What is a governance token?

A governance token is one that allows holders of the token to have a say in the decision-making of a project.

They give holders voting power, similar to how shareholders can participate in the decision-making of a company based on the shares they have.

Imagine this: A crypto project, Storm DAO, launches, and you purchase their token, $SDO.

This grants you voting power, a voice in the way decisions are made in the project.

You can then use this voting power to contribute to decision-making, such as: should the transaction fee for $SDO holders be changed, should we donate 1% of revenue to a charity, or should we buy a Bored Ape with our treasury funds. You get the idea.

How does this work?

Well, a proposal is made by either the team or a community member. Voting takes place on the project's website and could run from either hours to days.

Once voting ends, the option that has the most votes is then picked and executed.

Why is this important?

It basically ensures that there is no centralized control. Decisions are not made based on what the team thinks is right and instead place power in the hands of the community, who, since they have their money invested in the project, are more likely to make decisions that favor them and the project.

An example of a governance project is Apecoin DAO—the DAO of the famous Bored Ape Yacht Club Token (ApeCoin).

Holders of the token were able to vote on whether a new blockchain (Apechain) should be created for ApeCoin. They subsequently voted on which entity they wanted to develop the chain. So instead of the team deciding, the whole community gets a say in how things should go.

This model too is not perfect because those who hold the majority of the project's tokens get more say, but it's still something, I guess.

Hopefully, improvements will be made to this model.

And that's it for this week, fam.

P.S. Did you ape in on Notcoin?

And that's it for today. Thanks for reading. Have a blessed weekend, and don't forget to touch grass 🌱.

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🔵 What are governance tokens?