Understanding Tokens and Governance Tokens

Before we talk about what governance tokens are, it would be a good idea to understand what a token is.

Tokens represent digital interest in assets and serve as facilitators for transactions on a blockchain. Technically, “token” is just another word for “cryptocurrency” or “cryptoasset.”

Governance tokens represent the main utility tokens—a type of token that is used to access a particular product or service within a blockchain-based ecosystem that developers create to allow token holders to help shape the future of a protocol (basic sets of rules that establish the structure of the blockchain).

The creation of Governance token

It began on April 30, 2016, as a part of Ethereum and received funding through an ICO (Initial Coin Offering)- It is a fundraising method used by cryptocurrency and blockchain projects to raise capital.

The DAO was the first try at making something really decentralized.

Maker: MKR is widely considered one of the first governance tokens in DeFi (Decentralized Finance). Maker DAO’s MKR, which started in 2017, is one of the most successful examples of a governance token. MKR token holders vote on-chain on topics ranging from DAO (Decentralized Autonomous Organization) governance processes to ratifying new collateral types (collateral tokens are assets that are used to reduce risk when borrowing other types of crypto tokens, e.g., collateral pay, just as we have collateral types in a normal instance, e.g., auto loans, mortgages, and secured credit cards).

Another project that used governance and made farming tokens popular was the Balancer (BAL) token. This protocol was created between 2017 and 2018 and became available in 2020 with the addition of the government token.

Fostering Community Participation with Governance Tokens

A governance token is a type of cryptocurrency that seeks to democratize the management of decentralized applications (dApps) and other blockchain-based protocols.

One good reason you need a governance token is due to the fact that governance tokens allow a community to have a direct impact on the strategic management of a cryptocurrency project. To ensure only honest members of the community participate in the process, governance tokens provide voting powers to their holders. A governance token is of great benefit to every holder because its holders have voting rights to influence a project’s direction, proportional to the number of tokens they hold. Token holders can vote to propose changes to a protocol, such as implementing product upgrades, adding new features, and modifying the system’s parameters. Token holders who actively participate in voting and proposing changes can earn rewards or fees from the platform.

Start with Governance Tokens

Purchasing governance tokens is not so difficult. Crypto.com offers a user-friendly platform for buying and trading various tokens, including governance tokens. To get started, download the Crypto.com app and create an account. From there, you can easily buy and trade your preferred governance tokens using the app’s intuitive interface.

You can actively trade your governance tokens, as they are commonly bought, swapped, exchanged, and staked, offering passive income.

Earning governance tokens doesn’t solely depend on their activity levels within the compound network.

If you want to purchase some governance tokens, here are some good examples of governance tokens you could purchase: Uniswap, Internet computer, maker, Aave, synthetix network, eCash and so many more

The importance of Governance Token

The purpose of governance tokens is to decentralize decision-making and empower holders to influence the project’s operation. Governance tokens are important because they make things fair and not controlled by just a few people. Without them, users wouldn’t get to help decide how things work in DeFi. They are like special keys for making group decisions on online projects. Developers utilize these tokens in Web3 projects to decentralize power among a broad user base.” Without them, DeFi would have to rely entirely on very intricate computer contracts.

Limitations of Governance Token

Some of the problem with governance tokens is that big owners can control things more. 

They might make choices that aren’t good for everyone, so it’s not always fair.

If a small group of people get a lot of a project’s governance tokens, they can use their votes to make choices that don’t help the whole project. 

Some suggestions are too hard to understand for regular users. 

People vote by listening to important people who tell them what to do. 

There are too many suggestions.

Basic Points

• A governance token is a type of utility token, or better yet, a cryptocurrency, that gives holders the right to propose and vote on key changes to an underlying protocol.
• Many widely regard Maker (MKR) as one of the earliest governance tokens.
• Acquiring governance tokens doesn’t solely rely on their activity levels within the Compound network.