Governance Tokens 101

With the word of web3 moving so fast, new models and practices for ownership and organization emerge almost every day. Decentralized Autonomous Organization (DAO) is one of these models. In this decentralized ecosystem, everyone collectively owns the organization. This means every user has a stake and proportionate rights. These stakes are usually in the form of Governance Tokens. 

What Are Governance Tokens?

Simply put, governance tokens are tokens that give users governing rights in the particular DAO, Decentralized Finance (DeFi) or Decentralized Application (DApps) where they have been distributed. With these tokens,  holders are provided the power to influence the decision made on projects, proposals or how the governing system of that protocol should run precisely.

Let's break it down in practice.

How Governance Tokens Work

Decicion Making

In centralized traditional organizations, decision making usually rests on the leader or a small group of board members. These set of people have the power and right to set rules and regulations, make critical decisions on the future of the organization, while its users, employees or anyone who might have the organization's interest at heart are shut out from any of its governance discourse.

In Web3 Verse, decisions are made otherwise. Interetingly, any individual who holds the governance tokens for a particular protocol, along with other holders, may participate in its governance conversations on proposals, projects and the direction the protocol should take. One token means one vote, so the more the token held, the more the voting power of that holder. 

Rather than setting a ballot and a voting pole, voting is done via a smart contract on a blockchain network. With this, changes/votes are automatically made and no one can alter these changes nor can anyone decide for the other holders. 

Decentralization 

This is the beauty of governance tokens. When it comes to distributing the control of projects among the users of a community, governance tokens are very important. This is why all types of DAOs are established with a token system.

As an incentive, governmenance tokens help protocols distribute the power of decision making among users who are committed to the progress of blockchain projects, in an organised manner. This leaves projects completely decentralized and autonomous. So as a holder in a particular protocol, governance tokens ensure that you, like every other holders, are involved in decision making.

For instance, BanklessDAO uses a governance token named BANK. These token allows users to participate in governance by voting on project decisions and proposals that would help supports its mission.

How To Get Governance Tokens

Although you can buy some governance token without having to contribute in them, others require you to contribute inorder to hold their tokens. 

For instance; Luna, which is issued by the Terra network is traded on digital exchanges like other regular currencies. One doesn't necessarily have to participate in the network to hold its token. For other protocols like BanklessDAO, it is different. It was stated in the BanklessDAO launch article that "the only way to get BANK is to participate in the bankless community. And the Bankless DAO will determine what qualifies as participation through token vote". BANK doesn't exist on trading platforms yet. Although their purchase can be made indirectly on exchange platforms, they can only be own directly by participating in the community.

What Next

In a sense, governance tokens can be likened to traditional organizations' shares. They determine cash flow and give power to the holders to influence decisions on the future of the organization. However, governance tokens are different in the sense that they are obtained freely and place restrictions on voting in particular conversations. 

Even though governance tokens have shown to be a crucial tool in building  a decentralised and autonomous organization for the future, like other new technologies, they have potwntial shortcomings to them. Web3 is still early and there are newer experiments and practices to dig into. With the significant change in governance system, there's more to be excited about, more to build and a promising future that awaits.