What is a Governance Token and does it have any value?
Crypto has brought with it many different types of tokens, each with its own use case, and one of those tokens play a pivotal role in DAOs – the governance token. One of the questions I am asked most often by traditional finance professionals is, what value is there to owning a governance token?
The short answer is: You get to have a vote. Here I’ll explain why that may have value to you.
It has voting power
Let’s start by looking at what a governance token is. Governance tokens are used in Decentralized Autonomous Organizations (DAOs) to give holders the right to vote on decisions relating to the organization's direction and development. One example of a governance token is MakerDAO's MKR token, which is used to govern the MakerDAO decentralized finance (DeFi) platform. MakerDAO is a decentralized platform that allows users to lend and borrow crypto. Since it’s decentralized, MKR holders have the right to vote on decisions related to the platform, such as changes to the collateral requirements for borrowing stablecoins. This allows governance tokens to govern the direction of the platform, much like the management of a company.
You might say: that’s great, but why do I care to vote on MakerDAO’s future, and you may be right. An argument could be made that if you had a Google governance token (assuming that existed), you’d get a vote alongside the Google board and that sounds like it could be quite powerful and valuable, right? Still not convinced? You’re very likely on the right track and that leads us to the reality. A specific governance token may not have value to everyone.
You can sell it
Starting with the obvious, governance tokens generally have monetary value which means you can sell them on the secondary market for money or other crypto. The better a project/protocol does, the higher the value of the token. That is in part due to the fact that you may not be all that interested in having a MakerDAO vote, but your friend, who’s a huge MakerDAO fan, would pay big money to have such voting power.
Utility behind the token
Sometimes governance tokens also have value due to their utility within the protocol and we’ll look at MKR once again. If you want to make use of MakerDAO’s borrowing facilities (collateralized debt positions) there are certain fees and charges associated with it, and these are paid in MKR. This gives the token utility and value within the ecosystem.
The value proposition
The real value of a governance token, however, is when the vote does matter to you. When it affects the world that you operate in. Most countries around the world have a form of a homeowner’s association. It’s known by many names, HOA, Co-Op, Strata, etc. When you live in a gated community or apartment complex, there’s a monthly fee for communal expenses such as landscaping, which is paid to the association.
领英推荐
Now, imagine having a vote on the HOA of the apartment complex where you live. Such voting powers are generally not for sale but if they were you’d probably be willing to pay a lot for the ability to vote on whether your complex should spend their cash reserves to build a swimming pool or to allow a government request to purchase the garden section of the land to build a big road through it.
Since you can’t sell your vote (your token), there’s no specific monetary value in having that voting power but seeing as it affects the world you live in and could potentially affect the future sales price of your home, that vote has a lot of value to you. Similarly, for someone who uses Google for their business, it may be very valuable to have a vote on the Google board on which direction Google takes next, and someone who uses MakerDAO to borrow and lend, could find a voting right to be very valuable.
Final thoughts
Overall, the value of a governance token can be influenced by a variety of factors, including the utility of the token and the secondary market value of the token, but the main benefit is the ability to participate in the decision-making process for something which is important to you.
Governance tokens play a crucial role in the decision-making and direction of DAOs. They allow holders to have a say in how these organizations are run and ensure that the interests of the community are taken into account.
Now that you understand the value behind a governance token, you may have some questions on these DAOs we keep referring to, and we have a great article explaining DAOs in more simple terms which you can find here .
Here are a few more resources for further reading: