What is a Governance Token?

A governance token, also called a governess token, is a digital asset whose owners can vote on how a blockchain project is built. Most of the time, a token-based project management system is built on a decentralized autonomous organization (DAO) (DAO). Tokens give people the power to vote and come up with their own ideas. A governance token is a type of utility token that can be used to do more than just vote.

What Purpose do Governance Tokens Serve?

Blockchain technology has led to the development of decentralized applications and whole parts of the economy, such as decentralized finance (DeFi).

But these applications were still organized in a way that went against what they were meant to do. Over time, the DAO (decentralized architecture for project management) was made.

Thanks to the DAO, the project community now has the power to make decisions about some (and sometimes most) changes to a product or ecosystem. The governance token has turned into a way to join the DAO. It also became the main source of money for the community and a way to encourage people to get involved.

In fact, governance tokens are a share of “ownership” in a decentralized protocol. They are similar to stocks, but they can be used to have direct control.

When and why did the concept of governance tokens emerge?

Maker (MKR) of the MakerDAO protocol was one of the first governance tokens. As the name suggests, it has had a control system through the DAO from the start.

MKR is used for voting in the DAO, which includes the most important economic parameters of the protocol. One of MakerDAO’s features is that DAO participants, or MKR holders, can vote for it to be able to look at the results of a vote after it’s over.

The value of the tokens that are issued is not always the same. It depends on how many DAI stablecoins are in circulation. If the security falls below the standard, a part of MKR is used to bring the amount of collateral back to what it was before (and vice versa). So, MKR also serves as a way to get more money.

After MakerDAO, Compound is the other big DeFi project that stands out. Since the COMP project management token was first given to users through this method, its creators came up with the term “liquidity farming.”

After COMP was made available to everyone, its price started going up quickly. For a short time, this made farming in Compound a very profitable thing to do. This brought fame to the project and its governance token.

Today, COMP is used to pay returns for participation in platform pools and voting in the project’s DAO. You need to own at least 1% of the issued tokens to put an issue to a vote using COMP.

How to Get Governance Tokens

The most common way for a new governorship token to be released today is through an airdrop, in which the issuer gives a certain number of coins to a large number of users based on certain criteria.

Most of the time, there aren’t many rules about how to take part in an airdrop. For example, Uniswap has given the same number of UNI tokens to all users who exchanged cryptocurrencies or provided liquidity in the protocol before a certain date.

After the token is issued, it is listed on different trading platforms, where anyone can buy it. As with other crypto assets, the price of governance tokens is always changing because they can be bought and sold by anyone.

Are Governance Tokens a Viable Source of Income?

Participation can be achieved in many DAOs through the use of a specialized smart contract that involves the blocking of governance tokens. In addition, the holder will receive unique “wrapped” tokens in exchange, which can only be utilized for the purpose of voting.

At least some of the protocols for DAOs provide incentive for participants by allowing them to accumulate more tokens at a predetermined rate, in addition to the tokens that are locked. There is one more method, which is that individuals who take part in the vote are rewarded for their engagement through the use of periodic airdrops.

What else can governance tokens be used for?

Even while almost all governance tokens share the same functions and applications, certain token characteristics may vary from one project to the next.

Holders of KNC, for instance, have the ability to vote for or against the allocation of funds to new partners in the ecosystem of the Kyber Network. They also have the ability to vote on changes to the rate of return for staking an asset.

Those who are in possession of Curve protocol tokens can also make a suggestion to establish a new liquidity pool if they so choose (this will require 2500 CRV to be blocked). However, the suggestion needs to be put to a vote by the community working on the project.

In addition to having a say in the direction in which the protocol will be developed, owners of the Synthetix Network governance token are also eligible to vote for other members of the governing council. In Dash, owners of native coins that also have governance features can put up proposals to use 10% of the fees collected by the blockchain. These proposals can be voted on by the Dash community. In order to join the DAO, you will need to have at least 1000 DASH in your wallet.

The MANA token is the actual form of currency that may be used to purchase digital land in Decentraland. NFT creators from within the metaverse will sell their wares for the same amount of tokens.