If you're going through or interested in blockchain and its merging technology then you have definitely heard about the word "Governance Tokens". With the help of governance tokens, the group in a decentralized autonomous organization (DAO) or other blockchain-based protocols can make decisions. These tokens are incredibly popular among investors due to their variety of advantages as we discussed in detail in the given article. In this article, we'll discuss what governance tokens are and how they work. We will also deep dive into its benefits and drawbacks so without delaying more let's get started!
What Is Governance Token?
A governance token is a type of cryptocurrency token used to represent ownership or control in a decentralized autonomous organization (DAO) or other blockchain-based protocol. It provides token owners the power to decide whether to update a protocol or change a network's rules and policies.
Users have the ability to suggest changes to the protocol themselves, participate in deciding how it will be developed in the future, and control how it is developed. Users can receive rewards after the successful accomplishments of each governance task. Some popular examples of governance tokens include Compound's COMP token, MakerDAO's MKR token, and Uniswap's UNI token.
Top Governance Tokens
Here are some of the top governance tokens according to their market capitalization. But as we know their value could fluctuate in the future so they can shift accordingly.
- Curve DAO (CRV)
- Uniswap (UNI)
- Aave (AAVE)
- Compound (COMP)
- MakerDAO (MKR)
- SushiSwap (SUSHI)
- finance (YFI)
- Synthetix (SNX)
- 0x (ZRX)
- Balancer (BAL)
You can check the further top governance tokens on sahcoin.
How do Governance Tokens Work?
Governance tokens enable their holders to participate in the decision-making process of a decentralized autonomous organization (DAO). Here's a step-by-step guide on how they typically work:
- Ownership or Control: Governance tokens give complete rights to their holders. Holders can participate in the decision-making of DAO and can perform further amendments to the protocol.
- Voting Rights: Governance token holders have the right to vote on proposals or protocol-related decisions such as changes in its rules, policies, allocation of funds, or upgrades.
- Proposal Submission: Governance token holders can submit proposals themselves which means they have the right to suggest changes to the protocol. And the proposal can be put up for a vote in case it is accepted.
- Incentives: Holders who participate in the decision-making process or who vote on proposals can earn rewards in return.
- Decentralization: Governance tokens enable centralized decision-making without the involvement of intermediaries or central authorities.
Advantages of Governance Token
Here are the various advantages of governance tokens are given below:
- Decentralized Decision-making
- Transparency
- Incentivization
- Flexibility
- Community Participation
Disadvantages of Governance Token
Here the potential disadvantages of governance tokens are given below:
- Concentration of Power
- Slow Decision-Making
- Governance Attack
- Lack of Expertise
- Governance Fatigue
Conclusion
Governance tokens allow the community to make decisions in a decentralized autonomous organization (DAO) or other blockchain-based protocols as well as users can perform further amendments to the protocols. It always takes the protocol decision according to the holder's interest and engagement. Governance tokens have the potential to play an important role in the development and evolution of blockchain-based protocols, and their impact is likely to continue to grow as more protocols adopt decentralized decision-making models and seek to increase community participation. Governance token plays a potential role in the growth and development of the blockchain-based protocol and it adopts decentralized decision-making models to seek the high engagement and strong involvement of their holders.
