What is a governance token? All you need to know

Main

• A governance token, or governess token, is a digital asset whose holders can participate in decision-making on the development of a blockchain project.
• Most often, a project management system using a token is built on the basis of a decentralized autonomous organization (DAO). Tokens give the right to vote and put forward their own initiatives.
• A governance token is a variation of a utility token and can have other functions besides voting.

Why are governance tokens needed?

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

However, the form of organization of such applications remained centralized, which was contrary to their nature. Gradually, the decentralized project management architecture, DAO, was developed.

Thanks to the DAO, the project community has gained the right to decide on some (and sometimes most) issues related to changes in a product or ecosystem. The governance token has become a tool for participation in the DAO. It also became the main economic incentive for the community and the encouragement of its active members.

In fact, governance tokens represent a share of “ownership” in a decentralized protocol, acting as a kind of analogue of shares, but with the functions of direct influence.

How did governance tokens come about?

One of the first governance tokens was Maker (MKR) of the MakerDAO protocol. As the name implies, from the very beginning it was laid control system through DAO.

MKR is used for DAO voting, including the main economic parameters of the protocol. One of the features of MakerDAO is that the voting results can be reviewed after it has been completed, if DAO participants, that is, MKR holders, vote for it.

The value of the token emission is not constant and changes depending on the total supply of DAI stablecoins that are currently in circulation. If the security falls below the established norm, a part of MKR is used to restore the volume of collateral (and vice versa). Thus, MKR also acts as a vehicle for recapitalization.

The other notable DeFi project after MakerDAO is Compound. Its developers actually came up with liquidity farming, since the COMP project management token was first distributed to users through this mechanism.

After the release into free circulation, the price of COMP began to rise sharply, which is why farming in Compound became an extremely profitable activity for a short period of time. This brought fame to the project and its governance token.

Today, COMP is used to pay out returns for participating in platform pools and voting in the DAO project. Using COMP, you can put an issue to a vote, but for this you need to own at least 1% of the issued tokens.

Which blockchain projects have governance tokens?

Today, governess tokens are primarily used in DeFi and related areas, such as GameFi. They are also gaining popularity in the metaverse and NFT projects, where they act as the main payment method.

According to Coingecko and CoinMarketCap data as of June 2022, the top-cap governance tokens are:

• Uniswap (UNI).
• Aave (AAVE).
• Sushi (SUSHI).
• ApeCoin (APE).
• Curve (CRV).
• yearn.finance (YFI).
• Synthetix Network (SNX).
• Ethereum Name Service (ENS).
• Compound (COMP).
• Maker (MKR).
• UMA (UMA).
• Aragon (ANT).
• Balancers (BALs).

How to get a control token?

Today, the most popular way to issue a new governess token is through an airdrop, i.e., the issuer awarding a certain amount of coins to a large number of users based on certain criteria.

Usually the conditions for participating in an airdrop are not strict. For example, Uniswap has listed the same amount of its UNI tokens to all users who either exchanged cryptocurrencies or were liquidity providers in the protocol prior to a certain date.

After the issue, the management token is listed on various trading platforms, where anyone can buy it. Since governance tokens are openly traded, like other crypto assets, their price is constantly changing depending on supply and demand.

Is it possible to earn income from governance tokens?

In many DAOs, participation is implemented by blocking governance tokens in a special smart contract. At the same time, the holder receives in return special “wrapped” tokens that can only be used in voting.

At least some protocols encourage DAO participants by accruing additional tokens at a certain rate in addition to locked tokens. There is another mechanism: those who participate in the voting are rewarded for their activity with the help of periodic airdrops.

What else are governance tokens used for?

While almost all governance tokens have common features and uses, specific features may differ from project to project.

For example, KNC owners can vote for or against the allocation of funds to new partners of the Kyber Network ecosystem, as well as on issues of changing the rate of return for staking an asset.

In turn, protocol token holders curve may also put forward a proposal to create a new liquidity pool (for this you need to block 2500 CRV). However, the proposal must be voted on by the project community.

Owners of the governorship token Synthetix Network not only decide protocol development issues, but also elect members of the governing board. In Dash, owners of a native coin that also has governance features can put forward proposals to use 10% of the fees collected by the blockchain. To become DAO memberyou need at least 1000 DASH.

Metaverse Governance Tokens are often needed to purchase valuable digital items and shape the world. IN Decentraland MANA token is actually a currency for buying digital land. For the same tokens, NFT creators within the metaverse sell their items.