If You Are A Fan Of Digital Currencies, You Have Probably Heard The Name Governance Token. These Types Of Tokens Have Been A Hot Topic For Some Time since Decentralized Finance (Defi)Became.

Sovereign Token, In this article, we intend to examine the concept and mechanism of these tokens; Therefore, if you also want to know the advantages and disadvantages of these tokens and their differences from functional tokens, stay with us until the end.

What is a sovereign token?

One of the goals of manufacturing and supplying BitcoinAs as the first digital currency was to increase people’s control over assets and decentralize financial activities, A goal today known as the basis of digital currencies and blockchain activity.

After the launch of Bitcoin and the spread of Blockchain technology blockchain, organizations were also looking for a way to operate in a community-oriented way so that the power is not only in one person or a small group. Currently, this goal is possible with the help of governance tokens.

Many traditional centralized companies are run by one person or a board of directors. These small management groups have a lot of power and can determine how to manage the budget and the project’s overall strategy.

This management group is not required to seek the opinion or approval of the project community and customers for their decisions; For this reason, most of the time, the company works in line with the interests of these management people.

To solve this problem, governance tokens have become popular in blockchain-decentralized organizations and companies to provide a more fair, decentralized, and transparent governance and management method.

To these organizationsDecentralized, Autonomous organizations or DAO (DAO), It is said that can operate independently without central management. The governance token has allowed the mentioned institutions to develop pretty and healthily.

Why is the sovereign token so important?

Today, governance tokens are one of the most essential features of the DeFi ecosystem. A digital currency governance token empowers holders to vote on the proposed blockchain network and organization changes. Usually, each governance token is equal to one voting right.

Power is distributed fairly among all project participants and stakeholders using governance tokens. This issue can solve many problems of traditional companies and organizations,s such as corruption among management, lack of transparency, and wrong decisions.

These tokens allow every participant and activist in decentralized ecosystems to express their opinion to the developers and participate in how the project works and is managed. Also, governance tokens create a loyal community for the decentralized project and give the owners a sense of belonging.

In addition, votes and user participation in project development help developers when making tough decisions. It is worth noting that the governance token allows developers to interact more with the community and identify and fix project problems by receiving user feedback.

How does the governance token work?

Most decentralized projects reward users with these tokens due to their loyalty and activity in the network; Of course, buying this type of token is also possible. Any user with governance tokens can participate in voting and project development.

In most projects, the votes are through smart contracts, and the results are executed automatically. Using smart contracts makes manipulating and changing votes impossible, and decentralized organizations can ensure the accuracy of ballots and voting.

Voting is done in a section called Governance, where suggestions from developers or the community can be seen. In governance, all users can vote on whether the proposals are implemented by connecting the wallet and having the governance tokens of the project.

Finally, after the end of the voting, a proposal is approved and implemented that the majority of the community has voted for. Sovereignty tokens are not lost in the voting process,s and people retain ownership of these tokens.

The difference between governance tokens and utility tokens

The ecosystem of digital currencies and blockchain technology is vast. In addition to governance tokens, other tokens, such as utility tokens, have also been released, each with its own goals, advantages, and disadvantages.

Utility tokens are among the most popular tickets in the cryptocurrency space, and you’re probably familiar with many of them, such as Binance Coin (BNB).

Sovereignty tokens are a type of functional token, But there are essential differences in the goals of the two.

The most crucial difference between a governance token and a functional token is the purpose of its activity. While governance tokens are used in the decentralized community for voting and project management, utility tokens provide access to exclusive services or financial activities such as paying fees and providing capital.

The valuation of these tokens is also different, and the value of governance tokens is directly related to the project and organization’s performance and intrinsic value. Still, the price of utility tokens can change under the influence of various factors and is not directly related to the company’s or project’s valuation.

Security is one of the other factors that we should pay attention to when comparing governance and utility tokens. Sovereignty tokens are more secure, and fraudsters cannot easily create and supply fake sovereignty tokens, a more convenient process for utility tokens and initial Coin Offerings (ICO). We see fraud in this type of token.

Getting to know some of the most critical governance tokens

If you are interested in investing in and using governance tokens, there are currently many options on the market, and hundreds of diverse blockchain projects have launched their governance tokens. In the following, some of the most critical governance tokens of the market are given.

Yuen Finance (YFI)

YFI is a native token of the Yren Finance protocol, which aims to finance and provide business services to decentralized projects. To create a community-oriented project, the developers of Yren Finance have released the YFI governance token, which allows users to vote and decide on decisions and changes to the protocol.

Ethereum Semi-Service (ENS)

Ethereum Semi-Service launched in late 2020 and created a lot of buzz in the cryptocurrency and web 3.0 space at its launch. With the growth and expansion of this service, the ENS governance token also managed to attract a lot of attention. ENSIt is one of the top governance tokens in the market.

Maker (MKR)

makerToday is one of the top DeFi and Web 3.0 lending platforms, whose sovereign token is MKR. By having the MKR token, users can have the right to vote on the suggestions and changes of the Maker rules.

Uni Swap (UNI)

In the past few years, decentralized exchanges have become very popular swapIt is among the best of them. UniSwap has launched its native token, UNII, whose holders can participate in the development process of UniSwap like other sovereign tokens.

compound (COMP)

The compound is a DeFi protocol active in decentralized lending, and its sovereign token is called COMP. Determining and changing the collateral accepted for loans is one of the areas that users can decide about with this token.

Applications of governance token

The primary use of governance tokens is to make decisions about changes and how to manage projects and decentralized organizations. Each project offers its utility token according to its needs and operation mode, which has different features from other utility tokens.

Each project has its rules for governance tokens, and how a governance token works and is distributed may be completely different from one task to another. Also, how people participate in voting will depend on the project and its rules.

It is worth noting that governance tokens do not lead to complete control in a network, and the holders only have the right to vote on changes to selected and specified parameters.

With the help of governance tokens, users can have the right to vote and participate in the management and progress of the project.

Increase or decrease the amountBlockrewardedd the change in the total number of network tokens and the development path and how to manage the treasure,y, and new protocol changes are among the decisions in which governance tokens are used.

An example of using a governance token

For a better understanding of the application and how to use governance tokens, we mention two examples of critical applications of these tokens:

• Network changes: Most blockchain protocols experience changes after release and during activity. Owners of governance tokens have the right to vote on these changes,s and the project’s future course. Projects allow users to make the project’s future course, and projects allow users: Decentralized programs and protocols charge users fees in transactions to offset costs and reward network operators. The method of receiving and using this fee is one of the parts that can be changed in the governance system, and society can decide on how to use it and how much it is divided and distributed.

Disadages and advantages of the sovereign token

Today, governance tokens have become very important for decentralized projects and have many advantages for these applications; But these tokens may also cause problems for blockchain benefits.

Advantages of sovereign tokens

• Governance tokens fairly distribute governance power among users and the project community.
• These fairly distribute governance peroration among community users, which leads to increased participation and sharing of views on the project.
• Development of projects is faster with the help of governance tokens; developers can quickly hear the community’s views and apply the necessary changes.

Disadvantages of sovereign tokens

• The human ego and selfishness of some participants may prevent them from making ethical decisions in the interest of society.
• Due to the anonymous nature of the polls, no one is responsible for the changes and consequences created after that.
• Using their large reserves of governance tokens, whales can approve only decisions that benefit them.

Sovereignty Token Problems

Selfish users and contributors have created the first problem for governance tokens. In making decisions, these people vote only for changes that benefit them. Suppose the majority of the project community acts in this way in decisions. In that case, the path of the project and the decentralized organization will move away from its goals and eventually lead to the collapse and destruction of the project.

Lack of accountable removal of responsibility is another problem of using these tokens in decentralized projects. In traditional and centralized organizations, when a project fails, it is clear who was responsible for making the wrong decision and implementing the changes. This issue is not clear in decentralized projects.

It is natural that no one admi,s to voting in favor of the proposals that destroyed nature, but it is unclear who will be held responsible if the decentralized project fails and makes the wrong dark.

Finally, we must say that whales can also cause problems in this decentralized voting and governance system. A whale is a term in the digital currency market, and it refers to a person who owns a large amount of one or more digital currencies. Giant whales have more voting power; For this reason, they can impose their personal intereGiantand decisions on the project’s Future and community.

To better this problem, consider cryptocurrency exchange wallets. These exchanges have the most significant tokens and can easily use their governance tokens in voting.

A solution most significant to whales

Currently, some decentralized platforms have implemented a mechanism where more votes reqSomeal. In this mechanism, you need a token for the first vote; But for the second vote, you need four passes; in the same way, the more votes, the more tickets you need.

This mechanism makes it so that if a person has, for example, one hundred governance tokens, he can only vote ten instead of one hundred. This can significantly reduce the power of whales in the polls.

The Future of the sovereign token

Like other projects in the digital currency market, the future governance tokens are full of possibility and speculation and depend on how it develops and how much interest there is in independent organizations and de. It depends on protocol growth.

In case of public acceptance of these organizations and expansion of their use, governance of the tokens can also improve their position in the market. Despite all the possibilities, there is no doubt that governance tokens will be the leading and necessary solution in expanding and adopting decentralized and user-owned leading works.

Frequently asked questions

Why are governance tokens used?

Sovereignty tokens are a way for the decentralized development and management of projects by enthusiasts and the cryptocurrency community.

What are the most critical market governance tokens?

Among the most critical market governance tokens are Criticalion Maker (MKR), UniSwap (UNI), and Compound (essential Yen Finance (YFI).

Are sovereign tokens different from ordinary receipts?

Standard tokens,s are used for financial activities such as paying fees and storing vreceiptsBut governance tokens are also used in the management and development of projects in a . Still, governance.

What are the benefits of the sovereign token?

Governance tokens give holders a say in how the project develops and increase pillow holders. Are the disadvantages of the sovereign pass?

These tokens may lead to the elimination of accountability in projects. Also, the whales can have a large part of the voting power and move the project toward their goals and interests.

The Future of sovereign tokens toward governance tokens will depend on how they develop and how much interest grows in autonomous organizations and decentralized protocols. However, we must say that these tokens play a decisive role in the Future of the digital currency ecosystem and the expansion of decentralized networks.