Down the cryptocurrency rabbit hole in search of adequate safeguards and room for innovation.

Down the cryptocurrency rabbit hole in search of adequate safeguards and room for innovation.

Since the inception of Bitcoin brought about decentralized digital currencies and distributed ledger technology in 2009 the community has been trying to solve the problems brought about by centralized authority and the inefficiencies of oligarchies in an attempt to minimize the impact abuse of power has on society as a whole.

Say Hello To The New Oligarchies

The inherent differences between decentralized systems and centralized ones are based on who actually has control not what underlying technology they use or who appears to have control. This is why ripple is criticized for being centralized while they also benefit from using the words blockchain, distributed ledger technology, and decentralization. By allowing users to have base assumptions about its purpose based solely on the connotations around the words used to describe their technology stack.

Every new innovation especially ones that better enable our liberty and amplify our means to communicate also enable bad actors to abuse the system. To see this in other industries just take a look at facebook, they’re a company that enabled people to communicate with one another with a lower level of friction than ever before but is built on top of a system that puts capitalism above benefiting the end user and society as a whole.

With cryptocurrency If we continue down this path the new status quo will ultimately form new and harder to stop or identify oligarchies, which will operate under the guise of being decentralized and empowering to individuals.

Unleash the bounty hunters

A bounty program is an incentive structure to reward early adopters and new users for creating content that promotes the discovery of a project. This is usually done through the creation of content such as articles, reviews, shares, explanatory videos, and any content that would spread awareness of the project. Participants are usually compensated with the new coin being created and sold to the public for a project or service that doesn’t exist yet or has yet to introduce the features promised by the founder and team.

Bounty Incentive Promotions & Smoke and Mirrors

The main ways people in this space do independent due diligence and research on potential investments all revolve around discovery of organic content on the project and content created through the bounty program. Currently that process looks as follows.

1. See how strong the social media following of a project is. This includes checking twitter followers for a project, checking to see how many shares a project has, checking to see what content has been written about a project, searching for video content explaining the technology behind a project, looking at how much money has been contributed to an ICO, looking to see how big the market cap is for a cryptocurrency, checking how well the wealth has been distributed for a coin.
2. Investigating what technologies are used in a project. Does the project roll it’s own encryption or does it use tried and true methods for encryption? Is it decentralized or is it centralized?

How do projects and founders abuse this, their total control of raised funds, and perceived loopholes in securities laws to give the illusion of something being a good investment without consequences?

1. Founders and teams who compensate users through their bounty program without vetting the quality of the content to preclude compensating fraudulent or misleading content. I’ve seen this happen with paid articles on medium for ICO’s that have hundreds or thousands of claps from fake accounts, paying for twitter followings, paying for likes on their facebook page, paying for fake reviews on their facebook page promoting things that don’t even exist, paying for fake shares of their content on facebook pages, paying for shill posts / comments praising the project on their social media pages, and a failure to quality control paid foreign content creators by understanding if the content is accurate or honest before paying them. In many cases this happens simply because the founders are focusing solely on quantity of content versus substance and getting their project up in SEO so it is more discover-able in search results.
2. Companies who make large amounts of contributions from the founding team members or private investors to their token sale without being transparent about it. The issue with this is not that they are exercising their free will to contribute their own money to their own project but that it A) makes it look like there is more public interest than there really is and B) Further concentrates supply into a small group of people making the total supply of their coin less distributed and value more susceptible to manipulation.
3. Creating a total supply of coins and a distribution allotment that leaves them with enough of the supply to break features designed to keep the cryptocurrency decentralized such as telegram keeping more than 50% of the coins in a system designed to function on proof of stake. Or the founding team using the company and team reserves to manipulate the market for their coin made possible by an overall lack of regulation.
4. Not having a vesting schedule that prevents the founding team, early investors, and advisers from dumping their stake in the coins which essentially dumps their risk in the project immediately after the token sale, or in some cases allows them to benefit before users from insider knowledge the public doesn’t have access to such as knowledge that a deadline will be missed, regulatory action is imminent which can all impact the tokens price, ect. This ultimately removes the incentive for them to fulfill promises and meet deadlines in the hopes that will increase the value of their stake.
5. They outright lie about the experience of members of their project, who their employees are, If their employees are real, plagiarize their white papers, and lie about what capacity advisers are contributing to the project.

Welcome to the Wild West

Digital currencies are undoubtedly revolutionary and transformative but they are also new forms of investments simply due to the expectation of profit by the majority of people participating in token sales regardless of disclosures given. Too many people are looking at digital currencies and trying to apply old language. Asking is this a security, commodity, or is it money? The answer is it can be all of these things depending on how they’re used and programmed and unlike the traditional asset classes of the past are not static from the moment of inception. New features can be added and enabled that make them act differently for different users. Though investments are things that have existed since the inception of wealth stores, capitalism, and society itself. To say these things don’t need regulations at least to a degree similar to ones applied to securities, commodities, and money is serving your own biases and not based in reality.

Financial Darwinism

This argument seems to be made mostly by people who have a vested interest in keeping this space operating in a wild west of sorts where they can do as they please with a low barrier to entry. In practice systems like this incentivize corporations and people to operate in a way where ethics are often traded for profits.

A possible solution in sight? Enter the DAICO.

It would seem that there is still wisdom to come from within the industry itself that aims to solve this the same way bitcoin solved trust in financial systems back in 2009. The fact is both sides are right, too much regulation could stifle innovation but letting it continue as is will simply replace the existing system decentralization is trying to improve with a new system that suffers from the same problems of corruption. The concept for the DAICO was proposed by the creator of Ethereum Vitalik Buterin and it aims to thoughtfully balance these issues through what is essentially a means of self regulation. Instead of projects being able to raise money then immediately become the custodian of the contributions, contributors would have the ability to vote on when portions of the funds were released based on things like tangible accomplishments.

A DAICO contract is published by a single development team that wishes to raise funds for a project. The DAICO contract starts off in ‘contribution mode,’ specifying a mechanism by which anyone can contribute ETH to the contract, and get tokens in exchange. This could be a capped sale, an uncapped sale, a Dutch auction, an interactive coin offering, a KYC’d sale with dynamic per-person caps, or whatever other mechanism the team chooses. Once the contribution period ends, the ability to contribute ETH stops and the initial token balances are set; from there on the tokens can become tradeable.

I thought what i do was, I’d pretend I was one of those deaf-mutes… or should I?

This of course won’t solve the issues we’re facing as a new industry on it’s own though it looks like an excellent step forward to minimize the missteps teams and founders are able to make while we move the conversation of how to regulate the space forward in open dialog between governments and the community. With this the community will ultimately gain more power to disincentive unethical and dishonest behavior through their ability to revoke contributed funds to projects that breach trust. Using the same financial incentives these decentralized networks are employing to offer the innovations that keep participants who mine, stake, or otherwise participate in these networks honest in the first place. Remember the power of decentralization is supposed to be that we all have a say and bad actors get punished. If we had systems like this in place in the past then the 2008 financial crisis could have been avoided merely from the transparency and checks and balances it would allow us to have.

🖖🏽 Until next time…