A popular trend kicked off by the Compound Protocol in the Spring of 2020 was governance tokens for DeFi protocols. The dream of governance tokens was a beautiful ideal. Simply by using a protocol, you would automatically and freely receive ownership of it. Decision making around the protocol would be decentralized allowing thousands and ultimately millions to have their say and vote on changes to the protocol.
But the reality of governance tokens hasn’t lived up to the ideal. Token based voting for governance leads to subpar outcomes. This has been seen across decentralized finance. Token voting has suffered from lackluster levels of engagement, slow moving votes, and structural issues where token voters actually become a bottleneck to permissionless innovation.
One viable solution is to eliminate tokens from protocols. For some protocols, this will be the right choice. However, historically speaking, tokens have been crucial to scaling decentralized networks. Most prominently Bitcoin has scaled by distributing Bitcoin tokens to miners and Ethereum has scaled by distributing ETH tokens to stakers.
An alternative solution is to keep tokens but eliminate the governance. Removing any governance powers from a token follows the model of Bitcoin and Ethereum. The token plays a utility role in the protocol but retains no governance power. There is no voting, no parameter management, no gatekeeping. Instead, the token functions to strengthen and grow the protocol.