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What are Governance Tokens?

Posted July 21, 2022 2:46 pm
3 min
By Priscila Dick

Blockchain technology unlocked an almost never-ending waterfall of opportunities and innovations within the digital world. From decentralized finance (DeFi), Non-Fungible Tokens (NFTs), Web3 gaming, tokens, and many more.

These technologies allow for the birth of various organizational and ownership models. Subsequently, the products, services, assets, and the like emerging from these models are user-owned and operated – while also being built for and by the communities they serve.

But this level of decentralization brings an array of challenges around coordination, governance, and decision-making. To resolve this in earnest, communities adopt new and novel tools to help make meaningful decisions across time, space, and language. 

Enter governance tokens

According to CoinMarketCap, governance tokens are tokens that developers create to allow holders to help shape the future of a protocol. “Governance token holders can influence decisions concerning the project such as proposing or deciding on new feature proposals and even changing the governance system itself,” it explained. 

Commonly speaking, these proposed changes are vetted and then voted upon through on-chain governance accessed by using these tokens using smart contracts. While in other cases, the team behind the project is tasked with applying these changes or bringing in people who will. 

With that in mind, projects and systems that leverage governance tokens preach the allowance of user control, holding true to the core belief of cryptocurrency being decentralized and democratized.

These projects or organizations are labeled as decentralized autonomous organizations (DAOs). An example of governance tokens can be seen through Maker (MKR), which paves the way for holders to vote on decisions revolving around DeFi protocols that the decentralized stablecoin (DAI) runs on.  

For instance, holders of said token can choose to vote on switching the complex economic rules governing decentralized lending in a bid to keep a DAI’s price stable. 

In the Web3 gaming industry, game developers offer two different tokens to their players: a utility token and governance tokens. Offering utility and governance tokens are usually part of an economical design structured so players can earn rewards while they play.

However, it is essential to clarify that Web3 games do not necessarily offer tokens to their players. It is not mandatory. For example, some games can focus on NFTs (Non-Fungible Tokens) alone. 

Learn: A token is a type of cryptocurrency created on the blockchain. A token can be used for governance, rewards or other use cases. They are typically traded on a centralized or decentralized exchange.

The most usual type of token Web3 games issue is utility tokens. They allow players to pay for in-game assets while also the token offered to them as part of its reward structure.

In lieu of blockchain gaming, governance tokens offer the possibility of voting on decisions that affect the overall game. In other words, players contribute to the token’s issuer considering the scope of governance the token was created for.

It’s all about direction – think of a governance board steering an organization based on its goals and objectives. Simple examples of decisions a governance token in a Web3 game allow users to take part in include:

  1. New game features
  2. Which bugs to fix first
  3. Changes to the in-game economy
  4. Which skills/spells to nerf

This is just a brief introduction to the basics of governance tokens. Please remember to do your own research and check out our other educational content to help you on your Web3 journey.

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Disclaimer: The information provided on this page do not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the website's content as such. Individuals should do their own research before taking any actions related to the product they read about and carry full responsibility for their decisions.