DEMYSTIFYING GOVERNANCE TOKENS AND WHY THEY MAKE GOOD INVESTMENTS
If you have been following previous posts from this blog, you can easily infer tell it is geared towards helping you maximize your earnings during the course of your cryptocurrency journey. In order to true to this thematic preoccupation, we most definitely have to address a pressing issue. It is next to impossible to exist in or around the crypto space, be it actively or passively, and you have not heard of cryptos such as $CAKE, $AAVE, $UNI, etc. The rave reviews surrounding them, as well as the humongous profits their traders have been raking in for over a year non-stop, are almost impossible to ignore. In fact, you might already be among the profiting investors in these gems. This class of cryptos are called governance tokens, and this piece will attempt to break down what that means, why they have been performing so well, and how to spot the next big governance token.
Before we delve into the crux of governance tokens, it would do a world of good to bring into light what Decentralized Autonomous Organizations (DAOs) are. DAOs, otherwise known as Decentralized Autonomous Corporations, are organizations designed to have its rules engraved in a set of codes which allots every member voting power to alter the rules in the form of tokens. The activities and data of a Decentralized Autonomous Organization are hosted on a blockchain, making it public and transparent; as well as effectively eliminating the need for a central government. All its rules, features, and structuring are determined and altered by a majority vote by token holders, with the voting power of each party denoted by the amount of tokens he possesses. These tokens are governance tokens.
With this in mind, we can explore a broader view of governance tokens.
“Governance tokens are tokens that developers create to allow token holders to help shape the future of a protocol. Governance token holders can influence decisions concerning the project such as proposing or deciding on new feature proposals and even changing the governance system itself.” — CoinMarketCap.
The above definition perfectly encapsulates what governance tokens are. They basically represent your franchise in the digital democracy. It is quite easy to locate the place of Decentralized Autonomous Organizations in the definition, though governance tokens are not necessarily relegated to DAOs. The decisions made by stakeholders via governance tokens are automatically implemented by the smart contract, or the team behind the project. Governance tokens can also appear in various activities other than voting, such as staking or farming.
Knowing what governance tokens mean, why has their popularity shot up over the past year? It is noteworthy that DAOs, and governance tokens by extension, are not new entities. In fact, the Bitcoin network might as well be regarded as the first successful Decentralized Autonomous Organization, with Bitcoin being its governance token. However, the more recent conception of a decentralized organization is more evolved; thanks to the 2016 startup named The DAO. The DAO was developed by the German company, slock.it, and was more or less a decentralized version of Airbnb in providing its services. After pulling the most successful crowdfunding of the time, its faulty code succumbed to hackers, and caused a lot of problems for the furtherance of the DAO march. This caused its acceptance to stall, until the great DeFi boom of 2020. The sudden popularity of DeFi and decentralized projects amongst crypto enthusiasts triggered a corresponding popularity of their governance tokens in the market, and they have barely looked back ever since. An example is the launch of Uniswap’s governance token, $UNI, and its instant popularity driving its value up by well over 100% ever since.
So how can you devise a winning formula to scout for the next high flying governance token? You would have to factor the qualities that make a governance token stand out. There are some general factors that would indicate a crypto’s potential trajectory, such as we have discussed in one of our previous posts. In the context of governance tokens, you might want to put into consideration the popularity of the services offered by its native project, the enthusiasm and activeness of its holders in the project, major decisions voted upon in the project (such as bridging or forking), amongst others.
Our journey through governance tokens comes to a halt here. While this piece was geared towards understanding governance tokens in the context of profiting off of them, you can very well get a few ideas in buying into the DeFi vision. However you choose to take it, you’re welcome!
