What is a governance token?
Governance tokens are cryptocurrencies that represent voting power on a blockchain project. As of recently, they are mostly integrated into DeFi projects since they need to distribute powers and rights to users in order to remain decentralized.
As of February, the top 5 crypto projects in the DeFi segment have a combined market cap of more than $50 billion. If they were all to form one gigantic ecosystem with a single token, this mass would be ranked third on all crypto market leaderboards.
Such a trend implies that aspects like decentralization truly matter and that there is heavy interest in participating in governance. Although many refuse to participate in politics in real life, it appears that crypto people love having a say in their favorite projects. After all, they stand to directly benefit from their choices!
With these tokens, one can create and vote on governance proposals. By doing so, the user directly influences the direction and characteristics of a protocol. You can change the user interface, how a DEX distributes fees, what dev funds are used for, and all other vital questions.
Despite the fact that many DeFi tokens in the market are governance tokens, that does not mean that voting is the only feature behind them. In fact, these cryptocurrencies often allow the user to stake, create loans, and earn money by yield farming.
What is a utility token?
Utility tokens are the ones most commonly issued at an initial coin offering (ICO). Rather than representing an ownership stake in the actual company, they’re more like “golden tickets.” They give holders access to special services or preferential treatment, such as a discount at the launch of a start-up’s product line. These products might be software packages or software as a service platforms, for example.
Because they’re far more like promotional tools and don’t grant ownership stakes in companies, utility tokens aren’t considered investments. Utility tokens can grow in value if what your token represents suddenly becomes very popular and in demand. For example, if your token represents a limited access pass, those that haven’t been cashed in yet might grow significantly in value among those people who missed the ICO.
Governance token vs utility token
Is there a difference between governance tokens and utility tokens? If so, which one is better and why?
We previously covered governance tokens, so let’s quickly dive into utility tokens and see what they are all about. The additional context will help us analyze whether one crypto category is better than the other or not.
To explain it briefly, utility tokens are digital assets that have some form of utility. This utility is, most of the time, restricted to the native blockchain network or crypto platform. A great example of a utility token is BNB. The asset is used for various purposes on Binance, including paying for fees, voting on new token listings, and paying tickets as ‘entrance fees’ for features like the Binance Launchpad.
The name itself says it all, so there is nothing really to add. The fundamental fact that we have to note is that utility tokens feature no governance power. We did mention that Binance users can vote on token listings, but beyond that, there is really nothing else that can be done. Users cannot use BNB to decide on other more critical features or to cast their vote and decide to change how Binance looks like or works.
On that account, the answer is quite simple. Governance tokens are an upgraded version of utility tokens. Because of that, they are obviously the better option. As previously mentioned, governance tokens can also be used for other processes, like staking and creating loans. So, there is really no reason why one should prefer utility tokens over governance tokens.
New Governance Token in the Market:
Let me introduce you a new token launched in the market naming “SENA Token”.
About SENA: The SENA token is a governance token that entitles its holders to a share of the profit of the company and to take certain decision-making rights pertaining to the direction of the organization.
The SENA Group is a multi-division company that engages in several activities including construction, dredging, provision of clean water, R&D for defense equipment, manufacture and sales of under-chassis equipment and components of firefighter vehicles. The company is headquartered in Indonesia.
SENA Governance Token: To promote decentralized community governance of the network, the SENA group will allow holders to propose and vote on governance proposals to determine the parameters of project and subcontractor selection. Please note that the right to vote is restricted solely to projects featured on the SENA Group token page; the right to vote does not entitle token holders to vote on the operation and management of the company, its affiliates or their assets or the disposition of such assets to token holders and does not constitute an equity interest in any of these entities. The arrangement is not intended to be any form of joint venture or partnership.