What Is a Governance Token?

In the decentralized satellite of blockchain, projects are often looking for ways to administer a greater magnitude of powerfulness and work to their users. But successful bid for that to work, they request to employment a method that guarantees lone users who are earnestly committed to the occurrence of the task enactment successful it.

One mode to execute that is to make a peculiar benignant of collectively managed enactment known arsenic a decentralized autonomous enactment (DAO) and necessitate participants to put their ain wealth successful speech for voting powers to guarantee they each enactment honestly and the DAO prevails. Usually nether this setup, those who put much wealth person greater voting powerfulness implicit those who don’t.

A benignant of inferior token known arsenic a "governance token" is past issued to users to correspond each person's involvement successful the DAO.

Distributing power among stakeholders successful this mode is called “on-chain governance.” The powers denoted by the governance tokens whitethorn see accepted absorption roles and the authorization to alteration the project’s protocol, i.e. its instauration successful code. Sometimes users’ votes are weighted proportionally to the size of their holdings of the governance token.

To guarantee that the holders of governance tokens person an involvement successful the bully wellness of the task agelong term, protocols often transmission a stock of web transaction fees into the wallets of the token holders. The tokens whitethorn besides transportation non-governance rights, similar the close to beryllium exchanged for definite different tokens astatine predefined rates.

For example, the Terra web uses a governance token called luna. Luna is traded connected integer exchanges, conscionable similar a regular cryptocurrency, but 1 of its halfway functions is to alteration its holders to enactment successful votes connected the web policy. A ballot by luna holders precipitated a determination to "burn" tens of millions of luna tokens successful 2021 and mint millions of caller TerraUSD stablecoins. The pros and cons of the determination were hotly debated among luna holders successful the run-up to the vote. A full assemblage tin enactment thing similar an tremendous committee successful this way, strictly organized by the impersonal mechanics of the protocol’s smart contracts.

Governance tokens, therefore, get immoderate of their worth from the information they confer definite powers to their holders. That whitethorn lend to their sizable valuations: Luna ended 2021 trading astatine much than $80. In this way, they disagree from accepted cryptocurrencies similar bitcoin, which functions much similar accepted wealth arsenic a store of worth and mean of exchange.

DAOs often operation their decision-making utilizing governance tokens. These entities purpose to debar cardinal absorption altogether by placing authorization wholly into the hands of stakeholders.