Crypto Glossary

Posted on September 13, 2021 in

Governance Token

Tokens created by developers that give token holders a way to influence the development of a protocol are referred to as governance tokens. Holders of governance tokens (known as “stakeholders”) have a wide range of options to influence project choices such as submitting or deciding on new feature ideas, and they even have the power to change the governance structure.

What are governance tokens?

A governance token grants its holders voting rights, which enables them to have their voices heard when changes are made to smart contracts and issuing protocols. Investors that own governance tokens, on top of protocol fees, trading costs, and other benefits.

A huge number of governance tokens have been issued in the projects that have become major participants in the decentralized finance (DeFi) market over the past year. Other popular types of digital currency exchanges that have seen increased market capitalization include lending platforms, decentralized exchanges (DEXs), and hedge funds.

The term “governance” refers to the authority to make modifications to the protocol code, such as raising the block size or the inflation rate. In the majority of instances, users may then vote on these choices using their existing tokens (1 token = 1 vote). The introduction of a governance token provides a chance to more effectively engage the community in the decision-making process in a much greater transparent manner.

What are governance tokens important?

By participating in the project’s voting processes, governance token holders can influence the project’s software implementation, updates, and technical improvements. Because there is no centralized party making choices, these tokens help to foster genuine democracy inside the system.

Anybody who enters a DeFi environment will not be left behind or will have their voice unheard. Because tough choices are not the developer’s duty, they may work with the community to identify issues, determine how specific features should be modified, and manage money and partnerships.

Changes to smart contracts can be made by the community if governance is in place. Once a project’s ledger has been attacked, funds have been stolen, or any other type of criminal behavior has occurred, users and developers do not necessarily need to evacuate or jump to another network. Instead, voters may simply vote to restore the error, and developers will have the authority to make all the modifications once a quorum is reached.

Benefits of governance tokens

Prompt and effective development: While developers are not entirely excluded from making decisions, governance models allow them to arrive at a conclusion and implement the changes needed by their community with a lower amount of friction.

Decentralization: With governance tokens, there are countless smart contracts out there that no single party has any control over. The most important aspect of digital assets is decentralization, thus it is important to integrate them in a concrete form. 

Engaging: Communities get more involved as a result of better governance because users have both a purpose and a mechanism to actively shape the route and direction of the project.

Opportunities for collaboration: The benefits of voting include free discussion, which in turn spurs collaboration. Users are motivated to work with other community members and reach a conclusion in the debate because they have the option to vote on issues. What this shows is why online forums that regulate cryptocurrencies are a great social communication channel.

Nothing is perfect

However, there are certain issues associated with the use of governance tokens. Malicious individuals/parties that have accumulated governance tokens can still do operations that are considered assaults to the community. Financially empowered whales can interfere with the project, initiating and approving choices entirely on their own. 

It is important to point out that refining this system to the point of perfection takes time. However, users still have the power to implement technologies that might perhaps help reduce the effects of unfortunate incidents and slow the whales down.

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