Cryptocurrencies need to grow

Author: Ned Menton, blockworks Compiler: Shan Ouba, Jinse Finance

As cryptocurrencies make the leap from niche to mainstream, projects will need to adopt more professional management practices or risk being left behind

Accommodating the necessity of large-scale management

Today, Web3 vaults manage over $20 billion in total assets, with billions more allocated to this asset class. Despite the enormous financial risk, many cryptocurrency projects seem to refuse to adopt management practices appropriate to this scale. While conflicts, excesses, and lack of disclosure may be overlooked by today’s early adopters, tomorrow’s mainstream investors and institutions will not. Projects that cannot adapt will fail to attract the capital and talent needed to scale.

Stories of mismanagement within Web3 projects are common these days. Aragon’s problems, for example, are emblematic of the problems plaguing the industry as a whole. Investors have watched Aragon DAO battle the project’s management team over the past few months, culminating in several members of the DAO being banned from Discord while discussing financial matters. In addition to these bans, the Aragonese Association announced that they would be removing the DAO’s administrative authority and turning it into a grants program.

After much public scrutiny, Aragon has reversed these decisions, allowing all token holders to return to their Discord channel and welcoming some discussion among token holders on how best to allocate Aragon’s $200 million in funds.

Fund management, decentralization and transparency issues faced by encryption projects

Despite being the beneficiary of one of the most successful ICOs of all time, Aragon was unable to take advantage of the 275,000 Ether ( ETH ) they raised through a token distribution. Aragon’s exorbitant costs have reduced that funding - leaving them with a shorter operating runway, and with all that spending there are few new features to show.

Cryptocurrency projects need to start managing money and spending like they do — upstart tech companies have only achieved limited product-market fit. Only in this way can the project lay a solid foundation to survive the violent market cycles.

Web3 projects also need to decide whether to commit to decentralization. Most Web3 projects openly tout the virtues of decentralization. Many have even created DAOs and offered token holders some voting rights to express their devotion to these ideals.

In many cases, however, this decentralization is a deception.

Arbitrum’s AIP-1 controversy is a good example. Token holders voted against proposals put forward by insiders of the project. Instead of accepting the DAO’s judgment, insiders went ahead with the proposal, claiming that the DAO voted only to approve a decision that had already been made. Token holders have spoken out, and insiders have softened — but it’s clear that regardless of the DAO’s governance “rights”, insiders do have control.

Cases like this make investors and users wonder who actually controls a “decentralized” project and what the real value of governance rights is. Not every project needs a DAO, but every project that chooses to form a DAO needs to respect its integrity.

Finally, cryptocurrency disclosures currently range from incomplete to atrocious. Even as the crypto market matures, it remains a serious challenge for digital asset investors to find fundamental details about token ownership, attribution, economics, and roadmaps.

Internal Incentives and Transparency Challenges for Crypto Projects

Often, insiders are unable to disclose token design features or transactions, which can create perverse incentives for their teams, as happened recently with popular NFT exchange Blur. Tokens paid to Blur contributors vest monthly, at which point contributors can choose whether to sell them.

The problem is that Blur plans to release 300 million tokens to users via an airdrop in the coming months, which could cause the price to drop as users sell rewarded tokens. This creates an obvious conflict of interest, as contributors may want to delay the airdrop as long as possible to continue to cash out their vested tokens at a higher price. Such conflicts are fairly common in the industry, and projects need to be more transparent about how they are mitigated.

As cryptocurrencies move from niche to mainstream, Web3 projects need to mature and specialize. Some of the top teams in the space have already caught on to this trend and are working on generating financial reports, developing progressive decentralization plans and providing proper disclosures for their tokens.

These teams that are playing the long game will survive the crypto industry’s exit from adolescence — and those that fail to adapt may find themselves on the sidelines.