Seeing the opportunity, developers all over the world are creating programmatic systems for on-chain governance, and issuing governance tokens, which give holders the right to vote on protocols, products, new features, goals, upgrades and maintenance of a blockchain.
In short,
Governance tokens as virtual equities, but better.
You can buy/sell them freely on open market, no restriction, as long as there is liquidity.
Have utilities.
Functions:
1. Voting System
To decide the future of the protocol.
User/Developer submits proposal, token holders vote for pass or fail.
- A good example of the protocols that needs governance token badly.
a) Tornado Cash
b) Compound Finance
The Ethereum-based Compound governance token ($COMP) allows holders help determine interest rates for this lending platform, for example. It’s possible that down the road token holders will vote to award themselves with even more favorable lending or borrowing rates, or decide to direct a percentage of cashflows to token holders.
2. Liquidity Mining
Provide your tokens into liquidity pools and get rewarded with trading fees and token incentives (liquidity mining)
Eg. (BAL/USDT, UNI/USDT, BAL/ETH)
3. Collateral
Lend your asset to Decentralized lending protocols (Aave, Compound, etc.) to earn some yields.
Borrow any available asset to leverage your earnings with calculated risk. (Do not over leverage, control your health factor)
Why governance tokens are important?
Company = DeFi Protocol
Share/Equity = Governance Token
First, you have to check the token distribution & token emission(inflation rate) by the team, mostly available in whitepaper. Make sure the number is reasonable, fair and square so that no whales are able to manipulate the voting system.
(Example: Token Distribution of $AVAX)
Let’s assume that you are a shareholder of a company, if you are the largest shareholder of the company (>50%), theoretically you will be able to reject any proposals submitted by anyone. Same things applied to DeFi protocols! Make sure no one held more than 50% of the circulating supply. Abandon it immediately if you found any.
If you think that the company has the potential to be one of the biggest thing in the future, you might want to hold a fraction of share of the company. Same goes to DeFi protocols.
Unlike TradFi, if you are a token holder, you will be able to take part in the governance voting session, everyone can participate as long as they have 1 token.
1 token = 1 vote.
Let’s say someone submitted a proposal on Compound Finance to increase the $DAI deposit interest rate to 20% APY. We all knew that the protocol does not have enough revenue to provide that fat juicy yield. If that proposal get passed, the entire protocol will go bankrupt and no one wants that. To protect the protocol that you liked, you should take the responsibility to vote ‘NO’ to reject the proposal. Vice versa.
Self Thoughts
Protocols that are useful with governance token:
Tornado Cash (or other Mixers) - To control the movement of the hacked funds
All borrowing and lending protocols - Adjust interest rate, emission rate, token listing, vaults improvement
1inch DEX Aggregator - Referral reward, gas fee refund
In my opinion, governance token is still in an immature stage, majority of the people would like to lock their profit in fiat rather than just holding/staking the tokens. Majority still does not know their utilities yet!
Have fun interacting with the bridges! Enjoy the multiverse and cross-chain world!
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