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What is a Governance Token ?

Newton & KeplerFebruary 2, 2023

1 minute read

A governance token is a special type of cryptocurrency that represents ownership and control in a decentralized organization or network. It is used to give holders the power to make decisions and shape the direction of the organization.

What is the purpose of Governance Tokens ?

Governance tokens are used to give holders the power to make decisions regarding the future direction and development of the decentralized organization. They provide a way for the community to collectively make decisions about the allocation of resources, the implementation of new features and the overall direction of the network.

How do Governance Tokens work ?

Governance tokens work by allowing holders to vote on proposals for changes to the organization. The more tokens a holder has, the more weight their vote carries. Proposals are typically submitted through a decentralized platform, and holders can vote either in support or opposition. Once a proposal reaches a certain threshold of support, it is implemented.

What are their benefits and drawbacks ?

The benefits of governance tokens include greater transparency, improved decision-making processes, and a more engaged community. They also provide a way for token holders to benefit from the success of the network and to share in the decision-making process.

However, there are also some drawbacks, for example, the power may be concentrated in the hands of a small group of token holders, leading to centralization. Additionally, the process of decision-making through voting can be slow and inefficient, leading to delays in the implementation of proposals.

Examples of well-known Governance Tokens in the crypto world

Compound (COMP): Compound is a decentralized lending platform that uses COMP as its governance token. COMP holders can vote on proposals for changes to the platform, such as adjusting interest rates on loans.
MakerDAO (MKR): MakerDAO is a decentralized finance platform that uses MKR as its governance token. MKR holders can vote on proposals for changes to the platform, such as adjusting the stability fee on the DAI stablecoin.
Aragon (ANT): Aragon is a decentralized platform for creating and managing organizations. ANT is the platform’s governance token, and holders can vote on proposals for changes to the platform.

In conclusion, governance tokens play a crucial role in decentralized organizations by giving token holders the power to make decisions and shape the future direction of the network. While they offer many benefits, there are also some drawbacks to consider. It is up to each individual to weigh the pros and cons and decide whether these kind of token is right for them.