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What is a governance token

What is a Governance Token?

Introduction to Governance Tokens

One of the key features of the cryptocurrency and web3 ecosystem is tokens. The distinction between fungible and non-fungible tokens is reflected in a large portion of discourse surrounding tokens. The many sorts of tokens include governance, utility, platform, and security tokens, among many more. Now, these governance tokens have emerged as one of the key features of the developing web3 sector. They serve a crucial role in the decentralization of the web, which is one of the core principles of web3. Find governance tokens explained in more detail below, along with why governance in crypto is needed.

What is a Governance Token? 

Governance token grants control over a specific DApp, protocol, game, or DeFi solution. In conventional businesses, the direction of the organization was decided by a board of executives or a single CEO. With the use of smart contracts and tokens, decentralization has turned the story of centralized governance in established organizations on its head.

Anyone having a governance in crypto has the right to suggest new ideas for protocol enhancements and take part in decision-making procedures. The established standards for giving one vote to one token have been challenged by new methods for calculating voting power. Voting power of token holders is significantly influenced by how long they have held a token.

Application of Governance Tokens: 

The applications of what is a governance token may include:

  • Distribution of voting rights and exclusive rights to users via tokens is a promising application for governance tokens. Holders can vote on suggestions made by other community members or make new proposals for governance. 
  • Members of the community can use the tokens to exert direct control over the project’s future course and characteristics. 
  • Other uses for governance tokens include staking, borrowing money, and yield farming, which generates some passive revenue. 
  • One can also vote on various fees related to various network transactions, follow best practices when implementing UI changes, make alterations to the way transaction fees are distributed as rewards and fund adjustments for developers.

Significance of Governance Tokens: 

What is a governance token is integral for many distinct reasons, namely:

  • The fact that a token for governance in crypto promotes efficient power distribution makes its significance very clear. They give each member of decentralized ecosystems a voice. 
  • It can give developers the ability to avoid having to make difficult decisions about the project. 
  • To find any errors in the project, engineers can communicate with the public and ask for input. 
  • It becomes simpler for developers to comprehend the rationale behind particular project activities, including fund management and collaborations, or the justifications for adopting specific improvements.
  • They are a crucial component of the decentralized internet. . Additionally, only those who have invested in a particular platform are permitted access to the decision-making process with governance tokens.

Benefits and Challenges of Governance Tokens

Well, now that you have had governance tokens explained to you, you must see why they are an essential tool for decentralization. The following is a list of governance tokens benefits and drawbacks:

Benefits: 

  • Web3 projects can incorporate decentralization thanks in large part to the integration of governance tokens. They provide demonstrable evidence of real decentralization. 
  • Holders of governance tokens can vote on network-related issues and receive rewards for working with other community members.
  • A sense of involvement is created among community members through participation through tokens for governance in crypto. 
  • Efficiency can be increased through community members actively working together to define new governance in crypto and make decisions.

Challenges: 

  • Governance tokens may go to narcissistic and bad actors. Such project participants will always vote in their own best interests rather than those that could benefit the entire community. 
  • There is not much accountability overview. No one would publicly admit that they voted for a proposition that guaranteed the failure of a project.
  • Whales are a significant obstacle for governance in crypto since they have the power to seize the majority of tokens. The future of the project may then be determined by the whales, which would be a nightmare for decentralization.

Important Examples of Governance Tokens

Here is a list of governance tokens you should watch out for: 

  • $YFI is Yearn’s native token. Giving the community more control is the main goal. Additionally, it suggested a strong focus on the potential for developing a self-sufficient DAO.
  • Early adopters receive enticing benefits from the Ethereum Name Service (ENS). In the latter half of 2020, the project airdropped tokens, but since then, the value has increased, and early adopters received great prizes for demonstrating their support. In the DeFi community, the ENS token generated a lot of buzz and placed a strong emphasis on active engagement.
  • MKR, or MakerDAO’s native governance token, gives holders the ability to vote on proposals to alter the economic rules governing MakerDAO governance.
  • The typical functions of a governance token are served by the UNI Token of the Uniswap protocol. Owners of UNI tokens have the ability to vote on plans and choices for Uniswap’s future. 

Top Down Governance

In traditional governments, there is a power pyramid and decisions are made by those in charge. Usually, a small number of individuals are selected to serve as the company representatives. In this case, the rest of the community is likely to feel like they have no voice when power is concentrated in the hands of a select few without necessarily being inclusive. This also means that projects are not representative of the people who are contributing to their success. It results in a less involved community and a project that solely represents the opinions of a small number of influential and interested people.

Blockchain Flips the Script on Governance

Blockchain technology brings decentralization to this traditional governance structure. With tokens for governance in crypto, all community members can participate in platform governance. The decentralized decision-making mechanism facilitated by blockchains are bound to be a welcome perk for all community members in a certain company.  

Blockchain Governance Structures

Source: Freepik

The off-chain governance in crypto structure is one that combines off-chain decision-making with on-chain execution. At conferences and through written proposals, choices are made away from the blockchain, and a separate method is used to carry them out on it. A disadvantage of off-chain governance in crypto is that it sees important players competing for power through influence and strategy rather than actual decentralization.

How to get Governance Tokens

For any particular project, no one can actually predict when a project will introduce its own governance token or the specifics of the receiving wallets. This entails reviewing the project’s road map, speaking with engaged Discord users, reading the project’s white paper, or checking out the token’s details on the official website. It requires a little technical work, but may frequently produce some useful data about whether a drop is imminent.

What is a Governance Token – Value, Power and Responsibility

The fate of a project is in the hands of its community due to the allocation of authority through governance tokens. These symbols carry a great deal of responsibility in addition to power. How a project is governed by the community directly affects how well it works. 

However, with DAOs (decentralized autonomous organizations) beginning to compete with traditional businesses, the metaverse growing, and DeFi continuing to provide users with more equitable access to finance through decentralized protocols, it is the beginning of something significant—not just in terms of technology but also in terms of what we define as a community.

Governance Token Vs. Utility Token

Digital assets with usefulness are called utility tokens. This service is only available on a native cryptocurrency platform or blockchain network. For instance, BNB is used on Binance for a variety of things, such as paying fees, voting on new token listings, and purchasing tickets to access features like the Binance Launchpad. Utility tokens don’t have any governance power, which is the primary distinction between the two. 

Users of Binance can vote on token listings, but they cannot alter the way Binance appears or functions. Utility tokens have been upgraded into governance tokens. There is really no reason to choose utility tokens over governance tokens since they may be used for other operations like staking and generating loans.

What do Holders Vote on? 

Voting options for the participants in the on-chain governance in crypto system range from simple adjustments to the governance system’s structure to more complicated suggestions. There are frequently as many ideas as there are token holders, which is a huge quantity. Token holders can vote on a variety of different ideas, such as alterations to a cryptocurrency’s ecosystem to incorporate more cutting-edge technology to boost security, interest rates in a DApp, or modifications to a video game’s gameplay mechanics.

Governance Token Pros and Cons

Developers can only add the “De” to DeFi using governance tokens. Without them, projects would be nothing more than deserts of unmanageable smart contracts. Users are encouraged to work with other community members and come to a consensus through debate when they can directly vote on the matter. Since users have a motive and a way to actively shape a project’s path and direction, governance promotes more active communities. Governance models make it simpler for developers to come to specific conclusions and implement the changes that are thought required by their community, even while developers do not entirely forsake their involvement in the decision-making process.

However, there will always be individuals who solely consider their own interests when voting. Real accountability cannot exist under democratic governance structures. The community always assigns blame for bad decisions to an undefined, invisible group. Users will always point the finger at “the majority,” and you won’t find anyone admitting they are “the majority.” The one whale who hoards the project’s tokens exists in almost every governance in crypto scheme. Investors frequently worry that the whale would eventually control the majority of the tokens through sheer financial strength, independently generate proposals, and make self-serving decisions.

The Future of Governance Tokens

The building block of anything decentralized is represented by governance tokens. Without them, developers would not be able to claim how decentralized and superior their platform is because they are the focal center of the majority of DeFi projects. Governance tokens also lend power to new participants with ideas that aim to enhance the project and raise its worth. 

What are Smart Contracts and Governance Tokens

What are smart contracts are a set of digitally stated promises that also includes protocols that govern how the parties fulfill one another’s obligations. Such agreements could be made and carried out without the aid of artificial intelligence (AI). Power can be shared among governance token holders thanks to smart contracts and tokens. It gives authority to everyone in possession of a governance token, enabling them to submit proposals and take part in decision-making. One token is equivalent to one vote, which is the most basic structure. However, this leaves the system susceptible to attacks since powerful investors might use their vast financial resources to influence how a project is run in order to further their own personal interests. Other strategies can be used in projects to prevent problems like these.

Conclusion

We hope this post with governance tokens explained has been of help to you.  Tokens for governance in crypto introduces applications that add enormous value with the main goal of introducing real decentralization by shifting authority toward the community. Owners of what is a governance token can actively participate in the decision-making process by voting on the recommendations made by other community members. The well-liked items on the list of governance tokens demonstrate how stronger governance token applications could be developed.

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