Governance Token

Understanding Governance Tokens

A governance token is a unique type of token developed by developers to empower token holders in shaping the future of a protocol. By possessing governance tokens, individuals possess the capability to influence various decisions concerning the project. This includes proposing and determining new features, as well as making alterations to the governance system itself.

In numerous cases, suggested changes are thoroughly examined and voted on through on-chain governance, which is accessed using governance tokens. These changes are frequently executed automatically through smart contracts. However, there are situations where the project team is accountable for implementing the approved changes or employing someone to do so.

Advocates of governance token systems argue that they facilitate user control, aligning with the principles of decentralization and democratization that form the foundation of cryptocurrencies. Organizations that permit users to influence the development of their systems are commonly known as decentralized autonomous organizations (DAOs).

An illustration of a well-known governance token is Maker (MKR). Holders of MKR possess the ability to vote on decisions related to the decentralized finance (DeFi) protocol that operates the decentralized stablecoin DAI. For example, MKR holders can vote on modifying the intricate economic rules that govern the decentralized lending system supporting DAI’s price stability. At the time of writing, MKR holders were actively participating in voting on whether to increase the protocol’s debt ceiling.