What Is a Governance Token?

4 MINS READ

A governance token allows its owner to take part in managing a cryptocurrency project. A special token created by developers is being distributed to future decision-makers. Generally the more tokens you hold the stronger voice you have!

With governance tokens, users can propose, discuss, and make changes to a project without relying on or requiring the project team. In addition, token holders can use them to delegate voting rights to other users, experts, and even applications.

All software needs updating or patching mechanisms. Unforeseen vulnerabilities can be discovered at any time in the project. Besides, it may turn out that poor technical implementation of the token or unexpected events made elements of the source code base irrelevant, non-functional, or even illegal. Finally, there are usually some parameters in the source code base that need to be updated from time to time. Governance tokens provide holders with the ability to influence these issues.

Another basic form of governance is to enable the token holders to influence decisions regarding the distribution of funds allocated to support the project. For example, DASH and Decred provide token holders with the ability to designate funds from the general fund to contractors who perform various services to develop and maintain the project.

Any user with a sufficient number of tokens will be able to make proposals for the development. For example, offer a new asset on the DeFi platform or change the lending interest rate. Interestingly, such proposals themselves can be represented by digital codes rather than messages to the development team. If approved by the community, these proposals will be automatically incorporated into the platform structure.

In 2020, governance tokens have become widespread due to the DeFi boom. For example, a famous landing and borrowing platform Compound gives it’s COMP token holders the ability to govern the project making decisions together within the community!

Compound first introduced its token in February 2020. Its announcement was part of a plan to transfer control of the protocol to the community. During the initial distribution period, COMP tokens were distributed among the company’s employees and its investors.

The COMP token is an ERC-20 format token that is now used to govern the decentralized Compound protocol. Holders of COMP tokens and their delegates can discuss, recommend, and vote on different revisions to the protocol.

Compound incipiently deposited 4,229,949 COMP tokens in a specially created account, which the company calls Reservoir. For each Ethereum block generated in Compound, 0.5 COMP is transferred from Reservoir to the protocol – approximately 2,880 tokens per day.

These tokens are distributed among the Compound markets (ETH, USDC, DAI, and so on) in proportion to the interest that occurs. Within each market, 50% of COMP tokens go to lenders and 50% to borrowers.

Governance tokens are becoming demanded and are taking their positions in the crypto community. If the ICOs are teen to replace IPOs in the crypto sphere, the governance tokens are here to replace board directors in a more flexible way.

Summing up

If you are going to launch a DApp you should consider delegating decision making to your team and community, even if you have an existing project a new Gov token can help you get more people involved and make better decisions!

In case you want to know more about Gov tokens, their technical aspects and opportunities, hit us a message on hello[at]exio.tech!