Introducing Messari: An Open-Source EDGAR Database for Cryptoassets
There’s something rotten in crypto. And everybody knows it.
We’ve gotten beyond irrational exuberance, and beyond the point where we can say, “this is just growing pains!” without lying to ourselves. Are we really so powerless to curb some of the excesses?
I wrote about some of the more pernicious aspects of the token boom a couple of months ago in my post “Short-term Fear and Long-term Greed.” Since then, a very little bit of progress has been made on the self-regulatory front. Projects like Aragon and Balanc3 have unveiled important new features, and Miko Matsumura from the ICO Governance project has done an amazing job evangelizing for a new sort of crypto S-1, the IGF-1.
Beyond that, though, the most powerful players in the industry, the king-making hedge and venture funds, whose signals generally lead the less sophisticated to pile into new token offerings, have embraced the mania, and generally turned a blind eye to the excesses.
This year, after all, is their year of plenty — when they and their LPs make the extraordinary returns that pay back multiples of the entire funds.
There are neither legal nor social contracts that require the big fund managers to disclose when they are selling stakes in their positions — and there are generally no lock-up periods.
There are neither legal nor social contracts within the industry for influencers or promoters to disclose their advisory or personal investment positions within crypto.
There are neither legal nor social contracts that dictate how a new token project should sell its token “treasury” over time, or behave if its founding team defects and leaves a shell entity with $500mm worth of bitcoin and ether and token tote bags sitting on its balance sheet.
Even pro-industry innovations in regulation like the SAFT may inadvertently add to the mania, as such an instrument gives possible legal cover to professional investors whose livelihoods rely on calculated speculation.
I think we’ve gotten so excited about the 10 year plans for crypto that we’ve neglected the short-term risks of our collective behavior.
If we don’t do a better job of self-regulating and creating some foundational social contracts in cryptoasset sales and trading, there will be no adults in this industry that deserve a seat at the table when the new laws and regulations are written.
The good news, which I’ve also emphasized previously, is that I don’t think there is an absence of ethics or long-termism in this industry. Instead, there truly are unique structural issues that hold back progress.
Challenge #1: Low integrity, dispersed, and unstructured information.
Sunlight is absolutely the best disinfectant. If we want the cryptoasset party to last without serious legal setbacks in the years to come, radical transparency from token projects will be the very best form of regulation. Let people make informed decisions for themselves based on high-quality, free, public information.
Easier said than done.
Information about cryptoassets is scattered across various silos. It is hard to verify. It changes frequently as teams adjust the terms of their token sales and future inflation rates, and their treasury balances gyrate wildly. There is a deluge of this messy information to absorb that makes it prohibitively expensive for a centralized entity to properly curate.
Even an information services titan like Bloomberg would find it next to impossible to keep up with the onslaught of new info and to provide high integrity data. If they did make progress, they would quickly lose their top analysts to funds and advisory firms and token projects themselves.
I know this well — in the 18 months of restructuring CoinDesk, we had no employee turnover, save one position. Research analyst.
Two former analysts are raising hedge funds (successfully), another is working on a new venture-backed advisory business (successfully). The average age of those analysts was 27. The average tenure less than six months.
(CoinDesk would do well to lock Nolan in a closet after he shares the next “State of Blockchain” report at Consensus:Invest this fall.)
And all of that pales in comparison to what is the biggest challenge of aggregating cryptoasset data: there are no incentives for projects to volunteer such info, AND it’s against the very ethos of the industry to share such information with a third party when that third-party stands to only individually profit from the data aggregation.
Better to rally around a free, widely recognized, open-source library and have information services businesses focus their time synthesizing that non-proprietary data and innovating by collecting harder proprietary data.
Key Insight #1: The “Bloomberg of crypto” will be a network, not a centralized company.
Challenge #2: Faster time to liquidity creates hard problems for funds and venture backed companies.
The liquidity of this new asset class has created unintentional ethical problems for token issuers and smart money backers.
In traditional VC, you purchase equity stakes in high-potential projects with great teams. In the winners, you usually double down via pro rata commitments in later rounds. Liquidity in under three years is rare, under one year is next to unheard of. VC reputations are built over decades of investing, and the signal from having a reputable fund in your round is that this investor is aligned for the long haul. They will be in the trenches with you and will not sell. In fact, they will probably double down if things are simply ok. VC’s that abandon their portfolio companies generally don’t last long, as you are judged based on how you deal with your winners and your losers in the portfolio.
In crypto, such parochial and outdated thinking is laughable. Time to liquidity is almost always measured in months vs. years. Whether that value is realized does not matter. The fact that the option to sell into a liquid and unregulated market does.
And this is where professional investors and issuers are caught between a rock and a hard place: they are fiduciaries.
If they realize a 10x return in 30 days, they will almost always need to sell some of their stake — lest their LPs perceive that they are acting completely irresponsibly. The result is a return of principal at least, creating a dynamic where the funds are always playing with house money.
This sort of thing happened during the dot com bubble, too.
This isn’t problematic in the traditional hedge fund world. But it is problematic in an industry where these funds are giving VC signals with hedge fund flexibility. “Will it pump or dump?” is the only heuristic that matters right now— a terrifying thought when you consider that there are no professional investor disclosure requirements in crypto.
The issuer problems are maybe not so well known. But for companies that have issued new cryptoassets and held certain tokens “in reserve”, they simply *must* sell at least some of their token treasury when vested in order to satisfy fiduciary obligations they have to their shareholders. Best case scenario is this dampens future demand for high-flying token projects in the coming months.
Worst case?
This is a hidden, ticking inflation bomb that will cripple many projects in 2018, and lead to a vicious downdraft.
And no one is talking about it.
Key Insight #2: Understanding fund and issuer vesting schedules and short-term incentives is critically important to understanding how prices of a cryptoasset will fluctuate in the near-term. If “will it pump or dump?” is the primary driver of cryptoasset prices today, “can the market absorb the inflation?” will be the key driver in 2018.
3) Challenge #3: Tokens are not claims on assets of the organizations that issue them. There is no precedent for how to manage liquidations.
I predict that in 2018 we will see our first reverse ICO.
A team that raises money suddenly disbands because they decide to work on another, more exciting project or because they decide to retire at the ripe old age of 25. The entity that holds tens of millions of dollars worth of cryptoassets (or more) is suddenly a zombie organization with no liquidation procedures.
If we are fortunate, this first precedent case will involve a project that planned for this contingency. There will be a pre-defined method to redeem tokens in exchange for remaining ether or bitcoin balances existing at liquidation.
“But that won’t happen! That would make this pure “utility token” a security!” you say.
Perhaps.
However, it strikes me that using a governance tool like Aragon, for example, might just allow for token issuers to create smart contracts that escrow funds into something like long-term refund addresses, which could redistribute balances in the event that project leads with majority voting stakes decided to wind down the issuing entities.
The more likely and unfortunate scenario is that the precedent for how such treasury funds are redistributed stems from a legal issue like a class-action lawsuit. With so much money at stake, the trial lawyers already have their fangs out. These cases will be high-stakes and the decisions they spawn will have ripple effects for years to come.
Wouldn’t you rather voluntarily figure out how to do an orderly wind-down of a cryptoasset project?
Key Insight #3: Before we can talk about what token treasury policies should be, we really need to know simply what they are.
Punch line: If cryptoasset information and data transparency is critical to shed light on both good and bad industry practices and protect consumers, but aggregating that data as a company is fraught with challenges, you’ve got to think outside the box, and figure out how to herd cats on a global scale.
So I’m excited to announce my newest project, Messari, a distributed crypto data library that I hope will turn into this industry’s EDGAR database. Messari will some day act as equal parts investor portal, self-regulator, peer-review system, and directory for cryptoassets.
We’re starting small, and collecting simple, straightforward, non-proprietary and non-controversial information on all of the top cryptoassets. The most important data sets that check these boxes today are around supply curves and annual inflation — inclusive of vested token treasury balances.
If we design the Messari library and incentives structure the right way, it will become the single source of truth regarding the most important data on thousands of current and future cryptocurrencies, utility tokens, and tokenized securities.
Media companies, investors, dapp developers, and regulators alike will have a tool to reference in order to fully understand what is happening in a given protocol or associated cryptoasset.
In short, it would be the data layer for the new crypto economy.
It’s a big idea, it’s an important project, and it’s got some terrific early buy-in from many of the industry’s most important stakeholders. I’m excited to share more details about the Messari project at Token Summit this December. (Tickets here!)
If you are interested in lending *long-term* support to the project, please reach out!
If you’re looking for a pre-pre-pre-sale allocation, leave us alone. We’re not planning an ICO. What we have in mind is much bigger.
Stay tuned with updates via my email newsletter.
