Governance Tokens: What are they, and How Do They Work?

Governance Tokens: What are they, and How Do They Work?

One of the central features of NFTs and the blockchain technology is decentralization, a system that works via the use of smart contracts. However, decentralization has gone from the need for smart contracts to giving community members a chance to decide on the most critical issues. Today, governance tokens have helped to institute these features.  

Governance tokens are the same as most types of tokens and work on the same protocols. However, this token is more than a means of exchange or measurement of value. This article will explore what Governance Tokens are and how they work.


What Are Governance Tokens?

Tokens are digital assets that can serve various functions to the holder. It usually serves as a medium of exchange or a measure of value for the holder. The holder can use it in many ways that offer him utility. Tokens generally have the use depending on what type of tokens it is.

This decentralization has led to the development of communities that runs wholly on the blockchain, using the concept of smart contracts to serve as binding. These communities are usually called Decentralized Autonomous Communities (DAOs); they use smart contracts to define the rights of communities members. However, there is a need to give community members greater power and control in the control of DAOs, leading to the development of the Governance Tokens.

Governance Tokens are new sets of tokens that convey to the holder of the tokens the right to vote on decisions that will affect the community members. As a result, there is a more excellent distribution of power and responsibility to the bearer of the token. In addition, the possession of these tokens makes it possible for one to be a member of the community by possessing such tokens. 

There are several uses for Governance Tokens. It conveys to the holder some rights that include access to determine the direction the community would go. It also serves to define how the technology of a blockchain will evolve. In all, Governance tokens work so that the individual can have the power to decide the changes that happen in the community.

There are arguments for and against Governance Tokens. Some people believe that the tokens offer no new capability to the blockchain technology as the decentralization that it promotes is part of the original blockchain concept. On the other hand, others believe that it offers more than just what other technologies of the blockchain provides. 

An example of a Governance Token is Maker (MKR), which allows the holders to vote on decisions about the Defi protocols that DAI, a stable coin, runs on. Others include AAVE and COMP, and they offer different capabilities.

The question then becomes, how does Governance Tokens work?

How do Governance Tokens Work?