Those who are the owners of governance tokens have the right to vote in matters relating to the crypto project to which these tokens belong. In a sense, you are a member of the board of directors of the company. This decentralized model makes it possible to manage the project community and achieve the results that the majority needs.

Introduction

In centralized companies where there is control "from the center", various decisions can be made about who works and who does not. From there, decisions are made “where to move” and how much to invest.

In decentralized systems (DAO, DEFI, DApp) everything is different. All token holders vote here, and the right to vote determines the number of tokens one to one. Of course, all this is done for the development of the project and all participants are interested in this.

Operation of governance tokens

Often, tokens go to users who prove themselves on the network, and the voting itself takes place using smart contracts.

MakerDAOwas the first Ethereum-based decentralized governance token backed by DAI. Here, similarly, the token corresponded to the voice. And the participants made joint decisions in different areas: participants, commission, regulations, etc.

Another situation. DeFi has a protocolCompound, thanks to which you can borrow cryptocurrency. It has its own tokenCOMPfor important votes. More tokens go to more active users. And accordingly, whoever borrowed more from the service gets more tokens (votes 1 to 1).

There are other large decentralized projects and exchanges (Uniswap and PancakeSwap) and the rules for using governance tokens are different everywhere. For example, for certain tokens, restrictions on the decision topic may be introduced. Or dividends are provided in some governance tokens.

Benefits of Governance Tokens

1. No disputes on any issues. The decision is always taken by the majority, and the system itself calculates the result.

2.Plus. Communities are formed as loyal as possible to the project. Participants have an interest in looking for new ideas and putting forward and promoting them, while all information is available to project participants.

3. It is very difficult to carry out fraudulent manipulations in this system, since everything is transparent.

Minus governance tokens

1. The problem of large holders (whales). Their influence is very high in the project, since the possession of a large number of governance tokens indicates a large number of votes that the whale can use to please itself, and not the community.

2. The projects themselves strive for a uniform distribution of tokens, but the decision of the majority is not always correct.

Relevance of governance tokens

The governance token system remains very popular today. And every year the use of this system does not decrease, but only increases (in new projects). In decentralized networks, it is now indispensable (Web3). Even the giants in the world of video games are eyeing this system.

In the management token system, something is constantly being invented and developed. The problem of large holders will certainly be resolved.

The problem with the legislation of some countries, where there are restrictions on the use of governance tokens, because. their properties are similar to securities, and here are all the ensuing regulations and restrictions.

Outcome

Governance tokens are the main touch on any decentralized project, because give everyone the opportunity to take part in the life of projects. The system itself is not ideal, but it gives the most transparent picture of the course of the project.