Governance tokens are an essential component of decentralization. Governance token holders have the power to shape the future of a blockchain protocol and receive voting rights based on the number of tokens they own.
What Is a Governance Token?
Governance tokens are perhaps best described as an important decision-making resource in a decentralized autonomous organization (DAO).
Governance tokens are created and distributed by developers to allow holders to actively decide on the direction of a protocol. Anyone with a governance token has the ability to affect the protocol’s direction.
When it’s time to vote on proposals, a greater amount of tokens equals having more voting power. You can have an impact on anything from how the project’s budget is spent to what features are created in the next months.
Most protocols include a standard proposal submission mechanism that allows developers to submit multiple proposals. If a submission is put to a vote, token holders can utilize their voting power to influence any prospective changes to the project.
How Do Governance Tokens Work?
In centralized governance, a corporation’s board of directors has complete control over decisions about the corporation’s business strategy. A DAO, on the other hand, eliminates centralized decision-makers.
However, decisions concerning the project’s future must still be made, and that’s where governance tokens step in. DAOs can make decisions through a decentralized governance mechanism based on community votes and ideas.
The use of governance tokens is a feature shared by all DAOs. Because these tokens reside on the blockchain, they have properties such as transparent distribution and irreversible ownership, making DAOs an ideal decision-making environment.
When a governance proposal is put to a vote, token holders are offered the option to vote on the blockchain. In most circumstances, a token holder’s voting power is directly proportional to the total amount of tokens held.
Let’s consider the MIMO governance token as an example. Mimo governance tokens are distributed to MIMO protocol users when they create PAR through borrowing or provide liquidity in AAM pools.
That gives MIMO token holders the power to vote on proposals that govern the ecosystem. When a proposal gets majority support, it’s automatically executed by the DAO.
Final Words
Governance tokens are currently still in their early development stages, but they still managed to support the rapid expansion of numerous DeFi and DAO projects. Since they provide users with voting power for a project’s direction, governance tokens are the foundation of decentralization.
As long as governance tokens are distributed fairly evenly among members, the notion of one token for one vote puts users and the community at the center. That’s why more and more blockchain projects should start implementing governance tokens if they want to participate in building the decentralized ecosystems of the future.
