Governance tokens are cryptocurrencies that represent voting power on a blockchain project. As of recently, they are mostly integrated into DeFi projects since they need to distribute powers and rights to users in order to remain decentralized.
Governance tokens are tokens that developers create to allow token holders to help shape the future of a protocol. Governance token holders can influence decisions concerning the project such as proposing or deciding on new feature proposals and even changing the governance system itself.
In many cases, the changes proposed, vetted and then voted on through on-chain governance accessed by using governance tokens are applied automatically due to smart contracts. In other cases, the team maintaining the project is tasked with applying the changes or hiring someone who will.
Proponents of systems that use governance tokens believe that they allow for user control, which holds true to the original cryptocurrency ideals of decentralization and democratization. In most cases, organizations who let users control the development of their systems are called decentralized autonomous organizations (DAOs).
The Advantages of Governance Tokens
- Decentralization. The only way developers can put the ‘De’ in DeFi is with governance tokens. Without them, projects would be barrens of smart contracts over which no one has any control. Decentralization is the main goal digital assets achieve, so why not include it in a tangible way?
- Collaboration opportunities. Voting opens the door for discussion, and discussion opens the door for collaboration. When users can directly vote on the issue they face, they are incentivized to collaborate with other community members and reach a decision through discussion. This is why governance forums are the second-best social channel after Crypto Twitter.
- More involved communities. Governance leads to more involved communities since users have both a reason and a method to actively steer a project’s path and direction.
- Efficient development. Although developers do not altogether forego their part in the decision-making process, governance models make it easier for them to arrive at concrete answers and implement the changes deemed necessary by their community.
Governance tokens represent the foundation block of all things decentralized. They are the central point of most DeFi projects nowadays, and without them, developers would not have the right to boast how decentralized and better their platform is compared to CEXs.
Like the Agora in ancient Greece, governance models are the main spot for political thought and discussion. Forums are always filled with new entrants and ideas that seek to better the project and increase its value.
However, Governance tokens are not without their faults. Malicious actors can still perform activities akin to 51% attacks by merely accumulating tokens. With enough financial power, a whale can disrupt the whole project, and singlehandedly create and approve decisions. But the good thing is that it takes a long time to reach such a stage. Until then, users have the power to implement features that can prevent similar events and stop whales in their tracks.