In traditional finance, private companies have control over their clients’ funds and transparency is often lacking. In contrast to this, DeFi projects are often run by a DAO which allows all users to participate in the decision-making process.

This is made possible by a variety of tokenized governance models, many of which are still a work in progress. The following articles explore the basics of DeFi governance methods - read up and try our quiz below!

1. What is a DAO?

A decentralised autonomous organisation (DAO) is a novel way of running a project, underpinned by the transparency and trustlessness of blockchain networks. No individual has control over funds stored in the DAO’s smart contracts, and anyone is free to contribute to the project.

What is a DAO?
A DAO, or a Decentralised Autonomous Organisation, is basically a new way of how communities can come together to create and share value on the internet, while being rooted in the ideals of decentralisation and democracy. The organisation itself, ideally, works on rules that are transparently encode…

2. How does Governance work in DeFi?

A wide range of governance practices exist in DeFi from informal community feedback sessions to strict on-chain voting. Improvement Proposals may come from within the DAO or directly from community members and if an idea gains sufficient support, a vote will take place.

How does Governance work in DeFi?
Given the nature of the technology at play, the blockchain space holds the concept of decentralisation in high regard. The idea that power and responsibility should be spread as widely as possible is a key concept, and that extends to decision making in many DeFi platforms. Democratising the “boardr…

3. What are Governance Tokens?

Governance tokens allow users to participate in the voting process and may provide other benefits, too. Given the influence that they represent, these tokens may also have significant monetary value. Votes are usually weighted by the amount of the token a user holds, which often leads to low “voter turnout” for those who hold smaller quantities.

What are Governance Tokens?
Blockchain-based tokens have many functions; some are simply digital money, others act as a claim to a share of a pool of assets, and others still represent digital ownership. Many DAOs who wish for their community to participate in the project’s decision making process also issue tokens precisely f…

4. What is Tokenomics?

The way in which tokens are distributed and emitted over time is referred to as tokenomics, and a wide variety of models exist across DeFi. Tokenomics is especially important when it comes to governance tokens in order to build a loyal community with a vested interest in the wellbeing of the project.

What is Tokenomics?
In traditional economics, central banks are in charge of a currency’s monetary policy. In most cases, they tend to work with a fairly stable, established currency and attempt to promote sustainable growth within the economy. This is done by managing the money supply; adding to the supply by printing…

5. What are veTokens?

(Vote-escrowed) veTokens come from a particular model of tokenomics in which users must lock their tokens for set periods of time in order to vote. This creates a long-lasting link with the protocol, while simultaneously providing financial benefits. As well as to individual users veTokens are valuable to other projects who build on top of each other, promoting composability, one of the key characteristics of DeFi.

What are veTokens?
Many projects in DeFi issue governance tokens which allow their users to participate in the governance process. Governance tokens can also function as a way to distribute the platform’s earnings, accruing value over time based on underlying revenues. These tokens are generally earned as rewards for…

Summary

DAOs are a way to democratise participation in a project, based on the willingness to contribute to an open organisation. DAO governance is a simple proposition but leads to a myriad of different executions. The balance between strong tokenomics and meaningful governance is a fine line and DeFi projects are constantly experimenting in pursuit of an ideal model.

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Take the quiz to see what you’ve learned and then head on over to our Governance forum to get involved.

Quiz

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