I often talk about the wonders of cryptocurrencies as a form of investment. To date, there are over 8,000 different types of cryptocurrencies, with more emerging all the time. Today, I want to introduce a newer type of cryptocurrency called governance tokens.

Governance Tokens

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What are Governance Tokens?

Older cryptos like Bitcoin are run exclusively by the programmers and people who work to make them. This mechanism is known as Proof of Work (PoW) and requires people to prove they have worked with the currency to allow them to have a right to make changes or decisions regarding how it runs. Alternatively, some currencies use Proof of Stake (PoS) to help decide who makes decisions. One of these types of stakes makes for governance tokens.

The idea of a PoS is that you gain a stake in the control of your chosen cryptocurrency by offering a financial investment in exchange for financial interests and voting rights. By investing money (or other cryptocurrencies) in the network, you will receive the ability to have input regarding the future of the currency. It is essentially the same as buying shares in a company.

This is what a governance token is. It represents your position as part of the democratic decision-making process. By providing governance tokens, a network keeps its organizational structure out of the hands of any controlling government. This means it is run by users and owners of the currency.

As the state of the market changes, or when new regulations and laws are changed, decisions must be made about how they’re run. Governance token owners make these decisions, so if you have ever wanted to be involved in shaping the future of a cryptocurrency, this is how you can.

What Benefits are There to Governance Tokens?

Once you buy a governance token, having a say in the development of the network is not your only benefit. Most governance crypto networks offer airdrops – free coins or tokens that can be collected as part of a campaign to spread popularity – and other small gifts to their investors. It also provides you with much greater access to the currency should its value skyrocket.

Of course, having the voting power on a blockchain project is in itself a great reason to get involved in governance tokens. Being part of the ever-evolving activities of a cryptocurrency network is a fantastic way to shape the future of the system. It puts you on the front lines of innovation while giving you great insight into how the world of cryptocurrency is changing.

That said, it is not uncommon for people to simply put their support in these systems and not make use of their benefits. If you feel daunted by the prospect of helping make decisions about things you don’t understand, you are always welcome to choose not to. Sometimes, just the financial gain is enough for those investing in such cryptos.

What are the Different types of Governance Tokens?

So now you know what governance tokens are, let’s look at what options there are for you to buy. Here’s a list of the top governance coins with big market caps:

  • Aave (AAVE) is an open-source protocol for earning interest on deposit and borrowing assets. Its token – AAVE – is steadily growing in strength in the market, and it provides plenty of them to investors who support their project.
  • Curve DAO (CRV) is an automated market maker protocol that allows users to swap different tokens from similar assets (like USDC and DAI). Governance tokens for this network will give you access to a few sub-currencies to work with.
  • Maker (MKR) is one of the oldest decentralized finance options, most known for minting the DAI stablecoin. It is a strong performer in the Defi space and has a lot of yet-untapped potential.
  • Reef (REEF) – This network focuses on lending, borrowing, staking, and even mining cryptocurrencies. Owners of the REEF token have the ability to help decide on new function rollout, stake investments on crypto, and set a payout ratio for the profits you earn through these investments.
  • Uniswap (UNI) – Uniswap holds the enviable title of being the first decentralized finance currency site. UNI has become so widely traded that it has become its own investment and can be found on several exchanges. It is a fine example of what happens when a finance project far exceeds its original expectations.

Governance Tokens Yield Farming

Yield farming is a popular income-generating strategy in the decentralized finance world. It involves lending your tokens to get rewards in the shape of interest or transaction fees. The lending occurs through smart contracts with no intermediator. While risky, yield farming is a significant growth driver of the Defi sector.

Essentially, you lend your coins through a dApp (decentralized application), after which your tokens are locked into a liquidity fund. Then, based on the APY, you’re awarded interest or fees generated by the underlying marketplace. The liquidity pool fuels a marketplace where anyone can borrow or lend tokens. Users pay fees to access these marketplaces, which are used to pay liquidity providers (those lending tokens) for putting a stake in the pool.

Yield farming is tricky, and not all governance tokens have a clear reward structure. But I expect most governance tokens to offer an expected return in the future. Till then, let’s content ourselves with HODLING cryptos until the next bull run.

Conclusion

Governance tokens don’t get a lot of attention, but I believe more investors will jump into the DeFi space this year and invest in governance coins. Besides increasing in value with the upward price movement of Bitcoin, they grant their owners the right to vote on the protocol’s future.

Need help with getting started in the crypto space? Consider scheduling a call with a cryptocurrency coach. An experienced coach will help you get up to speed with more established investors and avoid the common mistakes that beginners make. With so many different ways the crypto market can fluctuate, it’s reassuring to know you can rely on someone’s experience to help you make the right trades and investments.