In simple terms, decentralized finance is an upgraded financial application, system, or a network, which was developed to transform the entire fintech network into a decentralized and transparent system. The Defi can achieve this by combining various blockchain tools like a smart contract, Dapps, and governance tokens. The governance tokens are mostly Ethereum tokens, which might be asset pegged, crypto pegged, etc.
What is a governance Coin?
Governance coin/tokens are tokens that developers created in order to allow the coin holders to help shape the future of a protocol. The decisions concerning the projects like; proposing or deciding on new feature proposals and even changing the governance system itself can be influenced by governance token holders.
In simple terms, the governance coin is a fuel that powers the blockchain-based voting process. It is the governance token that is used to show support or disagreement towards any proposed changes. And the governance token holders are also allowed to vote for any new changes to the protocol.
The process of governance tokens is that each governance token is equal to one vote. It means that if a token holder has more than one governance tokens, then the holder will have more influence over the protocol. There are various Defi protocols like the Uniswap, which runs in the Ethereum blockchain, allowing for trading of different digital tokens issued on the Ethereum blockchain. There are also other Defi protocols like the AAVE, Synthetix, etc., which we will talk about later.
The goal of the governance protocols is to help Defi projects in achieving their true potentials. These tokens are also making Defi achieve true decentralization. This is because, without the users being in control of the Defi project, it is not truly decentralized. Hence, governance tokens are a big step towards achieving true decentralization.
However, some complex protocols can be updated on-chain. There are places for proposals and votes. Governance coin holders vote for updates that will be applied to the protocol. One recent example is the recent YFI holders approving a new minting of 20% of YFI supply to fund development.
Let us look at the top 10 governance tokens to look out for in 2021
Top 10 governance tokens to watch out for in 2021
Although governance tokens and their voting mechanisms have been in existence for a long time, the increased acceptance of Defi has boosted the demand for governance tokens too. Below is a list of the top 10 governance tokensto watch out for in the year.
Uniswap is a trustless and highly decentralized financial infrastructure. UNI has proven to be a product-market fit for highly decentralized financial infrastructure with a platform that has survived independently. Also, UNI is now well-positioned for community-led growth, sustainability, and development. To achieve all these, Uniswap enables shared community ownership and a diverse, vibrant, and dedicated governance system, which will enhance the protocol’s future development. The UNI can be earned by providing liquidity to select pools, which will eventually be used for governance since a larger portion of the supply is issued.
Aave is a decentralized lending system that permits users to lend, borrow and earn interest on crypto assets without a middleman’s services. The Aave protocol runs on the Ethereum blockchain. Aave is a system of smart contracts that allows these assets to be managed by a distributed network of computers running its software. This simply means that Aave users don’t need to trust a person or institution to manage their funds. They only need to trust that its code will execute as it is written. The AAVE tokens are the native token of Aave.
Synthetix Network Token (SNX)
Synthetix is an Ethereum based Defi ecosystem that acts as a decentralized exchange (DEX) and as an issuer of assets. The different prices of assets, whether currencies, bonds, equities, commodities, or even other cryptocurrencies, can be tracked by these synthetic assets. So, if it has a real-world value, then the synthetix platform will allow a synthetic asset to be built to track the asset’s price. The systems maintenance is in the form of staking.
The process behind the SNX is like the one stablecoin uses to maintain its pegged value. However, the only difference is that rather than having a single stablecoin, synthetix will allow users to mint a synthetic asset backed by the SNX token – which is the native traditional token for synthetix.
Maker is an Ethereum based cryptocurrency project responsible for the DAI stablecoin. The protocol was proclaimed as the second-largest project within the Defi space, following right behind LINK, which makes the token price to be among the few that is high per piece. With the MKR token, users can vote for new changes, suggestions inside the maker DAO network through the Maker Voting Dashboard. The MKR was valued at almost $1,700 when it was launched in 2018, and now the price is around $2,500.
The various crypto analysts have predicted that MKR protocol is one of the Defi projects to watch out for this year. Because DAI promotes financial freedom, it has almost zero volatility, and it has been integrated into several Apps (wallets, games, and Defi platforms).
Compound (COMP) token is an ERC 20 asset pegged token which runs on the Ethereum network. The Compound is a market money or lending protocol (that’s according to Defi terms). The token holders can vote for suggestions, debates, and implement the network changes through the compound governance dashboard. The token works by allowing the borrowing and lending of a specific set of cryptocurrencies like ETH, DAI, USDT, etc. Now, any user with those cryptos can lend and borrow crypto instantly without spending the time, effort, and cost of working with a traditional financial intermediary.
So, if you have the cryptos, you can send, lock, deposit or lend any amount to the compound protocol. That’s like saving money in a bank account. Instead of depositing money in the bank, you are sending your crypto to the compound wallet.
SUSHI is an ERC-20 token that is issued on the SushiSwap decentralized exchange to the liquidity providers. SushiSwap is a decentralized exchange that allows users to swap cryptocurrency for another. People see it as a decentralized exchange because the protocol is not controlled by any single entity. It is smart contracts that control it.
The SUSHI token is earned in SushiSwap by providing a liquidity pool, and it can also be staked in exchange for SLP tokens, which are used to govern the protocol. The goal of the SUSHI token is to reward the users of the protocol. To achieve this, the protocol allows users to earn a cut of the Sushiswaps fees even when they are no longer providing liquidity to the Sushiswaps pool. Users achieve this by staking SUSHI to earn more SUSHI.
The Universal Market Access (UMA) is a decentralized protocol with a goal of creating globally accessible financial markets on Ethereum. The UMA creates a generalized framework for creating synthetic assets on Ethereum. This is accomplished through a framework for self-enforcing financial contracts and a secure oracle with economic guarantees. The native token, UMA, is used to govern the protocol decisions and it can also be used to create permission-less synthetix assets.
Yearn.finance is a Defi protocol that runs on the Ethereum blockchain. It allows users to optimize their earnings on crypto assets through lending and trading services. It is one of the leading Defi projects which offers its services using only code, removing the need for a financial intermediary like a bank or custodian. To achieve this, Yearn.finance has built a system of automated incentives around its YFI token. The protocol platform consists of different independent products such as APY, Earn, Vaults, Zap.
The users of the platform earn YFI token by locking cryptos in yearn.finance contracts running on the Balancer and Curve Defi trading platforms, using the yearn.finance platforms. Through this avenue, yearn.finance capitalizes on a practice known as “yield farming.” The yield farming is a practice that allows users to lock up crypto assets in a Defi protocol in order to earn more cryptocurrency. The higher the assets locked by users, the more tokens there are awarded by the protocol.
Curve DAO Token (CRV)
CRV is a governance token on the Curve platform with time-weighted voting and value accrual mechanism. It is one of the emerging decentralized finance (Defi) protocols built on Ethereum. The Curve doesn’t utilize a central order book; instead, it uses pools of cryptocurrencies provided by users who, in turn, can earn fees through their deposits.
Just like the Uniswap or Balancer, Curve offers cryptocurrency users an avenue to earn fees on their assets while letting traders buy and sell those assets at a higher price. One of the highlights that differentiate Curve from other Defi protocols is its focus on markets for stablecoins like Maker and USDT meant to track the price of US dollars and stable coins (like wBTC and renBTC) developed to track the bitcoin price. Due to the numerous options in the market, coupled with the risks involved, Curve’s goal is to allow the trading of stablecoins at a low fee.
Kyber Network (KNC)
Kyber Network is one of the leading DEX that captures value through its native token, Kyber Network Crystals (KNC). Kyber is an on-chain liquidity protocol that allows decentralized token swaps to be integrated into any application. Thus, allowing value exchange to be performed seamlessly between all parties in the ecosystem. By tapping into the protocol, developers can be able to build payment flows and financial apps, including instant token swap services. The KNC is largely burned from the fees collected from the exchange.
When cryptocurrency emerged, people were concerned about decentralization. However, as the years went by, different innovations began to emerge, thereby drawing people’s attention to cryptocurrency. Defi tokens have caught the eyes of individual and institutional cryptocurrency investors, as seen above. This attention is expected to grow and might lead to many innovations in the Defi Space. What do you think about these governance tokens for the year? Drop your opinion below.
All of these tokens are available at Binance exchange.
Written by: Narender Charan