GOVERNANCE TOKEN
Token for your voices in the ever decentralizing world
Table of contents
- What is a governance token
- Aspects and risks of governance tokens
- Governance token in the metaverse/games
Governance Tokens?
Blockchain is a technology designed for a secure and transparent transaction between individuals. At the heart of its philosophy lies decentralization. If we can build a network that can be secure and transparent at the technological level, why would we need centralized middlemen? Therefore, blockchain projects innately have a drive for the decentralized autonomous world.
When the world goes free of the centralized middlemen, the code and protocol will be the law. But the world will continue to evolve and also should the law to keep abreast of the changes. Thanks to blockchain technology, we can build a governance system that is decentralized, transparent, and autonomous. It is in its infancy and will rapidly evolve, but it is important to understand how it works for us to prepare for the decentralized future.
This is why the governance token is a pinnacle of all blockchain-based tokens because it is a key to maintaining accountability amid being decentralized. Just like oil to the cogwheel, governance token will facilitate decentralized governance.
In this article, we will discuss aspects that consist of decentralized governance, limitations or hardships in making one, its need, and, in the end, its use case in association with gaming.
Aspects of the Governance System.
Making a governance token and a decentralized governance system requires fine master craftsmanship for there are many aspects for the designer to consider.
Though there are differences between each governance model, the governance procedure in blockchain networks roughly follows these steps.
- Submit proposal
- Voting
- Evaluate the proposal
- Implementation or rejection.
The whole process should be autonomous.
One thing you should understand is that there is no boilerplate that fits all. Blockchain governance can have various forms depending on the structure and purpose of the project. Therefore, in this article, we want to break down the structure of the governance procedure and talk about each aspect in general.
- The proposal
In order to start the voting procedure, there must be a proposal, and the quality of the proposal directly affects the quality of the project. We can say that the ability to propose is the cornerstone of decentralized governance.
Submitting the proposal, the individuals are often rewarded in several forms. DFINITY, a project that connects computers globally through a distributed cloud service based on blockchain, has some interesting practices regarding proposals and submission fees. When submitting a proposal, the person can pay a submission fee, which in return will grant him more voting power depending on how much the one pays. Though there is raised eyebrow for it being a pay-to-win governance model, it is indeed an interesting way to reward the active participants. Some governments introduce the system to reward the person who submitted a proposal when the proposal is implemented to the system. This can also be another cool way to incentivize the proposers.
Submission fees in DFINITY help maintain a higher quality of the proposals. The fee prevents the torrent of low-quality proposals, but it can also hinder active participation. It will be crucial to find the balance of fee that promotes high-quality proposals while defending against spam.
2. Voting system.
Individuals can participate in the governance of a project through voting. No matter how good the proposals there are, without a well-designed, working voting system, it is impossible to maintain decentralized governance.
Usually, the individual who owns the governance token earns the right to vote. Sometimes it is necessary to stake their token in exchange for the right to vote. Some projects have a delegation system to help individuals who want to participate in the governance but do not have time to study the proposals, similar to how the congress in real life works.
Cosmos, a blockchain network that is designed to connect multiple blockchain networks, has validators and delegators in its governance. Delegators can lend tokens to a like-minded validator so that the validator can have more voting power. Delegates can withdraw their token at any time if the validators vote is not aligned with their interest.
The topics that are being voted on can be varied. Some of the topics include, but are not limited to, usage of funds, changes to the governance model, changes to block size or gas prices, fixing bugs, UI changes or adding new content.
3. Evaluation and Rollback system
The proposals should be evaluated before implementation. Both the problem and the solution that the proposal addresses should be backed by facts and data. This process can be cumbersome and time-consuming, thus the person who evaluates should be rewarded, possibly with tokens.
However, even if the proposal went through evaluation, malign decisions are inevitable in the voting system. Sometimes malign actors can exploit the system by capitalizing when there are not enough active voters. Sometimes a proposal that is implemented can turn out to have an unforeseen negative outcome. And sometimes the project simply needs some changes or upgrades to avoid disaster. In such cases, the project must have levers to roll back and address the critical issue.
What are the hardships in designing a governance system?
The history of political philosophy shows how hard it is to design a governance model, and making it decentralized and autonomous ramps up more challenges. When the governance is live on the blockchain network and when everyone can see and access the governance, it will get much more difficult to change how the system works. Therefore, we should get it right in the first place. In order to do so, we should take into consideration the hardships in designing decentralized governance and implement systematic measures to prevent such problems.
- Keeping the participants motivated.
Democratic governance requires the active participation of the members to more effectively reflect collective intelligence. However, as we can see in our real-life politics, it is not an easy task. Decentralized governance in blockchain projects faces the same obstacle. It can be even worse for there is no centralized authority to drive the members to participate. Therefore, ways to incentivize people’s participation should exist innately in the system.
This is where the governance token shines. Not only can it reward the people participating in the voting procedure, but also the value of the governance token in the market can be a strong drive. As the value of the governance token is tied to the performance of the project, the voters have intrinsic motivation to make sure the project succeeds. Otherwise, the value of the token will fluctuate, which will hurt the token holders. It is on their hand to secure the value of the token, and therefore, they are encouraged to participate in the decision-making process.
2. The public is not always right.
Winston Churchill once said that: “democracy is the worst form of government — except for all the others that have been tried.”
It is very apparent that the melting pot of diverse thoughts and idiosyncrasies of the masses can unlock the power of collective intelligence, leading to brilliant ideas and projects. But we should never forget that humans are imperfect and often misbehave due to various reasons and influences, like lack of sufficient information, misinformation, groupthink, selfishness, populism, and filter bubbles, just to name a few.
The reason why we have congressmen is that each individual cannot have such a level of proficiency, information, and awareness of the issues that arise in governance. The same can be applied to decentralized governance. As there is no centralized entity, individuals should make their own decisions, which can be a daunting challenge.
In order to tackle the issue, DFINITY has an automatic voting system for each member, the ‘neurons’, to follow the choice of other neurons. A voter can decide whom his or her vote should follow, and can have different persons for each different category. Also, the members can immediately stop the support when the delegate’s decision does not align with their interests.
Also, we should not forget the warning of Aristotle of demagogues instigating the public to put the benefit of some individual over the benefit of every member, the welfare of the society, and the prosperity of mankind. The goal of the decentralized governance procedure is to secure and improve the project, and thereby expand the benefits of all the participants, and not just to benefit a certain group of people. The thoughtful rules and regulations should be written on the blockchain as a smart contract, and they should be upheld in the decision-making process.
3. The whales and the trolls.
One big issue in decentralized governance in blockchain networks is that it tends to grant higher voting power to the person who stakes more tokens. While it is a great way to incentivize to stake more, it can potentially bring consolidation of power in the decision-making process, which works in favor of the few whales over the general project. Ideally, the whales deserve their votes as they are the ones who have supported the project at an early stage against all the odds, but inequality is the last thing we would want to see in decentralized governance.
Another problem is with the trolls. Democratic governance assumes that every individual is rational, but it is not the case in real life. There are people who make irrational decisions for the sake of fun or any other aberrations. These actors, whether deliberately or not, can drive a project wayward.
Incentivizing the voters, rigorous evaluation, and putting an effective and transparent roll-back system in place should be required to prevent such bad actors.
Then again, why do we need governance tokens?
Governance tokens are required to run the increasingly decentralized world. It accelerates the adoption of new participants and empowers the participants in the decision-making process by effectively incentivizing the active participants. It also creates a feedback loop that can be self-reinforced, adding value to the project. So, the effective governance system of and in itself can give a competitive edge to a project over another, and people would want to invest in a project with one. Traditional financiers are increasingly drawn to the ESG compliant businesses, the same goes for crypto.
While blockchain technology is like a brick that underpins decentralized governance, the governance tokens are the glue that holds the systems together to work, and it is a key to attract more people into the project.
Governance in gaming and metaverse.
How does governance token relate to the games and metaverse?
The gaming community has always been vibrant with thousands of gamers who spend as much, or even more, time on the gaming community as on the game itself. When people gather around, it creates social order and the need for governance. Especially in MMO, there has been and always will be the endemic need for governance, and as we have discussed earlier, the governance token can be the key to form decentralized governance.
At the initial stage, the governance token will work as a beacon to attract players who are eager to participate. However, it is almost impossible to reach a fully autonomous level of governance at the early stage, especially for the games. Game development is such an unpleasantly sophisticated practice that is challenging but unappreciated. It involves such a complex layer and components, such as different development layers, arts, game design, economy design, customer services, and bug reports, and etc. So, it would be unrealistic to transfer the steering wheel to the participants immediately. This is why it is hard to find a blockchain game that has fully decentralized autonomous governance. Still, at the end of the day, the ultimate goal is to transfer the decision-making process from the company to the players.
So, why would gamers want decentralized governance?
First of all, governance tokens will be a glue to connect the game developers and the gamers and their communities to work seamlessly and grow together. The token’s value is tied to the performance of the game, and therefore the token holders (both developers and the gamers) have the aligned interests to cooperate to make the game better. It will create a positive synergy between the two parties, which only had a unilateral relationship for decades.
Moreover, decentralized governance provides gamers a means to participate in game development. While the gamers and their community have grown so much influence in the game industry, they failed to get their voices heard. A lot of gamers get frustrated when game companies fail to communicate with them and leave. When the decentralized governance model takes root, it will become an arena for the gamers to finally voice their proposals and participate in decisions regarding the game that they love.
Final thoughts.
Decentralized Governance has been one of the crucial elements of blockchain technology. However, just like any other political structure, it is not an easy task to build one, especially when its goal is to make it decentralized and autonomous. Nevertheless, there are so many potentials in decentralized governance and the governance token. Though at such an early stage, the game industry is moving towards decentralized governance, and it will transform the whole interaction between the developers and gamers. And we believe that the relationship we will see in the future will be a positive one.
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