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

Like Equity

So what makes them valuable? Governance tokens are somewhat analogous to equities in that they are claims or rights. With equities, the holder has the rights to a business’s cash flows after all expenses are paid. With governance tokens, the rights are slightly different. The token holder has the right to vote in the governance and management of the blockchain. Token mechanics, which are incentive systems built within the design of a token, induce people to hold the tokens long-term, and that helps increase their value. Voting rights are enforced by cryptography and software, making the token trustworthy and valuable.

Tradable

Second, governance tokens are tradable, and can gain or lose value. Sometimes protocols issue free governance tokens when they are just starting out, in order to create new interest, awareness and add liquidity to the protocol. In late 2020, Uniswap “airdropped” their UNI governance token to the public. Anyone who had interacted with the protocol before the drop was entitled to 400 UNI tokens. UNI is trading at $26 as of this writing — those original token holders are now sitting on about $10K in value.

User Incentives

Third, early adopters will benefit from participating in a token’s ecosystem through incentives provided by the token’s design. Early users may get issued more tokens for doing something within the system that creates activity and raises an ecosystem’s liquidity. Or they could be incentivized to help promote a particular crypto project. Using incentives within the tokenomics allows for tokens to accrue more value.

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Jake Ryan

Jake Ryan

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