What is a governance token and what is it used for? If you didn’t get complete information about this subject, in this article on the shetcoiner site, we will answer this subject.
What is a governance token?
Governance tokens are tokens that developers create to allow token holders to shape the future of a protocol. Governance token holders can influence project-related decisions such as proposing or deciding on new feature proposals and even changing the governance system itself.
In many cases, proposed changes are reviewed and then voted on through on-chain governance accessed using governance tokens, due to smart contracts. In other cases, the team maintaining the project is tasked with making changes or hiring someone to do it.
Proponents of systems that use governance tokens believe that they allow for user control, which is true to cryptocurrencies’ core ideals of decentralization and democratization. In most cases, organizations that allow users to control the development of their systems are called decentralized autonomous organizations (DAOs).
Government tokens have various uses; Using these tokens, governance proposals can be created and voted on. Community members can spend tokens to further influence the features of a protocol. This action can be:
- Make changes to the UI
- Changing the bonus distribution
- Revision of the development fund
- etc. ….
Although most DeFi tokens on the market are governance tokens, that doesn’t mean voting is their only defining feature. Holders of government tokens can also borrow and earn income.
Why are governance tokens valuable?
No one feels left out in an ecosystem like DeFi. Developers don’t have to make hard choices and can interact with the community to understand what’s wrong with the project, why a certain feature needs to be changed, and how the team should manage funding and contributions.
The governance token also enables users to actively make changes to smart contracts. If we want to review, we have to say, governance tokens are important because they have decentralization properties. governance tokens are not of a predetermined structure, and the decision-making process on these structures only concerns those who invest in them. In general, we can consider governance tokens as shareholders who benefit from the success of a business.
In the following, we will examine the advantages and disadvantages of governance tokens:
- Decentralization is one of the most important goals for which governance tokens were created.
- Effective development: people understand that their presence in the whole structure can be effective.
- Absence of a clear structure to respond in inappropriate situations: when power is distributed among all the people of a society, if a problem arises, no one can have the power to respond; Because a community of people have made a decision and this community had the majority vote in that project; Therefore, the power of accountability will not be the same as that of government or private organizations.
- The presence of big capitalists in a market: Currently, no specific amount has been specified for investors so that more or less than that they cannot participate in that project; This causes people with large capitals to enter the projects, and as a result, the impact of their votes in the project is greater than other people.
In this article, we examined the structure of the governance token and pointed out what limitations led us to this opportunity. We also considered the opportunities created by the governance token and mentioned its advantages and disadvantages.