Author: Ned Menton, Blockworks Compilation: Shan Ou Ba, LianGuai
As cryptocurrencies rise from niche to mainstream, projects will need to adopt more professional management practices or risk being left behind.
The Necessity of Adapting to Scalable Management
Today, Web3 treasury manages over $20 billion in total assets, with billions more allocated to this asset class. Despite the significant financial risks involved, many cryptocurrency projects seem to refuse to adopt management practices suitable for this scale. While early adopters today may overlook conflicts, excessive behavior, and lack of disclosure, mainstream investors and institutions of tomorrow will not. Projects that are unable to adapt will fail to attract the capital and talent needed for scaling.
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Today, stories of poor internal management within Web3 projects are all too common. One example is Aragon, which symbolizes the issues plaguing the entire industry. Investors witnessed the struggles between the Aragon DAO and the project management team over the past few months, resulting in several DAO members being banned from joining Discord discussions on financial matters. In addition to these bans, the Aragon Association announced that they would revoke the DAO’s management powers and transform it into a grant program.
After significant public scrutiny, Aragon reversed these decisions, allowing all token holders to return to their Discord channels and welcoming discussions among token holders on how to best allocate Aragon’s $200 million funds.
Funding Management, Decentralization, and Transparency Issues Faced by Cryptocurrency Projects
Despite being one of the most successful ICOs of all time, Aragon has been unable to leverage the 275,000 Ether (ETH) they raised through token distribution. Aragon’s high costs have diminished this funding, shortening their operational runway, and there has been little new functionality to show for all the expenses.
Cryptocurrency projects need to start managing funds and expenses like the tech startups they are—achieving limited product-market fit. Only then can projects establish a solid foundation that enables them to survive in volatile market cycles.
Web3 projects also need to decide if they are committed to decentralization. Most Web3 projects openly advocate for the advantages of decentralization. Many even create DAOs and offer token holders some voting power to express their dedication to these ideals.
However, in many cases, this decentralization is a facade.
Arbitrum’s AIP-1 controversy serves as a good example. Token holders voted against a proposal put forward by insiders of the project. The insiders did not accept the DAO’s judgment and proceeded with the proposal, claiming that the DAO vote was only to approve decisions already made. Token holders voiced their concerns loudly, and the insiders softened their stance—but it is clear that regardless of the “rights” of DAO governance, the insiders do have control.
Cases like this make investors and users wonder who truly 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 brutal. Even though the crypto market has matured, finding basic details about token ownership, ownership rights, economics, and roadmaps remains a daunting challenge for digital asset investors.
Internal incentives and transparency challenges faced by crypto projects
Typically, insiders are unable to disclose token design features or trades, which can create undue incentives for their teams, as seen recently with the popular NFT exchange Blur. Tokens paid to Blur contributors vest monthly, at which point contributors can choose to sell them.
The problem is that Blur plans to distribute 300 million tokens to users through airdrops in the coming months, which could result in a price drop if users sell their reward tokens. This creates an obvious conflict of interest, as contributors may want to delay the airdrop as much as possible to continue cashing in their vested tokens at a higher price. Such conflicts are quite common in the industry, and projects need to transparently explain how they mitigate these issues.
As cryptocurrency moves from niche to mainstream, Web3 projects need to mature and professionalize. Some top-tier teams in the field have already recognized this trend and are committed to generating financial reports, developing gradual decentralization plans, and providing appropriate disclosures for their tokens.
These teams that are fighting the long battle will survive when the crypto industry exits its adolescence – those teams that fail to adapt may find themselves on the sidelines.