Around Block 13: About the Value and Risks of Governance Tokens

Circle of the Block highlights the main problems in the crypto space. In this edition, Justin Mart and Ryan Yi analyze the potential value drivers and risks of governance tokens in the Ethereum ecosystem. Potential Value Factors and Risks ContextDeFi has experienced tremendous growth over the past 12 months. All statistics – locked value, users, transactions, ratings, etc. – suddenly increased. However, some of these statistics are easy to track and digest, while others are more ambiguous. One statistic that is difficult to sneak is to appreciate. For traditional stocks, valuation depends on equity or direct joint ownership in a business. This fairness implies practical control over a company and provides certain benefits to shareholders, such as a proportional share of profits (dividends). So what are governance tokens? In decentralized protocols, code is law, so practical control depends on what the code says. In this sense, each DeFi application will have a different meaning of ownership, as each protocol encodes a different set of rules that define what ownership means. Some protocols are coded without the concept of external ownership – they only work according to their original internal rules and never change! However, most of the teams that create these protocols are aware of the need to adapt, upgrade, and change so they code in an ownership concept that allows for customization and modification of selected settings. Enter "Governance tokens". Simply put, these are ERC-20 tokens associated with a particular project and require a majority of the token holders to set or change the selected parameters. These markers thus "check" the protocol. However, it is important to note: Governance tokens do not result in unilateral control. Governance tokens can only affect selected settings that are encoded at the start of the project. Each project has a different definition of ownership and governance and will decide which parameters to choose.

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