Governance Token Explained: WRAP and other Tezos-based Projects
Disclaimer: This post is not investment advice or trading guidelines. Tezos Ukraine shall not be held responsible for your investment decisions. Never invest more than you can afford to lose.
Major companies issue two kinds of shares: ordinary stocks with governance rights and participating preferred stocks. Cryptocurrency projects make it simpler: governance tokens entitle the owner to governance and additional profits alike.
Tezos Ukraine reviews the governance token Wrap Protocol and explains why projects need tokens like that, should one buy them, and what holders can do.
What are Wrap Protocol and WRAP
Wrap Protocol by Bender Labs is an app designed to transfer ERC-20 and ERC-721 tokens between Ethereum and Tezos blockchains. It blocks tokens on Ethereum in a smart contract and issues wrapped FA2 tokens using the original ones as collateral.
WRAP is the governance token of Wrap Protocol. All WRAP on Tezos are actually wrapped WRAPs in ERC-20. The transfer of tokens both ways requires a 0.15% fee. WRAP holders can get ⅔ of said fee if they stake their tokens.
Why projects issue governance tokens
In most cases, it is the community that governs the evolution of a blockchain protocol. Developers make proposals and node owners vote for their implementation. Tezos works the same way: on Tezos Agora, you can watch bakers vote for updates in real-time.
The project’s fate should be in the hands of those who invested their effort and funds in it, that’s the heart of decentralised governance. In Tezos, bakers are the most important people for the project. In other projects, it’s major investors and regular users. To give those people voting rights, DeFi projects issue and distribute governance tokens.
- Wrap Protocol releases WRAP to the members of the quorum and the users who wrapped their tokens or staked LP tokens of the WRAP-XTZ pool.
- Crunchy Network distributes crDAO via their farms;
- The DEX QuipuSwap just airdropped QUIPU to everyone who exchanged tokens with them and added liquidity. If you have ever used their services, check your wallet.
What governance token holders can impact
Blockchain projects set up different conditions for self-governance. Usually it’s about changing the service fee or the distribution formula for new tokens. Wrap Protocol plans to launch a DAO based on the BaseDAO framework. Through it, WRAP holders will be able to do the following:
- change the fee structure, i.e. set different levels of fees, amend the list of recipients and the distribution model of funds;
- impact the governance of the WRAP token: change the formula and frequency of distribution, as well as the recipients and their distribution model;
- improve Wrap Protocol: vote for issuing grants and adding new assets for wrapping;
- put their own proposal up for voting.
Can I profit from governance tokens?
Blockchain projects care about adding value to their governance tokens. The value consists of four parts:
- governance: unique usage scenario that doesn’t work for any other asset;
- limited issuance: no inflation, greater potential for growth;
- profit distribution: e.g., Wrap Protocol gives 66% of its profits to users;
- earning with DeFi: governance tokens can be added to liquidity pools or staking for the purposes of passive income.
Even if the investor ignores voting, he or she still can profit from owning governance tokens.
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