Challenges of Transparency in the Crypto Assets Industry and Solutions

The Crypto Assets industry has undergone more than a decade of development and is currently at a critical turning point. Although some crypto companies are seeking IPOs, significant transparency issues in the token market hinder the industry's progress. Tokens are seen as the direction for future capital formation, but without addressing transparency issues, the industry will struggle to advance further.

Many liquidity token investors are concerned that the token market is turning into a "lemon market." This concept originates from economic theories in the 1970s, referring to the phenomenon where the overall quality of the market declines due to a lack of effective mechanisms to distinguish between good and bad. The token market faces a similar dilemma: the absence of standardized transparent disclosure mechanisms makes it difficult for investors to assess the quality of projects. As a result, high-quality projects are reluctant to issue tokens, while speculative projects proliferate, leading to a decline in the overall market quality.

In the token market, investors face many issues that equity investors need not worry about:

• Insufficient legal protection: The legal safeguards for token holders are far lower than those for equity holders.
• Multi-token issue: The team often issues a second token for new businesses, harming the interests of early investors.
• Parasitic equity issue: Token holders are uncertain about the attribution of cash flow.
• Founder behavior: may abandon the project after selling a large number of tokens through over-the-counter trading during a bull market.
• Foundation Abuse: The team may extract large amounts of funds from the foundation under the pretext of consulting fees and other means.

These structural issues have led to a risk premium for tokens as high as 20%, far exceeding the 5% for stocks. According to capital market pricing logic, this high premium has resulted in token valuations being discounted by about 80%.

In addition, the ambiguous relationship between equity and tokens is also a significant issue. A large portion of many projects' profits flows to equity holders, while the value of the tokens themselves tends to approach zero. Token holders are unclear about their own rights and are unaware of the rights of equity holders, leading to potential conflicts of interest.

The "Everything Bubble" period from 2020 to 2021 exacerbated the issues. At that time, in a global low interest rate environment, token prices rose without fundamental support. After the bubble burst, market participants have been waiting for the next "big cycle", but gradually realized that they need to provide investors with something substantive.

In response to these issues, there have been some positive changes at both the industry and regulatory levels. For example, Morpho Labs will become a subsidiary of a nonprofit entity to ensure that value flows to tokens. On the regulatory side, an SEC commissioner in the United States proposed the "Safe Harbor 2.0" proposal, which provides guidance for projects transitioning from centralization to decentralization.

To address the chaos in the industry, the Blockworks team has launched a token transparency framework, which is an open and standardized self-disclosure template. Project parties only need to fill out this form to clearly communicate their structural information to the market. The framework includes about 20 questions covering business descriptions, supply timelines, and agreements with exchanges, among other topics.

The framework adopts a bottom-up approach, relying not on regulatory enforcement but rather providing expression tools to teams that truly "do the right thing." It prioritizes encouraging the linking of on-chain data, while relying on project parties to self-report on unverifiable parts. In the long run, a reputation mechanism will drive projects to disclose honestly.

Industry experts predict that projects that participate and receive reasonable ratings may see their tokens gain a premium in the long run due to transparency. If the framework is widely adopted, it could drive more institutional capital into the liquidity token market. In the short term, projects with good fundamentals but overlooked by the market will become the main beneficiaries.

On the contrary, projects that treat tokens as arbitrage tools, lack real products, or abuse market structures will be marginalized due to a lack of transparency. The emergence of this framework is expected to put an end to the high valuations of "fraudulent tokens," allowing resources to flow more effectively to projects that truly have product-market fit.