Governance Tokens: Investing in the Building Blocks of a New Economy

(Originally in the Defiant Blog)

One of the most important building blocks in DeFi is the governance token. When blockchains have on-chain governance, there is no built-in central entity that controls how any given upgrade is managed. Seeing the opportunity, developers all over the world are creating programmatic systems for on-chain governance, and issuing governance tokens, which give holders the right to vote on protocols, products, new features, goals, upgrades and maintenance of a blockchain. There are as many approaches to governance tokens as there are blockchains, but one principle is true — when a blockchain increases in value, the right to govern it also increases in value. And that is important to crypto investors.

Like Equity

Many new crypto investors focus on a crypto asset’s ability to create value. That’s required but not sufficient. A wise crypto investor will also consider a token’s ability to accrue value. Token mechanics, like the ability to lend an asset at a certain interest rate and exercise governance rights, are attributes that support a token accruing value.

The Ethereum-based Compound governance token ($COMP) allows holders help determine interest rates for this lending platform, for example. It’s possible that down the road token holders will vote to award themselves with even more favorable lending or borrowing rates, or decide to direct a percentage of cashflows to token holders.


User Incentives

Crypto assets are nascent and their designs are being experimented with all the time. We are talking about start-up companies that will change, and new players will arrive and disrupt everything. Some platforms and projects will flourish, others won’t make it. Investing in governance tokens is investing in the building blocks of the next big economic wave.

When you think about the next big economic wave, where artificial intelligence, the Internet of Things, and robotics converge to create what I call the Age of Autonomy, governance tokens will be key. Governance tokens make it possible for a group to arrive at a consensus on managing the new crypto-networks that will be at the core of the decentralized finance and production structures of the future. Owners will become more active and participative with their capital. Governance systems will get more complex. Groups of people in decentralized autonomous organizations (DAOs) will participate with the projects they choose to invest in and hold tokens in. Governance tokens and the rights they bring are a critical primitive in how decentralized governance will work in the future and why governance tokens will accrue value now.

Jake Ryan is the Founder and Chief Investing Officer, Tradecraft Capital and the author of Crypto Asset Investing in the Age of Autonomy.



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Jake Ryan

CIO at Tradecraft Capital & Author of CRYPTO DECRYPTED & Crypto Investing in the Age of Autonomy, published by Wiley