Users have started to become interested in blockchain technologies due to the opportunities for earning, complete security, and anonymity. This can only be possible through the development of decentralized finance. 

But, complete decentralization can be achieved not only with the help of a smart contract network but also through the delegation of the decision-making process to the community members. One can speak of complete decentralization only when assets holders have the opportunity to decide the future of the product. 

There are now many Defi Crypto platforms such as http://saddle.finance/ that have successfully transferred voting rights to investors. Companies use governance tokens to achieve a similar result. Below, you will find detailed information about this technology concept and learn the benefits of holding such assets.

What Is Governance Token?

Governance tokens are a particular type of crypto coins most often used in DeFi projects. With the help of such assets, officials can distribute powers among community members. Token holders get the right to directly influence various aspects of the company. They can create a survey independently, change the control panels, and delegate their authority to other people. In DeFi projects, most of the discussions are on the following topics:

• Change of fee distribution between holders.
• View dev fund.
• Voting for the tokens section.
• Implementation of the latest UI technologies.

The ability to participate in voting, along with company management, is not the main task of governance tokens. Owners of such coins can use all services. They can engage in lending, staking, borrowing, and earning interest in yield farming.

Why are Governance Tokens Important for DeFi Projects?

DeFi is a fully decentralized direction of the blockchain ecosystem, which opens up enormous opportunities for project officials. In case of any problem, they can quickly turn to the crypto community and ask their opinion. The management can conduct a survey among investors and get an idea of the protocol’s problematic aspects or the introduction of new tools.

Owners of governance tokens can easily modify the smart contract network. This can help with hacker attacks. If scammers break into the system and steal confidential data, the company does not need to immediately move to another blockchain network.

Finally, tokens are difficult to obtain. Crypto investors cannot pre-mine utility coins. Only those crypto enthusiasts who directly invest in the project get the opportunity to participate in the decision-making process. Governance token holders can be considered shareholders of the company. This is because the project would not develop and move forward without their investment.

What Are The Advantages and Disadvantages of Governance Tokens?

Governance tokens are an extremely profitable investment that can bring considerable income and the opportunity to become part of a specific product. Below, you can see all the benefits that these virtual assets offer.

• Cooperation. Voting on essential aspects of the product consists of several stages. One of the main parts is the discussion in the community. During such meetings, investors have an incentive to cooperate with each other. That is why this social channel is in no way inferior to Crypto Twitter in terms of efficiency.
• Fast development. Management dramatically simplifies the process of making important decisions. With this governance token model, officials can get answers to specific questions and quickly make changes.
• Decentralization. The presence of a smart contract network cannot provide a complete decentralization for crypto protocol. Governance tokens are needed to achieve this goal.
• Involvement. Investors who own such tokens are much more interested in the project than others. All because they directly decide the future of the product.

Despite a significant number of benefits, each technology has some drawbacks. Below, crypto enthusiasts will find out detailed information about the disadvantages of governance tokens.

• Whales. In almost every project, some can accumulate a huge amount of tokens due to their considerable financial abilities. This creates the risk of unanimous decision-making on the protocol. A whale can initiate voting and make a selfish decision that can harm the company.
• Selfishness. Some investors vote for decisions based only on their interests, not on the project’s benefit. If there are many such people, the decisions can lead to negative consequences.
• Lack of accountability. In the case of a wrong decision, it is challenging to find the culprit. Investors will blame each other or an invisible group that played a decisive role in this process.

Nothing is perfect. Governance tokens have a number of drawbacks, but compared to the benefits, they do not matter. Holders get an excellent opportunity to become part of a big project, as well as earn income.

Final remarks

Governance tokens are the foundation of the entire DeFi sector. Without their use, companies would not create genuinely decentralized products. These coins can be regarded as the heart of every DeFi protocol. Thanks to collective decision-making, projects are filled with enthusiasts who develop new ideas and strive to improve the platform.

But do not forget that such utility tokens also have drawbacks. Whales can make decisions independently, relying only on their interests. Platforms may be subject to hacker attacks. But in general, this technology opens up many earning opportunities that everyone in the modern world should take advantage of.