A Governance Token: What Is It?
Developers design governance tokens to let token holders influence the direction of a protocol. Owners of the governance tokens have the ability to vote on requests for new features, change the governance structure, and make other project-related choices.
The modifications suggested, examined, and then approved by on-chain governance, accessed by using governance tokens, are frequently implemented automatically because of smart contracts. In other instances, the team in charge of sustaining the project is responsible with implementing the adjustments or with finding a replacement.
Systems that use governance tokens are defended on the grounds that they permit user control, which is consistent with the decentralization and democratic goals of the original coin. Organizations that allow users to direct the evolution of their systems are typically referred to as decentralized autonomous organizations (DAOs).
Maker (MKR) is a well-known illustration of a governance token. The decentralized stablecoin DAI is based on the decentralized finance (DeFi) technology, and this token gives its holders the ability to vote on issues related to it.
Holders of MKR, for instance, have the power to vote to alter the intricate economic laws governing the decentralized lending that enables DAI to maintain its price stability. MKR holders were voting on whether the protocol's debt cap should be lifted at the moment the text you are reading was created.