Crypto industry keeps getting bombarded with new tokens every now and then. There are different kinds of tokens available on the market, such as utility tokens, governance tokens, and security tokens. Now, governance tokens are a crucial part of the crypto ecosystem and are all set to evolve into more prominent assets in the near future.
What Is A Governance Token
A governance token provides its holders with the right to vote on subjects that concern the operation and development of a blockchain project. Through this token, the decision-making power is distributed among the community members. Thus, it helps align the interests of the project with those of the token holders.
How Does It Work
Governance tokens are the primary element to bring in decentralized governance in DeFi, DAO and DApp (Decentralized Applications). Active users are often rewarded with these tokens for their contributions and loyalty to the community. Token holders then vote on the issues that can bring major development to the project. The voting mechanism is carried out using “smart contracts”, therefore automatically implementing the results.
Projects are free to set their own outline for the workings of their governance tokens. These tokens are then distributed to all the stakeholders, including investors, the founding team, and users, according to particular calculation models. Some of these tokens can vote on a specific set of issues while others cover most of the issues. Also, some tokens let the users earn financial dividends too, while others do not make such profits.
Pros And Cons Of Governance Token
Pros
- Elimination of mis-aligning of interest unlike centralized governance
- Governance token transfers the management power to a broader community and lets the users align their interest with the organization.
- All this let these tokens build a close, collaborative and active community.
- The primary benefit of equitable decision-making is there with governance tokens.
Cons
- The biggest challenge is the whale issue. If you are familiar with crypto lingo, you will know the term “whale”. This term is used to denote the people who hold onto a greater percentage of a specific cryptocurrency. So, if the whales of a certain project are holding up the majority of the tokens, they can swing the decision in their favor.
- Another con is that there is no guarantee that the majority decision is the best decision. This disadvantage is not definite, but it cannot be disregarded either.
Future Of Governance Tokens
The Governance Token has just joined the industry and still has a wide sector of the market to explore. The Web3 ecosystem will definitely open more gates for this token with its decentralized mechanism. Along with DAO and DeFi, crypto gaming can soon adopt this token model for fair play. The voting process may evolve, and once the whale issue is solved, the governance token will emerge as a winner in tokenomics.
Conclusion
For still being in the development stage, governance tokens have shown promising progress. They have led to the growth of many DAO and DeFi projects. These tokens will soon become the pillars of a decentralized system in the crypto world because of their voting feature. Governance token will continue to expand its limit in the future with its one token one vote rule.
