Governance tokens in decentralized finance, or DeFi, have suddenly jumped into prominence following the success story of Compound’s COMP token, whose price action and liquidity mining program resulted in increased public interest.
Unlike previous iterations of “utility tokens” during the initial coin offering mania, DeFi governance tokens lend themselves to a more fundamentals-based analysis. DeFi projects usually have a well-defined revenue at a protocol level in the form of trading fees or interest rates.
As Michael Anderson, co-founder of Framework Ventures, told Cointelegraph earlier in 2020, the DeFi investment thesis hinges on token economics that would “capture the value” generated by the protocol. Spurred by the COMP distribution, Anderson spoke once again with Cointelegraph on a variety of topics, including the legal standing of DeFi tokens.Stocks analogies
In simplified terms, traditional stocks entitle their holders to a voting share in the corporate board of the company and a portion of the dividends it may distribute. Through these mechanisms, stockholders have a formalized way of influencing corporate development and directly profiting from its success.
While the governance aspect of DeFi protocol tokens is self-explanatory, some of the token economics approaches can be compared to dividends as well. Maker (MKR) uses a “buyback and burn” mechanism to capture value with the MKR governance token. Proceeds from the interest paid by borrowers are used to buy MKR tokens through an auction, and are then burned.
The mechanism creates a realistic price growth dynamic by stimulating MKR demand and reducing its total supply. While this approach is closer to the concept of stock buybacks, it generates value for holders in a similar manner to dividends.
Compound’s community has yet to decide a specific value capture mechanism, as Anderson noted. A Maker-like system is an option, as well as a more direct “dividend” d...