Governance tokens, also called management tokens, are a type of cryptocurrency that gives its owners a right in decision-making in a decentralized network. Unlike traditional tokens, which are basically a store of value or a means of exchange, governance tokens serve as a tool to influence the direction of the network.
In essence, management tokens democratize the decision-making process in the DeFi protocol. They allow token holders to propose, discuss, and implement changes to the protocol, effectively giving them a say in its future development.
Governance tokens versus regular tokens
While conventional tokens and management tokens both exist on the blockchain, their purposes are significantly different. Conventional tokens, such as Bitcoin or Ethereum, are mainly used as currency or investments. They are a store of value and can be traded on various exchanges.
Management tokens, on the other hand, are more like company stock. Owning these tokens gives you a say in the network. The more tokens you have, the more influence you have over the decisions of the network. This is the key distinction that sets management tokens apart in the DeFi world.
The role of governance tokens in DeFi
Governance tokens play a critical role in the DeFi ecosystem. They are the backbone of decentralized autonomous organizations (DAOs), which are organizations governed by smart contracts on the blockchain. DAOs use management tokens to make collective decisions about protocol changes, funding proposals and other important aspects of the network.
For example, Uniswap, a popular decentralized exchange, uses its UNI token to allow owners to vote on various proposals. Similarly, Compound, a decentralized lending platform, uses its COMP token for management purposes.
Examples of management tokens
There are several notable examples of management tokens in the DeFi space. These include:
- Uniswap (UNI): Uniswap's UNI token allows holders to vote on various proposals related to protocol development.
- Compound (COMP): COMP token holders can propose and vote on changes to the Compound protocol.
- Aave (AAVE): AAVE token holders can vote on protocol updates, asset listings and other key decisions.