What are governance tokens, and how do they work? — adidaswilson

In the world of decentralized finance (DeFi), governance tokens have become an increasingly popular way for cryptocurrency projects to give their community a say in the project’s direction and decision-making process. In this article, we will explore what governance tokens are, how they work, and their potential benefits and risks.

What are governance tokens?

Governance tokens are a type of cryptocurrency token that gives holders the right to vote on decisions related to a particular blockchain project. These decisions can include anything from changes to the project’s code or rules to the allocation of funds from the project’s treasury.

Governance tokens are often distributed to early investors or contributors to the project, as a way to incentivize their participation and give them a say in the project’s development. Governance tokens can also be earned by staking or providing liquidity to the project’s decentralized exchange.

Examples of governance tokens include COMP, which is the governance token of Compound, a popular DeFi lending platform, and UNI, which is the governance token of Uniswap, a popular decentralized exchange.

How do governance tokens work?

Governance tokens work by giving holders the right to vote on proposals that are submitted to the project’s governance system. These proposals can be submitted by anyone in the community, and can range from small changes to the project’s code to major decisions that affect the project’s direction.

When a proposal is submitted, it is reviewed by the project’s community, and if it is deemed worthy, it is put up for a vote. The voting process is typically conducted using the blockchain’s built-in governance system, and each token holder is given a certain number of votes based on the number of governance tokens they hold.

Once the voting period has ended, the results are tallied, and if the proposal is approved, it is implemented by the project’s developers. If the proposal is rejected, it is either revised or abandoned, depending on the feedback provided by the community.

Benefits of governance tokens