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Governance Tokens and Democratization Through DeFi

Governance tokens can help users to have better control over their assets. Such a utility has greatly increased the popularity of governance tokens and DeFi over the last year or so.

16 Oct
2020
Sree
Governance Tokens-Vote - SelfKey Newsletter
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For a long time, centralized authorities like governments, central banks and financial institutions have been controlling the entire financial industry unilaterally. 

However, cryptocurrencies managed to achieve steady growth in popularity. One of the prime reasons for the increased acceptance of cryptocurrency is its democratic and decentralized nature, as opposed to the more centralized traditional finance industry.

Even from the first cryptocurrency – Bitcoin – cryptocurrencies have been able to attract participation from users. Decentralization is one of the distinctive and elemental properties of blockchain, and cryptocurrencies have indeed managed to achieve a certain level of decentralization through the participation of users from all around the world.

The degree of decentralization increases with the number of participating users, which means that the more people use and participate in a blockchain network, the more decentralized and thus secure it becomes.

When compared to the traditional finance industry, cryptocurrency is still in its early days.

Yet cryptocurrencies have managed to inspire people to think differently and to envision a potentially better future. Nevertheless, like any other industry in its initial stages, the crypto industry has also faced some initial roadblocks.

Furthermore, the major products to emerge from the crypto space have tended to be principally investment-related.

However, with the introduction of DeFi, crypto has managed to present its users with other financial products that facilitate activities such as lending and borrowing. This may be the first time these kinds of products have been made available to users in a decentralized way.

Role of DeFi in Today’s Finance Industry

DeFi has managed to provide financial services like lending and borrowing through a blockchain with the help of DApps and smart contracts.

Users utilize these financial services with the help of DApps, while smart contracts deployed on the blockchain network help govern the transactions that take place on the network.

The rise of DeFi has the potential to resolve some of the primary issues that are common with legacy industries, such as censoring individuals, businesses, or financial services that are constrained by national borders.

DeFi has certain key features that have set it apart from legacy products:

  • The products and services offered through DeFi services are censorship-resistant, and unlike centralized products and services, DeFi does not distinguish its users on any grounds.
  • DeFi exists beyond borders and allows its users to utilize services from any part of the world; a concept that has always bugged the traditional financial industry. Although improvements are happening in this area, legacy products and services have not yet been able to truly address the issue.
  • Another reason for the increased acceptance of DeFi is that a majority of adults around the world are unbanked, and DeFi can be used by them as well.

Along with these factors, DeFi has opened a whole new frontier for crypto users through the emergence of Governance tokens.

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Governance Tokens

The primary utility of governance tokens is to give control back to users. Holders of a governance token can suggest or influence critical decisions about the blockchain project through a voting mechanism.

Recently, there has been a surge in the number of governance tokens being introduced into the market. 

The spike in the number of tokens indicates that there is an extraordinary demand for such tokens, with users increasingly looking for ways to control or influence the governance of their investments.

The use of a governance token is centered around a voting mechanism.

Token holders on a particular blockchain network can suggest changes or improvements regarding the token.

These suggestions may then be put to a vote, with token holders then having the power to vote either in favor or against the proposal.

The minimum percentage of favorable responses that need to be achieved for accepting a proposal may be predetermined by the community. Then, depending on the responses in the voting process, the proposal will either be integrated into the token or scrapped.

Although governance tokens and voting mechanisms have been in existence for some time, the increased acceptance of DeFi has boosted the demand for governance tokens too.

Moreover, the demand for governance tokens can be regarded as a welcome change in user attitude, indicating that people are not shying away from taking responsibility and control of their own funds.

Governance tokens are designed to give control back to the user, and SelfKey was also conceived with the idea that users need to have better control over their personal data, and safeguarding your privacy is easier than ever by using the SelfKey Identity Wallet.

Conclusion

The demand for governance tokens has been increasing rapidly, with the growth in DeFi fuelling the increase in demand.

Governance tokens can potentially resolve any internal conflicts that arise within a blockchain network through a democratic voting process.

Besides, it is also a welcome change to see that the crypto users are evolving from simply holding or trading tokens in a centralized exchange to taking on responsibilities for securing tokens and suggesting improvements on their working dynamics.

Governance tokens have been having a significant role in this transition. And as the crypto landscape continues to change, it’s reasonable to expect users will have an even more substantial role to play in shaping the future of the industry.