What is a Governance Token? What does it do?

Virtual assets developed for users to have a say in critical decisions that will shape the future of blockchain protocols are called Governance Token or Governance Token. Thanks to these tokens, token users gain the right to decide on the product to be developed within the project’s roadmap or new features to be added to the system.

Governance token holders can also suggest new features to be added to the protocol. It is also possible for them to make critical decisions such as putting the improvements in the roadmap into action or revising and redesigning them.

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The network can be managed democratically, thanks to the governance tokens that offer its owners the right to vote in almost any change to the protocol.

Every protocol is “flawed”

All software, for whatever purpose, needs to be updated or patched over time. Security vulnerabilities that could not be foreseen at an early stage may emerge later. There may be certain parameters in the code structure that need to be updated for optimization purposes.

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While all these changes we have mentioned are realized by the decisions of the administrators in traditional central structures, they are decided through a democratic structure in which every user can have a say in decentralized structures.

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Governance token holders use their voting rights depending on the amount of token they hold in the changes. The change indicated by the collected votes is usually implemented automatically through smart contracts. Sometimes, the team managing the project implements the change determined by the votes of the users.

Self-running structures that allow users to control changes in the protocol are called Decentralized Autonomous Organizations (DAO). In these structures, all transactions run automatically through Smart Contracts.

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Maker (MKR) is a well-known example of governance tokens. Working on the decentralized stablecoin DAI, MKR gives its owners the right to vote on network changes.

On the other hand, there are also projects defined as “blockchain governance” where decisions are made through the code structure. For example, their own management structures had been formed, such as increasing the block size in the Bitcoin network or whether the idea of ​​Segregated Witness (SegWit) would be implemented or not. In large networks such as Bitcoin and Ethereum, structures such as the “Bitcoin Foundation” and the “Ethereum Foundation” that do not have a direct relationship with BTC or ETH holders have been developed.

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In governance mechanisms that emerged later, such as QTUM, a formal relationship was tried to be established between token holders and management units.

As the common form of governance, token-based asset management applications stand out. In projects such as DASH and Decred, token holders; It has the ability to transfer funds to contractors who perform various project-related services such as research, development, public relations, outreach and legal representation.

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