What Are Governance Tokens? How Token Owners Shape A DAO Direction
Blockchain technology has created a plethora of new opportunities. From decentralised finance (DeFi) to digital scarcity and ownership via NFTs, there has been a surge in product, service, and platform innovation.
Cryptoeconomics and tokenisation are unlocking new ways to organise and own things. The products, services, and platforms of these new models are held and run by the communities they serve. These communities have people from all over the world with different backgrounds and skill sets.
Using blockchain technology, these global communities are looking for new and creative ways to build products, build community, and exchange value. At the same time, they face challenges that cut across governance and decision-making.
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What Are Governance Tokens?
Governance tokens signify ownership in a decentralised protocol. They provide token holders with some specific influence that allows them to affect the course of a system. It might involve deciding which new goods or features to develop, which budget structure, and which partnerships to find.
In general, exerting this influence can take two forms. First, governance token holders can suggest modifications through a formal proposal submission procedure. If specific requirements are satisfied and there is a proposal vote, holders of governance tokens can influence changes using their tokens. The particular techniques and processes of these rights vary among protocols.
Governance tokens are an essential way for decentralised autonomous organisations (DAOs) to make decisions when ownership is flat and spread out and when there is no clear leader like in traditional hierarchical organisations.
How Do Governance Tokens Work?
In conventional organisations, an entire executive body—typically a C-Suite, board of directors, and shareholders—has sole control over strategic choices.
DAOs vary from regular businesses because there is no centralised body of decision-makers, yet, companies must make choices that affect the organisation’s future.
DAOs make these decisions through a formal, well-defined governance process that includes proposals and community votes. There are many ways to govern DAOs, but they all have one thing in common: the governance token. Because they live on the blockchain, governance tokens have certain features, like unchangeable ownership and precise distribution, that make them perfect for decentralised decision-making.
When a DAO proposal goes to a vote, governance token holders can put their vote on-chain. The weight of a token holder’s vote usually depends on how many tokens they have.
Why Are Governance Tokens Important To DAO?
In the decentralised crypto world, the core development team usually start blockchain or protocol update. Users with governance tokens can vote on these proposals to decide whether or not to implement the update.
These tokens give their owners specific influence. They may be able to change the project’s protocol or vote on the network policy.
Polkadot also pays attention to its voting processes, which involve talking to the people behind the tokens to make sure the project will be successful in the long run. People who have DOT tokens can vote to have their interests represented.
Governance tokens are a crucial part of giving control of blockchain projects to user communities.
Communities are encouraged by these tokens, which give users control in a planned way. So, it ensures that each holder has a say in how the protocol is run and prevents a small group of people from controlling the network.
In other words, they give all owners a say in the ecosystem. Experts think that governance tokens let projects become fully decentralised and independent. For instance, YFI is the governance token for Andre Cronje’s Yearn.Finance project. As the project’s lead developer, Cronje doesn’t keep any tokens or powers that come with them. Instead, he gives the community complete control of the project, which makes it a ready-to-use DAO that doesn’t need anything else.
Challenges Of Governance Tokens
There are many fascinations surrounding governance tokens and what they can do for a decentralised future. Still, there are some fundamental problems and risks to envisage.
1. Regulatory Uncertainty
Regulators are usually two steps behind innovations. It is especially true for crypto, which is hard to regulate and, in some cases, a source of disagreement among regulators.
For instance, US-based regulatory bodies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have said that crypto falls under their purview.
2. Plutocracy Of Token Supply
Founders, team members, and investors often get many tokens, which gives them the power to make most decisions. Some projects have gone for a “fair launch,” where all the platform’s users receive governance tokens. Unfortunately, this may still let whales with prominent positions have much power over governance because they have many tokens.
3. Vesting Periods
Most team and investor tokens have a schedule for when they use them. It means that when a token first comes out, its Fully Diluted Value can go up because the float is smaller. On top of that, when this vesting period is over, there could be a shock to the supply, which affects the influence on governance votes and the overall market price.
The Future Of Governance Tokens
The future of governance tokens, like the future of almost everything else in crypto today, is full of possibilities and uncertainties. What the future holds will depend on important factors like regulations (like which types of tokens are considered securities), the adoption of DAO operating models (like how much of the important stuff happens on-chain), and technological advances (e.g., new token standards).
Governance tokens will be a vital part of the growth and use of decentralised, user-owned networks.
Governance tokens help DeFi projects reach their full potential by making them more decentralised. Through decentralising and democratising Web3 protocols, platforms, apps, and games, they will likely remain a crucial part of keeping the community and investors interested in the system for the foreseeable future. Protocols like Uniswap (UNI), Aave (AAVE), Curve (CRV), and Terra (LUNA) are paving the way for this in the DeFi space.
Over time, governing systems will likely become more complicated. Owners will become more involved and active in their communities. Governance protocols enable a group to decide together how to run the new crypto networks that will be at the heart of the decentralised financial and production systems of the future.