are financial instruments that separate the economic rights of a token from its voting power, enabling new markets for influence and risk management in decentralized protocols.
01
Vote-Governance Separation
The core mechanism that unbundles a governance token into two distinct assets: a vote token (carrying voting rights) and a governance-free token (carrying only economic value). This separation allows token holders to sell their voting influence without selling their underlying financial stake, or vice-versa.
02
Delegated Voting Markets
Creates a marketplace where voting power can be rented or delegated for a fee. Entities seeking protocol influence (e.g., projects, DAOs, investors) can acquire votes without holding the underlying capital, while passive holders can earn yield by leasing out their governance rights.
- Example: A protocol upgrade proposal's supporters might borrow votes to reach a quorum.
03
Hedging Governance Risk
Allows stakeholders to hedge against the outcome of governance decisions. A user who holds a token but disagrees with a proposed change can short the vote token or buy insurance-like derivatives, protecting their economic position from adverse governance results.
04
Liquidity for Locked Tokens
Provides liquidity for tokens that are vesting or staked in governance contracts. By minting a derivative representing the future voting power of locked tokens, holders can access capital today while maintaining their long-term commitment to the protocol.
05
Sybil Attack Resistance
Can increase the cost of mounting a Sybil attack (creating many fake identities to sway a vote). By creating a market for votes, the price to acquire a decisive majority reflects its true economic value, making large-scale manipulation prohibitively expensive.
06
Price Discovery for Governance
Establishes a market-determined price for protocol influence. The trading activity of vote tokens reveals the monetary value the market assigns to controlling a specific percentage of voting power, providing a transparent signal of governance demand.
primary-use-cases
GOVERNANCE DERIVATIVE
Primary Use Cases and Motivations
Governance derivatives are financial instruments that separate the economic rights of a token from its voting power, enabling new strategies for capital efficiency, risk management, and market participation.
01
Vote Delegation & Liquidity
Token holders can delegate their voting power to experts or institutions while retaining the economic benefits (e.g., staking rewards, fee accrual). This creates liquid markets for governance influence, allowing:
- Professional delegates to amass voting power without capital lockup.
- Liquid staking derivatives (like stETH) to become governance-enabled.
- Increased voter participation by incentivizing delegation.
02
Hedging & Speculation
Traders can take synthetic positions on the outcome of governance proposals without owning the underlying asset. This allows for:
- Hedging governance risk: A protocol user can short a governance derivative to offset the risk of a detrimental vote.
- Pure speculation: Betting on the passage or failure of proposals that affect token value.
- Volatility trading: Capitalizing on price swings around major governance events.
03
Capital Efficiency
Unlocks the value of locked governance tokens. Holders can use derivatives as collateral in DeFi protocols while maintaining their voting rights, effectively creating a non-dilutive loan. This solves the liquidity vs. governance dilemma, enabling:
- Borrowing against a governance position without selling.
- Using voting power in yield-generating strategies elsewhere.
- Reducing the opportunity cost of participating in governance.
04
Sybil Resistance & Vote Consolidation
Mechanisms like vote-escrow models (e.g., Curve's veCRV) are a primitive form of governance derivative, locking tokens for amplified voting power. Advanced derivatives can enhance this by:
- Creating soulbound voting tokens that are non-transferable but derived from liquid assets.
- Aggregating fragmented voting power into consolidated blocs for more decisive governance.
- Making Sybil attacks economically impractical by tying real economic stake to voting influence.
05
Example: Olympus DAO's gOHM
gOHM is a governance derivative of OHM, representing a fixed quantity of indexed treasury assets. It separates governance rights from rebasing economics.
- Governance Power: 1 gOHM = 1 vote, regardless of OHM supply changes.
- Economic Value: Backed by the DAO's treasury, accruing value independently.
- Use Case: Enables stable voting power and simplifies integration as non-rebasing collateral in other DeFi protocols.
examples
GOVERNANCE DERIVATIVE
Examples and Implementations
Governance derivatives are implemented through various mechanisms that separate voting power from underlying assets, enabling new forms of participation and risk management.
02
Liquid Staking Derivatives (LSDs) for Governance
Protocols like Lido and Rocket Pool issue liquid staking tokens (stETH, rETH) that represent staked ETH. Some DAOs, such as Aave, have experimented with using these derivatives as governance tokens, allowing users to participate in governance while their underlying asset remains staked and earning yield. This merges DeFi yield with governance rights.
03
Delegated Voting Platforms
Services like Tally and Sybil create on-chain delegations, allowing token holders to delegate their voting power to experts or representatives without transferring custody. This is a form of social derivative, where influence is derived from reputation and delegated authority rather than a direct financial instrument.
04
Governance-as-a-Service (GaaS) & Meta-Governance
Entities like Index Coop or Yearn Finance hold governance tokens in their treasuries. They create derivative products (e.g., index tokens) and use their underlying voting power to participate in the governance of other protocols on behalf of their token holders. This aggregates and professionalizes governance influence.
06
NFT-based Voting Power
Protocols like Uniswap (with its "Delegation NFT" for past airdrop recipients) and Nounish DAOs use non-fungible tokens to represent unique, non-divisible voting rights. This creates a derivative where governance power is tied to a specific, tradable digital asset distinct from a fungible token, often used for identity-based or reputation-based governance.
security-considerations
GOVERNANCE DERIVATIVE
Security and Economic Considerations
Governance derivatives are financial instruments that separate the voting power of a governance token from its economic value, creating new markets for influence and risk management.
01
Core Mechanism: Tokenizing Voting Rights
A governance derivative is created by locking a base governance token (e.g., UNI, COMP) into a smart contract to mint a new token representing its voting power. This separates the voting right from the economic stake, allowing each to be traded independently. The derivative holder gains temporary voting authority, while the underlying asset holder retains exposure to the token's price and potential yield.
- Example: Lock 100 UNI to mint 100
vUNI(vote-UNI).vUNIcan be sold or delegated, while the locked UNI remains as collateral.
02
Primary Use Cases & Market Dynamics
These instruments enable sophisticated strategies around protocol governance.
- Vote Trading: Entities can acquire voting power without long-term price exposure, useful for one-off proposals.
- Delegated Voting Markets: Voters can rent out their voting rights for a fee, professionalizing governance participation.
- Hedging & Speculation: Traders can hedge against governance-related volatility or speculate on the outcome of specific votes.
- Improved Liquidity: Separating votes from capital allows both assets to find more efficient market prices.
03
Security Risks & Attack Vectors
Decoupling voting from economic stake introduces novel security challenges.
- Vote Manipulation: Concentrated derivative holdings can facilitate governance attacks or vote buying, where an attacker cheaply amasses voting power to pass malicious proposals.
- Collateral Risk: If the derivative is debt-based, liquidations could trigger unexpected loss of voting rights.
- Smart Contract Risk: The locking contract becomes a critical, high-value attack surface for exploits.
- Sybil Resistance Erosion: Derivatives can circumvent token-weighted Sybil resistance measures by pooling votes.
04
Economic & Game-Theoretic Impacts
Derivatives alter the fundamental incentives within a governance system.
- Principal-Agent Problems: Voters with no 'skin in the game' (derivative holders) may vote contrary to the long-term health of the protocol.
- Voter Apathy & Professionalization: Can reduce participation from small token holders who sell voting rights, potentially centralizing influence among large derivative buyers.
- Pricing Governance: Creates a market price for a vote, which can signal the perceived value or contentiousness of governance decisions.
- Time-Bound Incentives: Short-term rental of votes may prioritize immediate gains over sustainable protocol development.
05
Real-World Examples & Implementations
Several protocols have pioneered governance derivative models.
- Paladin Protocol: Offered
wCOW(wrapped Concentrated Voting Power) for Compound, allowing users to delegate or sell voting power from locked COMP. - Element Finance: Introduced Principal Tokens and Yield Tokens, which can be extended to separate governance rights from underlying assets.
- Futures Markets: Prediction markets like Polymarket allow betting on governance outcomes, functioning as a price discovery mechanism for vote results.
06
Design Considerations for Protocols
Protocols can architect their governance to mitigate derivative-related risks.
- Time Locks & Commitment: Implementing a vote-lock period (e.g., Curve's
veCRVmodel) ties voting power to long-term token commitment, making derivative attacks more costly. - Whitelisting & Caps: Restricting which contracts can participate in governance or capping derivative-influenced votes.
- Transparency & Monitoring: On-chain analytics to track the concentration and flow of voting power from derivative contracts.
- Futarchy Elements: Formally integrating prediction market outcomes into governance execution to align derivative markets with protocol goals.
MECHANICAL COMPARISON
Governance Derivative vs. Traditional Governance Token
A structural comparison of the core properties and mechanisms of governance derivatives and traditional governance tokens.
| Feature | Governance Derivative | Traditional Governance Token |
|---|---|---|
Underlying Asset | A claim on the governance rights of a locked token (e.g., veToken, staked LP position) | The native protocol token itself |
Voting Power Source | Derived from the quantity and lock duration of the underlying collateral | Directly proportional to token balance |
Liquidity & Transferability | Typically non-transferable NFT or SFT; liquidity is in the underlying asset | Fungible and freely transferable on secondary markets |
Key Financial Mechanism | Yield amplification, fee sharing, or bribes for vote direction | Staking rewards or protocol revenue distribution |
Primary Utility | Financialization of governance influence (vote-selling/bribing) | Direct protocol governance and potential speculation |
Governance Delegation | Often allows for delegation of voting power without transferring the asset | Requires direct token transfer or explicit delegation functions |
Example Implementations | veCRV, veBAL, vlAURA | UNI, COMP, MKR |
GOVERNANCE DERIVATIVE
Frequently Asked Questions (FAQ)
Essential questions and answers about governance derivatives, a novel DeFi primitive that separates the voting power of a token from its economic value.
A governance derivative is a financial instrument that separates the voting rights of a governance token from its underlying economic value, allowing each component to be traded or utilized independently. It works by locking the original token (e.g., UNI, COMP) into a smart contract, which then mints two new tokens: a vToken (or governance token) that holds the voting power, and a bToken (or economic token) that represents the claim on the locked assets' financial value, such as fee accrual or staking rewards. This enables governance power to be leased, sold, or delegated without transferring the economic stake, creating a liquid market for influence.
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