DeFi (decentralized finance) is currently the biggest thing in the history of finance.
The numbers show that the DeFi ecosystem is quite healthy as the number of unique DeFi addresses reached 4.3 million in January 2022.
Experts also predict 100x DeFi growth in the next 5 years.
The Governance Token Hype: What is a Governance Token?
Governance tokens have become the buzzword among crypto enthusiasts as DeFi continues to explode. In simple terms, governance tokens are cryptocurrencies that represent voting power on a blockchain project. Major DeFi platforms such as Compound and Aave are creating and issuing more governance tokens. But what are governance tokens and what’s the use? A governance token is the main utility token of a DeFi protocol. These tokens allow for Decentralized Autonomous Organization (DAO) governance, where holders have the right to vote on governance issues in a DeFi protocol. It allows the token holders to help shape the future of the protocol by providing full control and right–something that is a basic tenet of the current crypto revolution. With the Saddle Finance governance token (SDL), for instance, users can vote on proposals via the Snapshot platform.
Governance Tokens: The Pros and Cons
There’s more to governance tokens than voting. Tokens are also a type of investment that can generate returns, among other benefits. But governance tokens are not all rosy. Here’s a breakdown of the value of governance tokens and what to be wary of before buying.Governance token: The good
- You get a share of protocol earnings
- Staking earns you handsome profits, helps you get loans
- Token valuations can go up fast
Governance tokens: The dark side
- Democracy in question
- A governance token can be overvalued at launch
- Governance tokens could be treated as securities