Originally published in the Zild blog.
Governance tokens have got tremendous popularity this year. With yield finance creating new records, governance tokens have become the biggest hit of the Ethereum ecosystem. So, what role does governance tokens play? Well, governance tokens give the token holders the power of influencing the direction in which the DeFi project will move.
There’s still a long way ahead for the governance tokens but one thing is for sure that the governance tokens are becoming increasingly popular. It is also making the users a direct stakeholder in the DeFi platforms. But there is an issue here! Many still don’t get it why are these tokens important. We expect that with the rise in popularity of DeFi, the knowledge about governance tokens will also increase.
What’s the use of Governance Tokens?
Everyone in the crypto space will agree that decentralized finance is all rage these days. At the same time, the decentralized protocols are evolving and it is of critical importance that its decision-making process is refined. There’s a great thing about on-chain governance — It allows every stakeholder to discuss and vote on how to manage the protocol.
You can call the “Governance Tokens” as a fuel that powers the blockchain-based voting process. It is the governance tokens that are used to show support or disagreement towards any proposed changes. The governance token holders are also able to vote on any new changes to the protocol. The typical system of governance tokens is that each governance token is equal to one vote. It means that if a token holder has more governance tokens then he will have more sway over the protocol.
How did the Craze Began for Governance Tokens?
During the ICO boom of 2016–2017, the governance token wasn’t as popular as they are today. Yet, many of today’s leading DeFi projects that are popular for their governance tokens have been in operations since 2016–2017. Many of today’s popular DeFi protocols like Compound and Balancer have been in operations since 2017 and 2018. But they came out with a governance token in 2020. During 2016–2017, MKR was the most popular governance token in circulation.
Do you know what is a MKR token? Itis a governance token of the MakerDAO project. You can also call the MKR tokens as a utility token and a recapitalization resource of the MakerDAO ecosystem. There were 10 million MKR tokens at the time of Dai’s launch. DigixDAO is also one of the pioneers when it comes to governance tokens. The Singapore-based company raised ETH worth over $5.5 million by selling 1.7 million DGD tokens. The token sale of Digix’s DGD tokens was held on March 30, 2016. The DGD token is an ERC-20 token and its role was of governing the Digix network.
The Current Popularity of Governance Tokens
The last few months have been nothing less than hyper-growth for the governance tokens and the yield farming space. The governance tokens and yield farming have got the crypto world talking about the importance of incentive structures in DeFi projects. Both yield farming and governance tokens came to the attention of the crypto community after the introduction of Compound’s COMP tokens.
The craze for COMP token was such that within no time its price of $80 grew almost by 400% to touch a figure of $300. Compound saw a flood of capital into their protocol and within a week after the launch, their total locked-in value arose to $1.7 billion. This is an astounding growth in terms of TVL as just a week before, Compound’s TVL was hovering around $100 million.
The second project that benefited from the craze for the yield farming and governance tokens was Balancer. The thing with BAL tokens is that it is not a token that can be minted and distributed. Even then, the BAL token saw a high growth as it was, too, riding on the yield farming wave. In mid-July, each BAL token was available for $8 but by end of August, each BAL token was worth $34.
There are two strong reasons for the sudden explosion in popularity of governance tokens. The first of which is that the DeFi projects which came up with a governance token proved to be a sure-shot route to earn exponential returns. The second reason is that the DeFi projects with a governance token are offering strong returns through interest or fees. Thus, the governance token holders believe that there is a huge chance of increasing the adoption of DeFi projects. Hence, they lap upon any DeFi projects that offer governance tokens. The past results don’t lie as the investors that got their hands on the governance tokens first saw a very high rate of returns on their investments.
The governance protocols are helping DeFi projects in achieving their true potential. These tokens are also making DeFi achieve true decentralization. Without the users being in control of the DeFi project, it is never really decentralized. Hence, governance tokens are a big step towards achieving true decentralization.
Are you waiting for the next big thing in the world of governance tokens? We have some good news for you! Check out Zild Finance. We are changing the DeFi lending space for good. Go get some Zild tokens if you want to play a role in deciding the direction of Zild Finance. Don’t forget to check out our other two tokens as well.