DeFi Protocols May Just Have Made a Huge Mess of “Governance Tokens”

The crypto market sector is booming right now. In the last week alone, decentralized finance (DeFi) protocols, including Compound (COMP) and Balancer (BAL), have launched so-called “governance tokens” that brought early recipients and investors over 200% gains in less than a week. 

At this time, though, the motives behind the launch of these governance tokens have been called into question, with evidence suggesting that these may not be more than “sugar-coated” tokens (with high-risks) flooding the market.

In simpler terms, these tokens, although labeled as a tool for governance on these protocols can quickly become irrelevant in deciding what changes are to be made. This situation is also worth considering given that early recipients primarily trade, rather than stored and used for the purpose for which they were seemingly designed.

The background

First pioneered by DeFi protocol, Compound earlier this month released COMP tokens, which, according to the project, would give holders the right to vote on governance decisions regarding the protocol.

Among other things, users could vote on protocol upgrades and what assets should be included in the lending pool. These tokens were given out as rewards to Compound Protocol users and subsequently moved from no price to over $300 per coin in less than three days.

The massive growth in COMP’s value in such a short time, no doubt influenced other DeFi projects including Balancer Labs, to follow the pattern and release the so-called governance tokens for their platforms, albeit with varying specifications.

The Balancer ($BAL) error?

Within 15 hours after launching its “governance token” and distributing the first batch to users, the token gained over 235% and have traded within that range. 

Balancer protocol users needed to vote on how the project would deal with questionable liquidity distribution and how to deal with mining rule changes.

But, instead of calling on BAL token holders to vote on these decisions, Balancer Labs organized a Discord poll and reported that it will now implement rules decided by a “community consensus reached over at [Balancer] Discord channel.”

Evidently, one may argue that since BAL tokens were not needed to reach “a community consensus,” the actual use case for which they exist may well be mere fantasy. The same could then be said of other DeFi protocols who have either launched or plan to roll out protocol “governance tokens.”

The end of a price discovery period for these new flock of DeFi tokens in the days ahead will likely reveal more about their fair market value, especially as investors grow in understanding of their use cases and role in protocol governance.