What are governance tokens? | Tokens like COMP, MKR, YFI
General - September 3, 2020
Governance is an important part of the DeFi world. You might’ve heard of tokens like COMP, MKR, and YFI, but what are these tokens, and why are they so important in the DeFi world? In this video, we break down what governance tokens are.
Public companies can be owned by purchasing its shares. Similarly, a company operating in the decentralized finance or currency space can be owned by purchasing its tokens.
But a token is more than a share. Not all public companies offering shares allow their shareholders a say in the company’s decisions. Similarly, not all tokens allow token holders a say in the company’s decisions. The tokens that allow these are called governance tokens. So, governance is simply taking part in the internal decision making of a DeFi company.
What kind of decisions are open to governance. Decisions that directly involve the tokenholders. Like what interest is paid out. What is the holding period of the token. How can the token be used.
These things are embedded into the tokens. These tokens have capital appreciation, meaning their price can go up or down depending on how the company performs. This works similar to a share. The tokens also have utility, meaning it can be used for something beyond capital appreciation. For instance, Maker’s MKR token is used as collateral to its stablecoin – DAI. Compound’s COMP token is used to vote to change lending and borrowing interest rates. These tokens are essential in maintaining the decentralized nature of these DeFi companies. Governance is one of the key features of DeFi coins, as important as utility (seen in ETH ) and value (seen in BTC ).
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