What Is a Governance Token? A Simple Guide to Voting

Naturally, if you've been learning about cryptocurrencies, you've heard of "governance token." At first, it might appear technical, but don't worry, this guide will explain everything in simple everyday terms.

A governance token is a unique type of cryptocurrency that allows its owners to cast votes on choices about the operation of a blockchain project or a protocol. 
 
For example, if a blockchain project is a company, then governance tokens are shares that allow you to have a say in how the business will run. Yet, holders of governance tokens typically use online platforms that use blockchain technology to cast their votes rather than in a boardroom.

Why Are Governance Tokens Important?

In conventional businesses, a CEO or a select group of leaders make all of the decisions. However, in the world of cryptocurrency, particularly in the areas of decentralized finance (DeFi) and DAOs (Decentralized Autonomous Organizations), the concept is that no one individual or organization should have complete authority.

Thus, governance tokens allow the community, including individuals like you and me, to participate in a project's development.

What Can You Vote On?

You can vote on a variety of topics with governance tokens, like:

• In what way project funds should be spent
• To Changes the rules (or code) of the protocol
• Adding or removing features
• Connecting with the other projects
• Upgrading the system or network

In general, there may be a vote on everything that has an impact on the protocol's operation.

How do Governance Tokens Work?

The process of voting is generally referred to as "on-chain governance." As a result, your vote is transparently recorded on the blockchain.

Here's how a normal method works:

• Someone makes a suggestion.  

Anybody with governance tokens can propose a new concept or modification in the community.

• Everyone in the community talks about it.  

The advantages and disadvantages are discussed, frequently on governance portals or forums like Discord.

• Token owners cast vote.  

The suggestion is put to a vote using your governance tokens. You may have more voting power if you own more tokens.

• The change occurs if it is approved.  

Once a sufficient number of people have agreed, the development team or the change is automatically implemented.

Real-Life Examples of Governance Tokens

It is hard to say what are the best governance tokens, however, let's consider a few important examples of governance tokens:

• Uniswap (UNI):The Uniswap exchange's governance token is called Uniswap (UNI). On issues including fee adjustments and liquidity incentives, holders cast votes.
• Compound (COMP): Users can vote on interest rate models and the assets that the protocol should support using Compound (COMP).
• MakerDAO (MKR): The DAI stablecoin system's risk criteria and collateral kinds are determined by MakerDAO (MKR) holders.

Each of these projects depends on its community to guide it.

Do You Get Paid for Holding Governance Tokens?

The answer is not directly. The main purpose of governance tokens is voting power rather than financial gain. But occasionally, keeping them can result in indirect advantages:

• The token's value could increase if the protocol expands and becomes successful.  
• Some protocols give a portion of the protocol's profits to active users as a reward.
• Tokens may occasionally provide additional benefits like airdrops or access to exclusive features.

It's vital to keep in mind, though, that governance tokens are not stocks. You are not given ownership of the business or granted financial success.

The benefits of governance Tokens

• Decentralization: The protocol is not dominated by a single individual. Rather, people in the community share power.
• Transparency: The blockchain makes it clear to everybody who voted for what.
• Incentivized Participation: Due to their concern for the project's future, token holders are driven to make wise choices.

Innovation: New features and helpful improvements can result from community suggestions.

Drawbacks of governance Tokens  

Low Voter Turnout: Many individuals choose not to cast votes which means that a small number of powerful people make all the decisions.

• Whales Have Power: A person can control votes if they possess a significant number of tokens.
• Lack of Expertise: Some token holders are not familiar with the details of proposals.
• Security Risks: Voting systems that are not well-designed are at risk of fraud or an attack.

What Are DAOs and How Do They Use Governance Tokens?

Decentralized Autonomous Organizations, or DAOs, are decentralized organizations that are managed solely by community votes and smart contracts.

To control everything from recruiting engineers to budgets, DAOs frequently use governance tokens. For example, the DAO that controls the Maker Protocol (using MKR tokens) casts votes on how to maintain the security and dependability of the DAI stablecoin.

To be the owner of a governance token in a DAO is similar to being seated at the table of a large, international digital organization.  

Governance Tokens vs. Utility Tokens: What’s the Difference?

Governance tokens let you vote on important decisions about how a blockchain project runs, giving you a say in its future. Utility tokens, on the other hand, are mainly used to access or pay for services within a project — like a ticket to use a platform’s features. So, while governance tokens are about control, utility tokens are about use.

Are Governance Tokens the Future of Democracy?

It's an interesting idea. Even though governance tokens are still relatively new, they are already allowing users to have more control over how digital networks function.

Blockchain-based voting systems might potentially be used by governments, educational institutions, or nonprofit organizations, according to some people's visions. It could improve the speed, fairness, and transparency of decision-making.

However, many issues remain, such as ensuring that voting is safe, accessible, and abuse-free.

How Do You Get Governance Tokens? 

Usually, you can find them by:

• buy them via exchanges (such as Uniswap, Binance, or Coinbase)
• earning them through platform participation (staking, liquidity provision, etc.)
• getting them via airdrops, which are free tokens distributed to early backers

Just be sure to do your homework on the project beforehand, since not all governance tokens are useful or profitable.

Final Thoughts

In the field of cryptocurrency, governance tokens are among the most significant developments. They allow ordinary citizens to have an honest say in the management of decentralized projects. Although they are still in early stages, governance tokens are a step in the direction of a more democratic digital future.

Understanding governance tokens can increase your ability to engage with the communities influencing the next generation of technology, regardless of your level of experience with the governance token meaning.