The core notion behind blockchain is that no one can edit the entries in the ledger. It is a system designed by and for the people. However, it can be governed via governance tokens. Governance tokens are blockchain tokens that give their users voting and management power. They are extremely important in a DeFi situation where the power balance is required. You can vote on proposals relating to your blockchain using governance tokens.

Governance tokens ensure that blockchain participants’ perspectives are heard when making decisions about the codebase and its management. These tokens can also set the rules that the blockchain uses to verify transactions and blocks. Furthermore, governance tokens might have an impact on new products, their development, and important features. It can also be used to vote on patches and upgrades for existing apps.

Consider these an improved form of standard utility tokens. As a result, users can jointly decide on matters such as coin listing and late fines, as well as topics on which utility tokens can vote. These tokens open the door to collaboration. They include people in the project and assist engineers in making decisions. These tokens, for example, can be used to make decisions about code updates and treasury management. The idea is analogous to higher management making strategic decisions about the company’s future. However, in this scenario, general, day-to-day consumers bear accountability.

One thing to keep in mind is that governance tokens do not enable complete control over the ledger. This is due to one of the blockchain’s core rules: no one controls it. These coins can only be used to vote on changing the parameters of the blockchain, which users cannot change otherwise.Governance tokens are typically not mined in the same manner that traditional cryptocurrencies are. Instead, founders can distribute these tokens by fund allocations or user returns. This is done to avoid people associating a monetary value with governance tokens.

Scenarios in which governance tokens are useful

If a project contains a code module that can grant malevolent people access, or if the project contains protocols that are no longer in use, you must delete them from the blockchain. This can be accomplished by voting on protocols using governance tokens. With enough votes, you can change or eliminate those protocols.

If a base protocol in the code is impeding the blockchain’s ability to scale, it may be necessary to alter it. For example, if a module is causing issues with a given country’s financial rules, you must be able to reorganize or update the code.  In that case, governance tokens are extremely helpful. You can even use the governance tokens to vote on how to administer the governance tokens themselves, i.e., how many tokens to distribute and who qualifies for them.

Governance tokens are making headlines.

Many DeFi companies, including Aave, Curve, Compound, and Balancer, have begun to issue governance tokens. There has also been talking about service nervous systems that can divide governance tokens to create a permissionless and decentralized blockchain.

All of this is in place to ensure that the entire control of blockchain remains in the hands of its users, and the only way to change things is through autonomous voting. The basic idea behind blockchain is that people should have control over their own money, and governance tokens are an important means of generating trust in the decision-making process.

Governance token problems

All of this is not to say that governance tokens are without flaws. Certain hazards are related to the concept of governance tokens. When governance tokens are exchanged, for example, they can induce crypto collapses, leaving investors bemused.

That is exactly what happened with Sushi Swap. Investors attempted to exchange their tokens for modest profits, causing the cryptocurrency to become extremely volatile. When the founder began trading their tokens, the value of the entire currency plummeted.

Other issues exist with governance tokens. They could, for example, be exposed to a 51% attack. There’s also the issue of vote delegation to consider. Many voters enable someone else to vote in their place rather than voting themselves. Voters usually do so when they believe the other person/team/company is more knowledgeable than them and hence can vote more effectively. However, this can also shift control from qualified voters to sharks, who can then tilt the blockchain in their favor.

Changes to governance tokens are required.

To begin, blockchain companies must ensure that their governance token has no market value. They must demonstrate that there is no monetary advantage associated with these tokens, only the power to vote. These tokens should only serve one purpose: to allow people to vote on blockchain-related issues.

Engineers also require a method to ensure that no single entity can own more than one token. Assuring that this is the best approach to prevent 51% of attacks. They must also ensure that users who receive these tokens understand the significance of their vote. When the time comes, it should be the users who have tokens who vote. 
They should not delegate their vote to anyone.

Last Thoughts

Having a governance token grants you merely the right to vote. It does not offer you the ability to influence the blockchain unless the rest of the members endorse your concept. This enables users to invest in the protocol rather than just the cash or market value.

Governance mechanisms are required to protect both the community and the interests of investors in the system. Of course, there are some problems with the idea. However, businesses are developing novel concepts and theories to address these difficulties. All of these concepts will eventually make blockchains more efficient and help them run more smoothly.