Decentralized Finance (“DeFi”) platforms have greatly grown in popularity in 2020 and 2021 year to date, having a significant impact on the financial technology sector. These platforms were created by combining blockchain technology with financial technology, providing financial services that billions of people use around the world, including lending, borrowing, savings, insurance, and investments.

This coming financial revolution was made possible by decentralized applications and the use of smart contracts, a computer program that automatically executes, controlsand/or documents legally relevant events and actions according to the terms of a contract or an agreement.

What are Governance Tokens?

Governance tokens are tokens that represent a user's voting power in DeFi projects. One of the first applications of a governance token was as an off-chain process by which stakeholders could determine the direction of a DeFi project. The disadvantage of the off-chain process is that it resulted in a situation in which miners and core developers wielded more power than users because most users lacked the resources to use the off-chain process.

The primary purpose of the governance token is to give users control over the platform. Any user who owns a governance token should be able to participate in platform decision-making. Another application for governance tokens is as on-chain processes.

The demand for governance tokens is increasing as the DeFi sector grows. The presence of governance tokens in any DeFi project allows for a well-organized decision-making process. It also allows for the peaceful resolution of disputes.