Governance tokens are a type of cryptocurrency that provides holders with voting rights and decision-making power within a DeFi protocol. These tokens are used to decentralize the decision-making process and give control to the community of users, instead of a centralized entity.
One of the most well-known examples of a governance token is MakerDAO's MKR token. Holders of MKR are able to vote on proposals such as adjusting the system's collateralization ratio or changing the stability fee. Other DeFi protocols, such as Compound and Uniswap, also have their own governance tokens.
Governance tokens are typically distributed to users through a process called liquidity mining, where users provide liquidity to a DeFi protocol in exchange for rewards in the form of governance tokens. These tokens can then be used to vote on proposals and participate in the protocol's decision-making process.
While governance tokens provide an important mechanism for community participation in DeFi protocols, they also carry risks. One potential risk is the centralization of governance power in a small group of token holders. Additionally, there is always the potential for token holders to vote in their own self-interest, which could lead to decisions that are not in the best interest of the broader community of users. As such, it's important for DeFi protocols to carefully consider their governance structures and ensure that they are designed to promote fairness and decentralization.