The chaos in the crypto world exposed by the wave of IPOs of encryption companies: if we don’t bail-in soon, everyone will run to the neighboring stock market.

Original: Empire

Compiled/Organized by: Yuliya, PANews

In the crypto market, the uncertainty faced by token investors far exceeds that of traditional financial markets. Behaviors such as the founding team issuing new tokens, opaque related-party transactions, and hidden operations of market maker agreements frequently occur, leading to serious information asymmetry regarding the true value of projects and investment returns. Against this backdrop, the Blockworks team launched the Token Transparency Framework, aiming to guide project parties in disclosing key information through an open-source standard tool, promoting the industry towards a path of openness, trustworthiness, and long-term development. This episode of the Empire podcast is hosted by Jason Yanowitz, featuring insights from Dan Smith, the data director of Blockworks and initiator of the framework, Felipe Montealegre, the chief investment officer of Thea, and Louis T, the investment partner of L1D, who delve into the framework's design philosophy, scoring methods, and future vision. PANews has compiled and organized the dialogue for this episode.

Why is a token transparency framework necessary?

Yanowitz：

The cryptocurrency industry has a history of 15-16 years and is at an important turning point. Although crypto companies are going public, there is a significant issue in the token market that hinders industry development: lack of transparency. Tokens are seen as the direction for future capital formation, but without addressing the transparency issue, progress cannot be made.

Felipe:

Many of us liquidity token investors are worried that the token market is turning into a "lemon market." This term originates from an economics paper in the 1970s, which described how the used car market, due to a lack of effective signals to distinguish between "high-quality cars (peaches)" and "low-quality cars (lemons)," resulted in all cars being priced at an average. The result was that good car owners were unwilling to sell, and the market ultimately only had "low-quality cars (lemons)" left.

The token market is also facing similar issues. Without a standardized transparent disclosure mechanism, investors cannot assess the quality of projects. As a result, high-quality projects are unwilling to issue coins, while speculative projects are rampant, leading to a decline in the overall market quality.

In the token market, investors face many issues that equity investors do not have to worry about:

• Insufficient Legal Protection: The legal protections for token holders are far inferior to those for equity holders, and this is not theoretical, but a frequent occurrence in practice.
• Multi-token issue: Equity investments in early-stage projects (such as Amazon or Apple) can benefit from their subsequent successful products (like AWS or iPhone). However, in the crypto world, teams often issue a second coin for new business lines, which harms the interests of early investors.
• Equity Parasitism Issue: Token holders are uncertain whether cash flows will go to tokens or equity. A famous example is Uniswap, whose frontend generated about $90 million in fees that flowed to equity holders rather than UNI token holders, who are still waiting for the fee switch to be turned on. If even top projects like Uniswap are like this, it shows the general situation in the market.
• Founder Behavior: Founders may sell large amounts of tokens through OTC (over-the-counter trading) during a bull market, achieving personal financial freedom and then abandoning the project.
• Foundation Abuse: Some teams will transfer project cash flow to the foundation and then extract 5 to 10 million USD to their own pockets from the foundation under the guise of consulting fees, logo design, etc.

These structural issues have raised the "risk premium" of tokens, with this risk premium reaching 20%, far exceeding the 5% of stocks. According to the pricing logic of capital markets, this high premium has led to an 80% discount on token valuations.

Yanowitz: Felipe, you mentioned an equity risk premium of 5% and a token risk premium of 20%, which results in a discount of about 80% on token valuations. Can you explain the mathematical logic behind this?

Felipe:

All capital is in competition. Assume a company's long-term growth rate is 5%, and the current yield of a ten-year U.S. Treasury bond (risk-free rate) is 4.5%.

• Regarding Equity: The minimum return rate required by institutional investors is 9.5% (5% equity risk premium + 4.5% risk-free rate). Subtracting the 5% growth expectation, investors require a 4.5% cash yield. The corresponding price-to-earnings ratio is approximately 1 / 4.5% ≈ 22 times.
• For tokens: The minimum return rate required by institutional investors is 24.5% (20% token risk premium + 4.5% risk-free rate). Similarly, after subtracting a 5% growth expectation, investors need a cash yield of 19.5% (approximately 20%). The corresponding price-to-earnings ratio is about 1 / 20% = 5 times.

The huge difference between a 22 times price-to-earnings ratio and a 5 times price-to-earnings ratio reflects a valuation discount of about 78% (which I call 80%). In this case, excellent founders who hope to establish long-term businesses may choose to issue equity instead of tokens when they see such a large valuation difference between the equity market and the token market. This creates a vicious cycle where fewer and fewer good projects issue tokens, and the market may ultimately collapse.

Yanowitz: Dan, do you have any additions to Felipe's "lemon market" perspective?

Dan：

Yes, the situation is even worse than what Jason described. Because not only are the "car owners" (project parties) in control of the information, but also the "car manufacturers" (early teams) hold the core information, and there is currently a lack of a standardized tool or format for them to disclose this information. This is exactly where we see the opportunity. Teams that are operating properly and striving to avoid the scams mentioned by Felipe are eager for a tool to explain their practices.

The IPO of Circle is an interesting circumstantial evidence. Its IPO pricing was around 30-31 dollars, with an opening price of about 70 dollars on the first day, and a trading price reaching 120 dollars a few days later. Stablecoins are currently in vogue, which may partially reflect the market's preference for equity, as equity has more explicit guarantees, even though merely looking at financial statements may not yield such a high valuation. This suggests that in the future, more companies that should have issued tokens on-chain may choose to go public.

Yanowitz: Louis T, can you elaborate on the structural issues in the token market?

Louis T：

I completely agree with Felipe's point of view. In addition to what he mentioned, a core structural problem in the current token market is the ambiguous relationship between equity and tokens. For example, many GameFi projects fail partly because tokens are used to incentivize user behavior (such as trading, playing games, and paying fees). Users invest real money (ETH, stablecoins), but most of the profits ultimately flow to equity holders, while the value of the tokens themselves (FDV) may tend towards zero. Token holders are unclear about their rights and also do not know the rights of equity holders, which creates potential conflicts of interest and competition.

In addition, the VC bubble of 2021 further exacerbated the supply of "lemons." A large number of early private placement projects received investment, and their deployment plans forced funds to continue investing, resulting in the market being flooded with more projects that may lack real value but are eager to enter the market to create value (often lacking transparency).

Felipe:

How did we get to this point? It is largely due to the "everything bubble" period of 2020-2021. At that time, global interest rates were nearly zero, and large-scale monetary issuance and fiscal stimulus led to a rise in token prices without the support of fundamentals, income, or cash flow, and no one talked about the cost of capital. The industry learned the wrong lessons from that period. After the bubble burst, market participants have been waiting for the next "big cycle," where fundamentals become irrelevant again, and all tokens can rise for no reason. However, over time, people have gradually realized that they need to provide investors with something substantial for them to buy your tokens. Only now are we beginning to truly confront these tricky issues, such as project income and fundamentals.

Dan Smith：

In response to these issues, there have been some positive changes at the industry and regulatory levels. For example, Morpho Labs recently announced that it will become a wholly-owned subsidiary of the Morpho Association (a non-shareholder entity), ensuring that value flows to the token. Miles Jennings from a16z also expressed views on the "end of the foundation era" and mentioned emerging legal structures such as "DUNAs" and "BORGs," which aim to address the needs of off-chain entities (such as foundations) engaging in business activities (such as signing contracts).

In terms of regulation, Hester Peirce, a commissioner of the U.S. SEC, proposed the "Safe Harbor 2.0" initiative, which provides a three-year grace period and guidelines for projects transitioning from centralized entities to decentralized networks. At the same time, the "Market Structure Bill" currently advancing in Congress is also laying the foundational framework for disclosure standards.

Industry Chaos

Yanowitz: Can you share some real cases to help everyone better understand the current issues in the token market?

Felipe:

We once invested in a project with an FDV of only $40 million, spending a lot of time helping them deploy on Solana, and eventually they started generating about $40 million in cash flow annually, which can be considered a very successful investment. One day we received a notification from the team saying they "were going to abandon this coin." The actual situation was that they decided to separate the IP from the coin, leaving the cash flow entirely to a small team of four. This is very common in the crypto world, known as a "Rug Pull." But if Tim Cook treated Apple shareholders like this, it would be absolutely intolerable in the public market.

For example, Aave previously discussed issuing new tokens for its Real World Assets (RWA) business line, which sparked widespread discussion and concern within the community. Investors are worried that, as holders of Aave tokens, they may not benefit from the issuance of new tokens. Especially considering that Aave already occupies about 70% of the existing EVM market share, expanding into new markets has become a key strategy. Fortunately, the founder of Aave publicly stated a few weeks ago that no new tokens would be issued for the RWA business.

Uniswap is another example where investors believe that its strong moat will eventually bring returns, and in fact, it has; they have monetized through the front end. However, UNI holders haven't received a penny in income.

Yanowitz: How many of these problems are due to the founders "maliciously acting," and how many are structural issues arising from regulatory gaps?

Felipe:

Indeed, if the founders engage in a "Rug Pull" protocol, this is illegal in the securities market. However, not returning revenue to the tokens is not necessarily illegal; it may just be that the regulatory mechanisms are not yet完善. My point is not to blame the founders, but to highlight that under the current structure, tokens are extremely unattractive to institutional investors.

Yanowitz: Dan, Louis, do you have any other examples? For instance, founders cashing out in the secondary market, opaque transactions with market makers, etc.

Dan：

We do not oppose founders cashing out in the secondary market, but some individuals cashing out excessively in advance can lead to the death of the entire project. This is especially common in the token market.

There are also related transactions, such as the foundation paying the core team "consulting fees" or development costs. In traditional finance, these need to be disclosed mandatorily, while in the encryption market, almost no one knows about them. Our proposed disclosure framework also specifically requires such information to be stated.

Many teams have fewer than 10 people, which is actually an advantage of capital formation in the blockchain: projects can be launched quickly and at a low cost. However, this also creates a breeding ground for abusive behavior. Traditional market investors assess intrinsic value and predict the future, while in the token market, they also have to deal with projects that attempt to deceive. The foundation system is often abused, with the core team charging high consulting fees to the foundation, accelerating token unlocking and cashing out.

Louis T：

In many projects, the foundation is responsible for managing a large portion of the tokens for ecosystem development. Labs, on the other hand, is an entity composed of founders and core developers, responsible for the development and daily operations such as updating the front end. The issue is that these two are often controlled by the same group of people. As a result, the foundation can "pay" tens of millions of dollars worth of tokens to Labs each year in the name of "consulting fees" in exchange for some marginal front-end changes.

This information is often not publicly disclosed, and we hope that at least it will be disclosed so that investors can make their own judgments.

Dan：

I would like to add a point about market makers and the listing of coins on centralized exchanges. Currently, the liquidity at the time of token issuance is mainly concentrated on centralized exchanges, but some top exchanges impose stringent listing conditions, including requiring project parties to provide 2%-5% of the supply and high cash listing fees. All of these are signed under non-disclosure agreements and are not reflected in the officially disclosed token release plans.

On the other hand, although there are excellent market makers providing liquidity, there are also many cases of abuse of privilege. Some projects that only have a foundation and tokens have seen their market capitalization inflated to hundreds of billions or even trillions of dollars, followed by a price crash of 50-90%, leaving investors completely unprepared. Subsequent document leaks revealed that the crazy options clauses in the market maker agreements were the cause of the price collapse. The market needs to understand these agreement terms and listing conditions to reduce losses.

Concept and Design of Token Transparency Framework

Yanowitz: There is obviously a serious lack of information disclosure in the industry. How do you plan to address this? Will it be driven from the bottom up, or will it rely on regulatory enforcement?

Dan：

We have adopted a bottom-up approach and launched a token transparency framework, which is an open, standardized self-disclosure template. Project parties only need to fill out this form to clearly communicate their structural information to the market. This framework is not meant to judge "good" or "bad", but to let the market know what the project is doing.

This is also an important supplement to the Market Structure Bill. Currently, the information disclosure section of this bill is very brief and far from sufficient to address industry issues. We hope to provide expression tools for teams that are truly "doing the right thing" through this framework.

Yanowitz: Please briefly introduce the specific content of this framework. What information does it include?

Dan：

You can think of it as an "encryption native version of the S1 form." When a company wants to go public, it must fill out the S1 form to disclose basic information about the company's business, financial status, and so on. Ideally, when a token is issued, such a form should also be submitted. Of course, for tokens that already exist, this will be a retrospective process. It is essentially a form or a set of evaluation criteria that looks like an Excel document or a large table. The framework requires the project party to answer about 20 questions covering business descriptions, supply timelines, and agreements with exchanges, among other things, and to provide relevant supporting materials. The scoring mechanism assigns different weights based on the importance of the questions, ultimately generating a simple and understandable rating. For information that cannot be disclosed due to confidentiality agreements, the scoring mechanism will also make corresponding adjustments to avoid unfair penalties for the project party. The entire framework is open-source, allowing the public to view the complete responses, while also providing concise scoring results for quick assessments or in-depth research on the project.

Yanowitz: What if the project is lying? For example, they say the team does not sell coins OTC, but in reality, they do?

Dan：

The framework prioritizes encouraging links to on-chain data, such as marking team wallets and public transaction records. For unverifiable parts, it relies on the project party's self-declaration. However, the risk of lying publicly on the framework's website far outweighs the risk of not making a statement, because if found out later, it will significantly damage the project's reputation and may even result in a loss of funding and recruitment capabilities. In the long run, the reputation mechanism will drive projects to disclose honestly.

expected impact

Yanowitz: Felipe, how do you think this framework will affect token prices?

Felipe:

Teams that participate and receive a reasonable score (60-70% or more) may have their tokens at a premium for transparency in the long run. While this change won't be immediately apparent, the increased transparency will attract the attention of more liquid token funds, which typically have capital pools that are authorized to hold for several years. Analysts believe that liquidity fund managers attach great importance to transparency standards and are dissatisfied with the lack of transparency in the current market, so projects with good information disclosure are more attractive. If this framework is widely adopted by the market, it may drive more institutional capital to flow into the liquid token market, thereby alleviating the lack of transparency, a major problem that hinders institutional capital access.

Louis T：

In the short term, projects with strong fundamentals that have been overlooked due to market noise, narratives, or hype will become the main beneficiaries of the new framework. These projects can showcase their true fundamentals more clearly to institutional investors, liquidity investors, large holders, and token holders by applying the framework to their own tokens and projects and publicly releasing the results, thereby enhancing market awareness and attention. This approach helps projects stand out more easily from market noise and achieve rapid development.

Yanowitz: Which projects will oppose this framework?

Felipe:

Projects that treat tokens as arbitrage tools, lack real products, or abuse market structures will be sidelined due to a lack of transparency. The emergence of a framework will end the overvaluation of "fraudulent tokens" and allow resources to flow more effectively to projects that truly have product-market fit.