Transparency 2020

Two nights ago I vented my frustration at the lack of data standards and transparency at many of the industry’s top 10 projects. I stand by that message.

It was a bulk call out of some of the top funded organizations in the industry - the Ethereum Foundation, Block One, Ripple, Stellar, Binance, the Tezos Foundation and others - to up their collective games in the decade ahead. The industry’s ultimate success hinges on our ability to deliver on the core promise of offering a marked improvement over the current financial system, not a race-to-the-bottom in quality and consistency.

That extends to data quality and investor/stakeholder protection, as well.

There are four issues here:

1. Ad hoc, selective transparency is not good enough.
2. One time disclosures are low fidelity, and quickly outdated.
3. Analog, unstandardized disclosures are inadequate. (I mean, come on…)
4. Self-reported, un-validated claims are not reliable.

We’ll go one at a time, then talk about where Messari fits in to this whole equation.

Ad hoc, selective transparency is not good enough.

Let’s look at some of today’s best practices. (Credit where it’s due!)

Ripple has posted quarterly XRP transparency reports for three years. They are good, but leave much to be desired, as some "selective transparency" has had the effect of overstating XRP market cap, while understating the liquidation rate of insider-owned XRP (and the degree of centralization at Ripple, Inc.), I've written about some of these issues for two years.

Binance is excellent at regular reporting as well. They post a quarterly recap of their token burns from CZ himself. It’s the closest thing the industry has to a quarterly earnings update from a major company. But we don’t know what the liquidation policy is for company and founder-owned BNB. Where is the treasury held and how can it be distinguished from the rest of the exchange's holdings? Where do updates live regarding the Binance blockchain? Where do people learn about proposed or existing (i.e. value generating) use cases for the BNB token? Binance Research has one of the best libraries of token disclosures reports in the industry - 40 so far - but BNB is curiously not among them, and most of their profiles, while good, aren't regularly updated.

The Tezos Foundation now posts weekly updates on the project, as well as a biannual report. They’ve completed an audit with PwC, and hired a former PwC partner as CFO. They are arguably best-in-class out of the major projects when it comes to reporting on their token treasury. But there is no structure to the disclosures, discussions of risks, or review of ongoing treasury policies.

Again, these are the good practices.

On the other hand, we’ve gotten basically nothing of any substance out of Block One regarding their ongoing contributions to EOS, despite the fact they raised a multi-billion dollar war chest from 2017 token investors, and they are set to receive 10% of the EOS block rewards over the next ten years. Saying Block One isn’t affiliated with EOS is a bit like Ripple saying they aren’t affiliated with XRP. It's just obviously false.

Then there’s really damaging non-reporting that raises eyebrows. In one of our reports earlier this year, we identified a 2017 inflation bug in the Stellar protocol that had been exploited, and patched in relative silence. More recently, we noticed the Stellar API was hard coded this fall to return a static supply of 50 billion XLM around their massive burn of airdropped tokens. This was done to keep news of the token burn a secret until the very last minute, but the API wasn’t actually updated for weeks.

I'll remind you, these are five of the top 10 assets by market capitalization, not long-tail assets. God help us.

One time disclosures are low fidelity, and quickly outdated.

Crypto moves quickly. Projects pivot, fork, turn over governance control, wind down to zombie status, etc. More often than not, there are human contributors who drive those decisions. And we can and should get periodic updates from those contributors. No, no, no. That’s not strong enough.

We should *demand* updates from those contributors if they work at an organization that raised money from outside stakeholders in return for sale of a token.

Qiao wrote succinctly about the principal agent problem in crypto yesterday:

"Anyone serious about investing in crypto should spend some time to study the principal-agent problem.

Investors in developed countries take this for granted. Regulators like the SEC force companies to spend huge compliance dollars on reporting in order to the minimize the information asymmetry between the agent and the principal.

In crypto, there are at most 10 projects where I, the principal, think I know as much critical information as the agent. [That’s bad for a “decentralized" ecosystem.] The principal-agent problem is the primary reason why a) retail investors got burned during the 2017-2018 era, b) serious investors are by and large staying away from this emerging asset class, including some of the coolest projects.

Why does the market rally around Bitcoin vs. alts? Partly because it is the most decentralized project. Decentralized means smaller asymmetry between the principals and the agents. But before projects can fully decentralize themselves, the only way to fix the principal-agent problem, thereby attracting liquidity and supporters, is to disclose as much critical information as possible."

I don’t even know how this can even be disputed at this point. Wasn't the entire purpose of this movement "don't trust, verify" using the audibility of everything on chain? Why are we trusting these central bodies with inside information as if they're a central bank?

And yet many teams will throw up their hands and say “we can’t make disclosures because the project is decentralized.” I empathize with the awful and counterproductive dynamic that has been created by the SEC, where teams need to play this game, often on the advice of counsel, to do everything possible not to “look” like a security under the 80 year old Howey test.

But just between us, it’s a bullshit bit of pushback, right?

Analog, unstandardized disclosures are inadequate.

Then there’s the problem of steadily standardizing these disclosures over time and digitizing them. Ripple, Binance, and Tezos (again, these are the good ones) make updates via PDFs, blog posts, and tweets.

Seriously.

Then some of these teams turn around and rip the quality of the information providers! FUD!

OF COURSE crypto data / information is broken. It’s unstructured and unstandardized! And you won't step up to help fix it!

There's a structural stakeholder communications deficiency in crypto, and it needs to be corrected. We don’t have (nor do we, I think, want) an SEC to enforce standardized self-reporting on crypto assets and participatory networks, which are mostly *not* designed to be equity-like securities. Maybe we could look to Singapore or Switzerland for some sensible disclosures regimes that won't stifle innovation, agree to the basics, and then get to work digitizing these records, and making them ubiquitous.

[This is exactly what we’re doing at Messari and our disclosures registry.]

Imagine a world in which GAAP/IFRS accounting standards weren’t prevalent, EDGAR did not exist, and the xbrl reporting standard had not been created. Bloomberg, S&P, Thomson Reuters, and FactSet would likely pull different information from the same publicly traded companies, and you wouldn’t be able to reconcile the numbers. Complete chaos.

Accounting is the language of business, and right now, every single crypto project speaks a different business language. It’s not going to change unless top teams - token creators and exchanges, especially - take it more seriously.

The added benefit to this sort of investment would be that it could lead to an industry-led “common application" of sorts that helps automate listing processes across liquidity providers and ultimately helps prevent a scenario where tokens need to be registered as securities.

Self-reported, unvalidated claims are not reliable enough.

There’s a reason the "Big Four” accounting firms exist, and it's not because most accountants are the life of the party. It became obvious fairly quickly that “trust, but verify” should be the default standard in public markets as people by nature have a tendency to overstate good news and understate (or hide) bad news. These global verifiers make nearly $60 billion per year on auditing services. The agents in this case are the asset creators (corporate issuers) who pay for these audits to address the demands of their principals (investors). The system mostly works.

Crypto will be no different.

If you want project marketing materials and completely unreliable information, then the expectation should be that projects continue to self-report on their key stats with no paid third-party review and the public will continue to lack sufficient public information to do their own due diligence.

Congratulations, we'll never graduate from the kid’s table.

If instead, some disclosures standards and independent reviewers (read: services outside of the listing exchanges) do emerge, then the industry will level up, and attract more capital and credibility.

Ok, we’ve properly pitched our book.

Yes, this is Messari’s business today. But it’s not our long term money maker.

We’ve proposed a registry service that acts as a v1 for where we think the industry needs to trend in the coming years with respect to self-reporting. Not because we want to get uber-rich off this product, but because we don’t want all of our other data infrastructure we build resting on a house of cards.

We’re aiming to help everyone solve the garbage in-garbage out problem, so we can then compete on higher value offerings.

To make that self-sustaining (and prove this sort of auditor market could exist), we charge $10k per year as a flat fee to projects. This got us working with the teams we knew were serious about collaborating beyond an initial PR move. We've announced the projects we’re currently working with, so you know exactly how much we’ve made in revenue from that business line.

And all the info is free to consume. So go steal it from our free API.

BUT GUESS WHAT.

Let’s say our addressable market today is the ~200 projects with a market cap higher than $10mm. Let’s also make the unrealistic projection that we onboard 100% of those teams to our registry next year. At $10k per year per customer, that’s still not enough to cover Messari’s annual OpEx.

On the other hand, most people in the trading, exchange, and token project community seem to want us to continue to exist. What to do when there's macro interest, even if there’s often micro skepticism/criticism.

How do we solve for this issue: critics accuse us of “shaking down” teams in pushing them to work with us (and pay us the mini-fee), but it’s really a thankless, money-losing, but ultimately necessary job.

I don't have a crystal clear answer, but I’ll propose something to the top 10 teams who have pushed back on our $10k annual fee or have viewed it as a blocker:

Help our research team get up to date, comprehensive data on your projects - like we’ve done for 70+ smaller teams already - and we’ll do this verification work for free in 2020.

Then we’ll work towards decentralizing the audit process (maybe via a DAO) in 2020.

In 2021, you can choose another paid auditor that joins the decentralized network if you like the idea, but despise Messari because of me and the fact that I'm a relentless and obnoxious ball buster.

But then again I can't bust your balls if you don't have any. So I want to know who’s got brass ones, and who’s all talk.

What this industry needs in terms of disclosures isn’t rocket science. It’s not even proprietary or sensitive info. Just common sense, timely, basic info.

Let’s fix this.

-TBI


P.S. And with that, I’m off for the holidays above-the-fold. You’ll still receive this daily with the top news items of the day, but I’ll personally see you in 2020.