The internet of value and the ecosystem known as "web 3.0," built on blockchain technology, allows for the creation of communities and organizations that are self-governing in a public, transparent, and secure manner.
This is possible thanks to blockchain technology and with the help of what is known as a Governance Token, a type of crypto asset issued with the aim of democratizing and governing forms of organizations known as DAOs (Decentralized Autonomous Organizations).
Power will then fall to the users of these platforms and not to a small centralized group—as would be the case in a traditional company—which could have positive consequences for the user.
In fact, this practice has been evolving for several years, and many protocols already implement it to decide on their future.
Next, we will analyze what exactly a Governance Token is, what the main benefits of using them are, and what problems or challenges they face.
A Governance Token is a crypto asset that grants its holder the ability to participate in the governance processes of a given DAO.
A DAO, as we have already mentioned, is a company like any other, with the peculiarity that it is managed in a decentralized manner. In it, different users work from different geographical locations, but with the same objective.
But... how is it possible to reach agreement in a decentralized organization?
Well, thanks to the voting power granted by Governance Tokens.
These tokens allow their holders to help continue building and improving the organization.
A person would then create a unique address that would identify them on a specific blockchain network. Through that address, they could acquire a DAO token hosted on that blockchain.
Finally, interacting with network programs (smart contracts), it will use this token to cast a vote, intended to decide on changes in the organization, on proposals issued by community members.
In a DAO, ultimately, the creators do not have complete control over the organization, but rather delegate its direction to the holders of the Governance Token, which can be distributed or sold according to the rules of each protocol.
In conclusion, it is important to note that this governance has nothing to do with the governance of the blockchain itself: on the one hand, we find the governance mechanisms of blockchain networks (an interesting topic that we will analyze in another post).
Instead, this blockchain network can host numerous decentralized protocols, each with its own governance.
As we have already mentioned in other articles, there are different types of tokens and different ways of classifying them (fungible and non-fungible, cryptocurrency or token, security tokens, platform tokens, etc.).
In this case, the line between which category Governance Tokens fall into (Utility token, security token, etc.) seems blurred since, as a result of the flexibility that programming allows, some of them could be considered a security, as they may share some key characteristics with company shares.
On the other hand, unlike a Utility Token, a Governance Token allows you to vote on decisions and propose changes.
But... can we consider voting power as a utility?
If the purpose of this token is solely to vote, we can say that this is its utility and therefore it is considered a utility token and, at the same time, a governance token.
However, if, in addition to being able to vote, the holders or owners of these tokens receive a monetary reward either directly or indirectly, we could classify them as security tokens and governance tokens.
This latter classification would imply that the issuance and registration of these tokens would be controlled by the market regulatory bodies of each country.
In another article, we will analyze how to differentiate between a utility token and a security token.
The difficulty in classifying tokens could lead to several problems, both for token holders and issuers, as the applicable legislation will differ depending on how they are classified.
However, given that these are decentralized protocols, the holders or even issuers of these tokens may not be physically identified and could therefore avoid the consequences of the legislation (beyond the fact that those actors operating within the regulation do not allow interaction with these protocols).
We already know that Governance Tokens are distributed and used for voting, but how are they used to reach agreements?
Well, DAOs typically use platforms as a means of communication and voting for governance.
Some protocols such as Uniswap, AAVE, Compound, Descentraland, Optimism, and Arbitrum have external platforms that bring them together and simplify this process: changes and improvements are discussed and proposed.
One of the most popular DAO governance DApps is Snapshot.
Well, platforms such as Snapshot interact as decentralized APIs that allow users to cast votes and communicate with the blockchain network through smart contracts.
They enable communication between protocol participants without the need for high gas costs for network usage.
It is important to mention that protocols, in the event that these intermediaries are "neutralized," have or should have other mechanisms to continue communicating on-chain and avoid censorship.
Subsequently, there is a voting period. The actual voting process consists of the user signing a specific transaction that records their vote.
Once a majority is reached or the voting period ends, the decision that received the most votes from the community will be implemented in the project.
As we have been discussing throughout this article, the main and obvious advantages of using Governance Tokens lie in their ability to give users greater power, allowing them to acquire more control and rights with respect to the organization in which they participate.
They go from being mere spectators to participating in the process of continuous improvement thanks to the fact that the governance of the protocol is more decentralized, equitable, and transparent.
This leads to greater commitment on their part, and with more people involved, new and brilliant ideas may emerge that would not otherwise have been possible.
On the other hand, the possibility of programming tokens allows them to be endowed with other qualities such as the distribution of dividends or any other function that we can think of and that allows us to improve the operation of the decentralized organization.
On the negative side, precisely because of the flexibility in programming them and the regulatory context in which we find ourselves, we can highlight the difficulties in knowing exactly what requirements must be met when issuing and acquiring these tokens.
This entails consulting costs for those protocols that intend to organize themselves through Governance Tokens.
Decentralization could also lead to chaos in the protocol's direction and ultimately result in the loss of users.
Nor can we forget that decisions based on majority consensus tend to be much slower than if they were made centrally by a small group of people.
Finally, as these are open protocols, there is a possibility that a large percentage of the Governance Tokens on offer will be acquired by a few users, who will then end up governing the protocol in a more centralized manner.
Let's not forget that all these disadvantages may have greater or lesser weight depending on the economic models and rules of each protocol.
Governance tokens have an uncertain regulatory future.
They are not currently considered financial instruments (although in cases such as MakerDAO's MKR, they may be considered security tokens), so the MiCA regulation, which regulates all types of non-financial crypto assets, should apply to them.
Although it is true that there is no specific law for this type of token at the moment, it is mentioned that DeFi projects (referring to DAOs) developed by companies in the EU must be regulated and undergo KYC/AML (customer identification) processes.
It therefore remains to establish a defined taxonomy that allows them to be classified and, consequently, regulated.
In short, Governance Tokens enable a paradigm shift in the structure of many organizations: it is even possible to create new business models.
Furthermore, the flexibility offered by this ecosystem allows them to be equipped with various qualities that can further exploit their potential.
It is true that decentralized governance is not necessarily valid for everyone, and many organizations will have to continue to be managed in a traditional manner in order to remain competitive in the market; but those actors who know how to take advantage of technology to bring their users closer and turn them into architects and accomplices of the organization itself will achieve robust communities that will grow exponentially as a result of widespread satisfaction.
However, it will be essential to build these organizations on sustainable economic and social models so as not to fall into systems doomed to failure, as was the case with the Terra protocol.
We must not forget that, both from a legal standpoint and in terms of the long-term sustainability of the project, it is essential to seek advice when working with Governance Tokens.
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Funded:
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Objective:
1.840.728,33 €
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