What Is Governance Token In Cryptocurrency?
A governance token is a privileged coin that gives holders the right to influence a decision targeting a change in a blockchain network. In other words, the answer to the question – of what is governance token in cryptocurrency is to have an active role in managing decentralized projects.
The innovation offers certain projects an opportunity to maintain their DeFi status. The idea is not to centralize decision-making power with a limited group of people. Thus, governance tokens involve general users to influence decisions through a process known as governance.
Furthermore, governance tokens have become a key attribute of the DeFi ecosystem. However, with power comes responsibility, and governance token holders tend to gain and lose more. Generally, holders tend to get a chance to vote on fees, reward distribution, system modification, and user interface.
Stick with us to learn more about the question, “what is a governance token in cryptocurrency?”
Uses of Governance Token
Governance tokens put users in a preferred position on the blockchain by offering them certain rights. Thus, governance tokens’ holders decide future strategic decisions, including alterations in existing proposals.
Other key uses for governance tokens include the following.
- Changing the network’s reward structure
- Revising funding amounts for developers
- Implementation of changes in the project’s user interface
- Voting for the network’s fee structure changes
- Creation of new blockchain-related proposals
However, governance tokens do not limit themselves to holders’ voting rights, which are used for crypto staking or yield farming functions. Thus, such tokens place holders at a distinguished place in the community.
Working on Governance Tokens
Governance tokens are the building blocks to establishing decentralized governance in DAOs (decentralized autonomous organizations), DApps, and DeFi projects.
Individuals who have shown loyalty to the platform and made significant contributions are rewarded with governance tokens. Token holders, in return, are vested with the responsibility to make decisions for the successful progress of the project. Generally, users vote through smart contracts, as results are enacted and tabulated automatically.
Additionally, each crypto project, including Bitcoin, has its rules for awarding governance tokens. Generally, founding members, users, investors, and stakeholders are through numerous calculation methods.
Moreover, some governance tokens limit voting right to just one decision, while others allow power to vote on almost anything about the community. Similarly, some tokens offer financial returns, while others do not.
Examples of Governance Tokens
Most governance tokens are involved in the DeFi space. Additionally, the majority DeFi protocols run on the Ethereum blockchain.
However, there are different governance tokens, each serving a different purpose. Let us have a look at examples.
COMP is a utility token on Ethereum, enabling DeFi borrowing/lending. Holders of the Compound token get a right to vote for the changes in the network through the COMP governance dashboard.
- Maker (MKR)
MKR is another governance token based on the Ethereum network. MKR is responsible for the making of DAI stablecoins. Holders of the MKR have a right to either vouch or reject changes to the DAI protocol network. Additionally, MKR has received high praise for remaining decentralized by offering stablecoins.
- Yearn.finance (YFI)
YFI token is popular for allowing holders a yield farming option. Users can earn YFI tokens by pledging their crypto funds in smart contracts on Curve and Balance platforms.
Furthermore, users can earn higher returns by staking coins on the platform for longer and earning more YFIs.
- Aave (AAVE)
Aave is a platform that supports borrowing, lending, and earning interest. It runs on smart contracts to manage the platform’s financial operations. AAVE holders get the leverage to vote for potential future development in the platform.
- Synthetix Network Token (SNX)
Also known as “synths,” it is a decentralized exchange that mirrors the price of real-world assets. It is one of the best replacements for traditional capital markets.
SNX holders have a say in the future direction of the platform.
Advantages and Disadvantages
While governance tokens may seem appalling in theory, practically, they have pros and cons.
- Community involvement
- Diversity and inclusion
- More effective
- Better decision making
- Selfish decisions
- No accountability
- Potential of takeover
Governance Token vs. Utility Token
When answering the question “what is a governance token in cryptocurrency,” it is key to notice that it is an improved version of the utility token. Contrary to governance, utility tokens usually have a limited scope of use.
For instance, BNB only offers a discount to Binance traders. Other than this, there is no use for BNB coin.
Here are the key points of difference between governance and utility tokens.
Governance tokens offer governance privileges, while utility tokens offer exclusive access rights to holders.
- Expected value
Governance tokens increase with the rise in the value of projects. In contrast, the value of utility tokens has nothing to do with the project’s overall value.
- Security risks
Immutable proof of ownership for governance tokens relieves security risks. However, utility tokens are more prone to security risks.
Frequently Asked Questions
Do governance tokens have value?
No, governance tokens do not have any intrinsic value. They, however, vest holders’ power to make decisions about the future of the related community.
Do governance tokens make money?
Yes! You can trade, swap, exchange or stake your governance tokens to make money. These are generally used to create a passive income stream.
What are examples of governance tokens?
Here are a few examples of governance tokens.
- Curve DAO
- Uniswap DAO
Are governance tokens fungible?
Governance is fungible when a blockchain-based system allows the holder to cast one vote per token.
A governance token is not a rarity; rather, it is any token that profits holders a share of influence about the operation of the network. In addition to making future decisions, holders can apply such tokens on decentralized social media platforms.
Further, since cryptocurrency is the future of finance, thus it needs to involve general investors in decision-making. Since the crypto market boasts itself of being decentralized, thus decision-making needed this feature as well. So, governance tokens emerged as a result of decision diversity.
We hope you now know all the information to the question – what is a governance token in cryptocurrency? Please leave your feedback in the comments section, and let us know what governance token you hold.