A governance token allows its owner to take part in managing a cryptocurrency project.
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 of the chief cryptocurrency protocol. For example, offer a new asset on the decentralized finance (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.
COMP token and Compound
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.
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.
Yearn finance and YFI token
Yearn finance allows you to participate in profitable farming (Yield Farming), interacting with defi-protocols. Farming on a blockchain is like planting seeds in the ground to multiply them. yEarn uses DeFi protocols like Curve, Compound, Aave, and dYdX to optimize token issuance. In short, it is a complex protocol that directs liquidity to different sectors of the DeFi space to find the best profit.
yEarn is probably best known for its yPool on Curve. When a user deposits tokens, they are converted to yield optimized tokens (yTokens) such as yUSDC and yDAI. That allows a user to earn not only regular lending fees but also trading fees on Curve. yEarn is channeling liquidity to various sectors of the DeFi space, and yPools has received some of the best loan rates in 2020.
yEarn is one of the most decentralized projects in the crypto space, also referred to as Bitcoin DeFi due to its high annual percentage yield (APY).
YFI is the platform’s governance token. The asset is distributed only to users. yTokens can be compared to a pool. Whenever a user deposits or withdraws funds from this pool, the smart contract checks the annual interest rate. It acts as an oracle, but only within the network.
It normalizes information on the network, like a robot striving for maximum profitability. And all of this is automated using smart contracts.
Yearn.finance (or yEarn) is an entire ecosystem that includes ytrade.finance, yliquidate.finance, iborrow.finance, and yswap.exchange.
yEarn supports DAI, USDC, USDT, TUSD, and sUSD stablecoins. DeFi newbies may think of yEarn as an intricate protocol, but the concept is pretty simple. yEarn shifts supported stablecoins between Compound, Aave, dYdX, and Curve depending on which asset pool suggests the highest yield.
YFI is an ERC-20 token that powers the yearn.finance ecosystem. The protocol distributes YFI to liquidity providers. The idea of the token was to be used for voting, not as a medium of exchange.
Andre Cronje, the creator of yearn.finance, has repeatedly stressed that the YFI token is useless and will not be traded on any exchanges. However, at $ 24 268,59 (at the time of writing), the coin has overtaken Bitcoin and is nowhere near worthless.
Governance tokens are becoming demanded and are taking their positions in the crypto community.