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In this article, we will look at what governance tokens are and everything you need to know about them.
Tokens are one of the main highlights in the cryptocurrency and web3 landscape. Currently, a major share of the conversations concerning tokens reviews the classifications of fungible and NFTs.
What is a Governance Token?
Governance tokens are crypto tokens that give you voting power on a blockchain and cryptocurrency project.
They represent the primary utility token of Decentralised finance protocols since they share powers and rights with users through tokens.
With the possession of governance tokens, you have the power to make crucial decisions with other holders regarding various crypto projects.
They are usually given to active users for their loyalty and participation in the community. As earlier mentioned, the holders of the governance token vote on the central issues to make sure there is a strong development of the projects. Usually, voting takes place through smart contracts, and the results are carried out automatically.
One of the first governance tokens in existence was provided by an Ethereum-based DAO, MakerDAO.
The Maker Protocol is controlled by MKR, which are its governance token holders. One MKR token gives you one vote, and the decision with the highest votes is chosen.
People who own these tokens have the power to vote on various issues, such as appointing members of the team, making changes to fees, and making new rules and regulations. The objective is to make sure there is stability, transparency, and order in MakerDao’s stablecoin.
We will get into many other governance tokens in a bit.
The Importance of Governance Tokens
The significance of a governance token becomes clearly visible because it lays a foundation for a functional distribution of power.
Nonetheless, when we think of why governance tokens are so valuable, we can refer to the more profound importance of a governance token.
One significance of a governance token I want to point out is that it gives every participating member a voice in decentralised ecosystems.
When it comes to making hard decisions and choices when it comes to a project, governance tokens help a lot.
Instead, developers can communicate and get responses from the community to pick out any disparity in the project. This makes it easier for developers to understand why specific changes are being introduced or the rationale for projects like fund management and partnerships.
Also, because governance tokens are an essential aspect of the decentralised web, they are regarded as valuable. Additionally, only people who have invested in a particular platform can be included in the decision-making process relating to governance tokens.
These tokens can be seen as company shares, giving you multiple company benefits when owned.
Merits of Governance Tokens
1. Effective Development:
Developers must remain involved in the decision-making process. Still, governance tokens make it easier for them to find legit answers and implement the changes seen as necessary by their community.
2. Decentralisation:
Without governance tokens, cryptocurrency and blockchain projects will be nothing more than smart contracts with no control. Developers can introduce decentralisation in web3 projects, mainly because of the integration of governance tokens. Decentralisation is the main objective digital assets achieve, so it is best to include them in the best way possible.
3. A Hands-On Community:
Due to governance, users have a purpose and a way to steer a project’s path and direction actively.
4. Opportunities To Collaborate:
Because governance tokens can be used for voting, this opens the floor for shared discussion, which opens the floor for collaboration. A direct vote on an issue encourages users to collaborate with other community members and reach a decision together. Because of this, governance forums are seen as the second-best community channel after Twitter.
Demerits of Governance Tokens
1. In a situation of voting, there are always people with selfish and malicious intents, and holders of governance tokens are not left out. During a voting process, there is the possibility of people with selfish interests which does not benefit the community or the project itself.
2. There is also the issue of the absence of accountability. When a decision made after the voting process goes wrong, a lot of blame is thrown around, and there is no central person who takes responsibility.
3. Crypto whales are also a big challenge for governance protocols. Cryptocurrency Investors usually have the fear that one day, through sheer financial power, the whale will take over most of the tokens and solely create proposals and reach a selfish and malicious decision, which is one of the biggest fears of a blockchain democracy.
Examples of Governance Tokens
1. MKR:
MKR is the native token of MakerDAO. This is one of the top web3 lending platforms. Token holders can accumulate interest fees on loans on the platform and vote on accepted collateral types for loans.
Holders of MKR can also vote on proposals for changing the economic rules in MakerDAO governance.
2. UNI:
This is a token of the Uniswap protocol. Holders of the UNI token can vote on proposals and make decisions concerning the future of the Uniswap protocol. Developers, however, can shape the project’s future directions, which means there is more centralisation than with other protocols.
3. $YFI:
$YFI is a native token of Yearn Finance. The main goal of the developers behind the YFI governance token is to focus on giving control to the community. Additionally, the governance token also implied a clear emphasis on possibilities for creating a self-sufficient DAO.
Conclusion
The significance of these tokens cannot be overemphasised. Without them, the developers wouldn’t have the right to brag about how decentralised and better their platform is compared to CEXs, as they are the main point of most decentralised finance projects. Governance tokens represent the foundation block of decentralised finance and everything decentralised.
Governance tokens unite the community and give people a voice in essential decision-making matters.
But notwithstanding, governance tokens have their disadvantages. People with selfish and malicious are still very much present in the space. A whale who has enough financial power can disorganise the whole project and solely make and mandate decisions.
