Crypto needs to grow up

Today, Web3 treasuries manage over $20 billion in total assets — and billions of dollars more have been allocated to this asset class. 

Despite the massive financial stakes, many crypto projects seem resistant to adopting management practices that would be appropriate at this scale. 

While today’s early adopters may look past conflicts, excesses and a lack of disclosures, tomorrow’s mainstream investors and institutions will not. Projects that can’t adapt will fail to attract the capital and talent necessary to scale. 

Stories of mismanagement from Web3 project insiders are concerningly common nowadays. As one example, Aragon’s problems are emblematic of those that plague the industry at large. 

Investors have watched as Aragon DAO has gone to battle with the project’s management team over the past few months, eventually leading to the banning of several members of the DAO on Discord during a discussion about finances. In addition to these bans, the Aragon Association announced they would revoke the DAO’s governing authority and transition it into a grants program.

After considerable public scrutiny, Aragon walked back these decisions, allowing all token holders back into their Discord channels and welcoming some discussion from token holders about how best to allocate Aragon’s $200 million treasury. 

Read more from our opinion section: NFTs are stuck in Web2

Despite being the beneficiary of one of the most successful ICO’s of all time, Aragon has been unable to leverage the 275,000 ether (ETH) they raised through that token distribution. Aragon’s excessive costs have dwindled this war chest — leaving them with a shortened operating runway and few new features to show for all that spending. 

Crypto projects need to start managing their money and spending like what they are — upstart technology companies that have achieved only limited product market fit. Only by doing so will projects be able to build a firm foundation that will allow them to survive violent market cycles.

Web3 projects also need to decide whether or not they are committed to decentralization. Most Web3 projects publicly extoll the virtues of decentralization. Many go so far as to create a DAO and provide some voting rights to token holders to express their dedication to these ideals. 

However, in many cases, this decentralization is a sham. 

Arbitrum’s AIP-1 controversy is a great example. Token holders had voted against a proposal made by the project’s insiders. Rather than accept the DAO’s judgment, insiders proceeded with the proposal anyway, claiming the DAO vote served only to ratify decisions that had already been made. Token holders cried foul, and the insiders relented — but it was clear that insiders were really in control, regardless of the DAO’s governance “rights.” 

Cases like this one leave investors and users wondering who really is in control of a “decentralized” project, and what the value of governance rights really is. Not every project needs a DAO, but every project that chooses to form one needs to respect its integrity.

Finally, crypto disclosure currently ranges from incomplete to atrocious. Even as crypto markets have matured, it remains a serious challenge for digital asset investors to find even basic details about token ownership, vesting, economics and roadmaps. 

Oftentimes, insiders fail to disclose token design features or transactions that may create perverse incentives for their teams, as happened recently with the popular NFT exchange Blur. Tokens paid to Blur contributors vest every month, at which point contributors can choose whether or not to sell them. 

The issue is that Blur is planning to release 300 million tokens to its users through an airdrop in the coming months, which will likely drive prices lower as users sell their rewarded tokens. This creates an obvious conflict of interest, as contributors may wish to delay the airdrop as long as possible to continue cashing out their vesting tokens at higher prices. Such conflicts are concerningly common in this industry and projects need to be much more transparent about how they mitigate these issues. 

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

These teams, who are playing the long game, will survive as crypto exits its adolescence as an industry — those who fail to adapt will likely find themselves on the sidelines.

Ned Menton is an analyst at digital asset investment management firm Runa Digital Assets. Runa specializes in liquid token investing using a fundamental, value driven approach to invest in this nascent asset class. At the firm, Ned specializes in research relating to decentralized governance and consumer applications in Web3. Prior to joining Runa, Ned began his career in banking. He holds a Bachelor’s degree in Financial Management from Clemson University.

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