Governance Token

What Is A Governance Token?

Governance tokens are tokens that developers create to allow token holders to help shape the future of a protocol. Governance token holders can influence decisions concerning the project, such as proposing or deciding on new feature proposals and even changing the governance system itself. The power invested in the holders can change the future of a nation.

Deeper Definition

In many cases, the changes proposed by these token holders and vetted and then voted on through on-chain governance accessed by using governance tokens are applied automatically due to smart contracts. In other cases, the team maintaining the project is tasked with applying the changes or hiring someone.

Recently, they are mostly integrated into DeFi projects since they need to distribute powers and rights to users to remain decentralized. As of February, the top 5 crypto projects in the DeFi segment have a combined market cap of more than $50 billion. If they were all to form one gigantic ecosystem with a single token, this mass would be ranked third on all crypto market leaderboards.

Such a trend implies that aspects like decentralization truly matter and that there is serious interest in participating in governance. Although many refuse to participate in politics in real life, it appears that crypto people love having a say in their favorite projects. After all, they stand to benefit from their choices directly. It can be a means to solve political apathy.

Even though many DeFi tokens in the market are governance tokens, that does not mean that voting is the only feature behind them. With these tokens, one can create and vote on governance proposals. By doing so, the user directly influences the direction and characteristics. These cryptocurrencies often allow users to stake, create loans, and earn money by yield farming. Due to these accesses, one can find oneself actively in politics.