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Governance tokens have gained lots of traction lately due to some distinct factors. - 2
These assets focus on sharing power and ownership while offering some privileges as well.
Governance token is concerned with the administration of blockchain. It’s a form of cryptocurrency that democratizes the management of blockchain-based protocols. For those who already know, decentralization works more inclusively. Unlike centralized platforms, blockchain-based bodies follow the concept of shared ownership.
The latter makes sure that every decision is taken with the agreement of every member of the network. Governance tokens help with that. They make certain that every aspect of the distributed ledger is implemented the way it should be.
The governance tokens come with exclusive rights to vote. They enable the members of the network to have a say in project-related decision-making.
Governance Token: Here’s How It Works
Distributing ownership isn’t the only function of the governance tokens. They also deliver other benefits of DeFi to the network members. The token holders can earn money through yield farming, stake assets, and take loans. However, the primary function is still distributing power. Notably, governance tokens are new to the space, and their efficacy is often discussed among experts.
While some advocate their true decentralized nature, others worry that they could also be exclusive to a few. They help in establishing decentralized autonomous organizations (DAOs), dApps, and other DeFi projects. Members who make significant contributions to the community get governance tokens as rewards.
They give their nods on key issues to ensure the progress of projects. The voting with governance tokens works with the deployment of smart contracts. This helps in tabulating and attaining a workflow in blocks.
Every blockchain has its unique set of governance tokens and its predetermined rules. The network uses different calculation methods for their distribution among members.
The recipients include investors, users, founding team, and stakeholders. It should be noted that not all governance tokens follow the same protocols. While some are limited to governance issues only, others may include development updates as well. In the same way, some can offer financial returns, others may not.
Maker DAO was among the first platforms that issued governance tokens. It’s an Ethereum-based network whose stablecoin is Dai. One token is equal to usually one vote. Moreover, different network have their distinct voting portals too.
Maker Governance Voting
MKR token holders vote on a variety of matters including rules, fees, and team appointments. The goal is to maintain the blockchain’s efficacy, stability, and transparency.
Compound Governance Voting
The voting rights on Compound depend on the participation level of members in the network. For example, users who lend and borrow frequently receive more COMP tokens. The members can also delegate their rights to others on their behalf.
In 2020, Compound switched to total governance by token holders while abandoning all governance methods.
Differentiating Between Governance and Utility Tokens
Utility tokens are regular assets that can serve a variety of purposes. They can be used to make payments or gain access to particular products or services. The governance tokens primarily deal with the administration of the blockchain network. The purpose of a utility token is to convey the basic functionality of its native blockchain to users.
For instance, the BNB token from Binance enables holders to pay fees and users other features of the platform. The holders can use it to access services like Binance Launchpad. The key difference lies in the governance power. The utility tokens usually offer more accessibility in terms of services. Governance tokens, on the other hand, bring more privileges.
They allow the holders to take loans and stake tokens.
Pros and Cons of Governance Tokens One Must Know
Pros
Governance tokens are wholly decentralized in nature.
They also make the decentralization of projects easier.
They encourage participation in governance through incentives.
They help the network grow and maintain efficacious operations.
They establish a more democratic system by involving everyone.
Cons
Governance tokens and their models could be hard to understand for people.
The holders with a large number of tokens can abuse the platform for their gains.
If tokens are held by a few, the sense of accountability also shrinks.
Impact and Scope of Governance Tokens
Governance tokens symbolize power and administration. More than delivering basic service, they are concerned with empowering the community. At the same time, they focus on improving organizational efficacy.
They also emerge as a reliable source of earning passive income. Above all, they bring additional benefits like specific services and share from the protocol’s revenues.
All in all, they enable crypto users to take full advantage of a decentralized ecosystem.
According to experts, the dominance of governance tokens is only going to increase.
The crypto space is keen to see how this scenario builds up. Hopefully, it would make decentralization more prominent and fruitful for everyone.
Source: https://www.thecoinrepublic.com/2023/11/25/governance-token-its-functionality-abilities-and-advantages/