Get to know Governance Tokens, Crypto Assets That Can Involve Users in Projects

What is Governance Token?

Governance tokens are tokens created by developers to allow token holders to vote on updates and changes to crypto and blockchain projects to help guide the future of the protocol. It is called “token governance” because token holders have the authority to influence decisions regarding projects. For example, proposing or deciding on new feature proposals and even changing the governance system itself.

Proposed changes from token holders are then examined, then selected through on-chain governance which is accessed using governance tokens that are applied automatically due to smart contracts. But in other cases, there is a project maintenance team tasked with implementing the changes or hiring someone else to do it.

Generally, token holders can vote or vote using their tokens. Where 1 token is valid for 1 vote. So, the greater the number of tokens owned, the greater the influence of the holder’s vote in determining decisions on the protocol.

Advantages of Governance Token

With the governance token, Defi projects can run properly from smart contracts that cannot be controlled by any party. Governance token plays an important role in decentralizing the decision-making process behind it. This decision-making is called “on-chain governance”, where governance tokens become “gasoline” for it.

Users also get a new experience with voting which is the door for discussion for collaboration. Users can directly vote on existing problems, users are encouraged to work with other communities to find solutions.

Token governance can make it easier for developers to find the right solution because it is assisted by token holders who participate in voting. So that the development process becomes more efficient, although the development team is not completely free from its role in the decision-making process.

Disadvantages of Governance Token

Token holders do have voting rights, but that doesn’t mean they always vote for the best results. Because there may be token holders who choose decisions that only benefit themselves.

There is also a lack of accountability in governance tokens. Judging from the case above, there will be no real accountability with a democracy-based governance model.

Example of Governance Token

There are already many governance tokens circulating in the market. Here are some examples:

Maker (MKR)
Token Maker allows its holders to make decisions related to decentralized finance (Defi) protocols. The protocol is run by the decentralized stablecoin DAI.

Uniswap (UNI)
UNI is a cryptocurrency asset from a decentralized exchange (DEX) platform called Uniswap. This token allows investors and traders to exchange their ERC-20 tokens for other related crypto tokens.

Pancake Swaps (CAKE)
CAKE is the governance token for Pancake Swap, a well-known and popular crypto exchange platform. DEX PancakeSwap itself is built on top of the Binance Smart Chain.

Compound (COMP)
COMP is the governance token of the Compound platform, which is a blockchain protocol. Compound allows its users to be able to borrow or lend a variety of crypto assets.

Aave (AAVE)
Aave is a crypto asset that helps strengthen and drive decisions made on the decentralized exchange (DEX) protocol.

eCash (XEC)
XEC is a utility token from an exchange platform called eCash that enables the smooth transfer of funds.

That’s an explanation of governance tokens. In your opinion, what token governance is currently good or hype? Write in the comments column yes.

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