Governance tokens are tokens that grant their holders permission to participate and influence protocol and other platform related decisions, with the weight of their influence being proportional to the share of tokens held. Changes to a protocol can be proposed, after which they are vetted and voted. In the case of Decentralized Autonomous Organizations (DAOs), decision making is facilitated by executing smart contracts, which lead to the acceptance or rejection of proposals put forth.
One prime example of governance tokens in a DAO is the Maker Protocol or MCD (Multi-Collateral Dai) system in the MakerDAO project. This project allows users to generate the stablecoin DAI, which is soft-pegged to the US dollar and was one of the first DeFi (decentralised finance) applications with wide adoption. The governance rules of this dapp on the Ethereum blockchain are imprinted in its voting contract, DSChief, which assigns voting weight proportionally to the amount of the MKR token that each voter stakes.
A major difference between this and owning stock (equity), which also constitutes a way of getting involved in organisational governance, is that individual decisions can be voted on, in contrast with a board of directors electing a management board that takes care of individual decisions.
The answer to why governance tokens matter to enterprises is manifold. Firstly, off-chain governance is costlier than on-chain governance (and entails a higher risk of hard forks). Secondly, governance tokens are a tool to increase the user base of a business. This is because users may find added value in the prospect of participating directly in decision-making for personal, business and/or ideological reasons. Thirdly, governance tokens lead to more involved communities, which is something often sought. Fourthly, they are a necessary component in DeFi, allowing to claim membership to a novel and innovative group of undertakings. Finally, they bring about the actual benefits of decentralisation, such as collecting disperse knowledge through democratic discussion and decision-making. Risks exist, however, such as the dilution of accountability in the group and the possibility of “whales” (those with control over a large number of governance tokens) taking over the decision-making process
The Maker Protocol, also known as the Multi-Collateral Dai (MCD) system, allows users to generate Dai by leveraging collateral assets approved by “Maker Governance.” Maker Governance is the community organized and operated process of managing the various aspects of the Maker Protocol. Dai is a decentralized, unbiased, collateral-backed cryptocurrency soft-pegged to the US Dollar. Resistant to hyperinflation due to its low volatility, Dai offers economic freedom and opportunity to anyone, anywhere.