Since 2017, investors have lost billions investing in blockchain and cryptocurrency projects. In an information-starved environment, exit-scams, poorly executed ideas, and applications that simply do not make sense are able to thrive. A recent study can possibly shed some light on why this has happened—and is happening—in crypto.
MERL Tech, a research-blog focused on technology’s application in humanitarian aid, published an article on Nov. 29th with additional commentary from the author of a study which examined the gap between the claims a blockchain-related project makes, and the actual, verifiable results. The findings were startling.
According to a study by John Burg et. al., the claims made by many blockchain projects are dubious, with many failing to provide any tangible evidence to support their claims.
Burg has a long history of working in international development and humanitarian aid, having worked as a fellow at the Office of U.S. Foreign Assistance Resources (USAID) and having previously worked as a coordinator at the U.S. Department of State’s Foreign Assistance division.
The study he and his colleagues conducted sampled 43 different blockchain projects, especially those in the non-government organization, government contractor, and humanitarian aid space.
According to Burg, he attempted to examine the veracity of claims such as: “operational costs… reduced up to 90%,” and “accurate and secure data capture and storage.” If so, was there verifiable, tangible evidence.
In his follow-up post on the research, he added that many of the statements made by these companies were spurious, with little evidence to prove that these figures are legitimate, or even attainable:
“We found a proliferation of press releases, white papers, and persuasively written articles. However, we found no documentation or evidence of the results blockchain was purported to have achieved in these claims.”
More troubling, these companies did not use any kind of framework. Whether these companies were succeeding or failing, there was no way to objectively evaluate performance:
“We also did not find lessons learned or practical insights, as are available for other technologies in development.”
What was most troubling, however, was that these projects were completely opaque, or unwilling to even share what little findings they had. Burg inquired into all 43 projects, and not one was willing to share data:
“Not one [blockchain project] was willing to share data on program results… despite all the hype about how blockchain will bring unheralded transparency to processes and operations in low-trust environments, the industry is itself opaque.”
Such an assessment of the industry is chilling. For a technology that positions itself as a way to usher-in transparency, operating in such secrecy is troubling. As further iterated by Burg:
“There are many… sales pitches available to convince development practitioners of the value blockchain will add to their work. But, there is a lack of detailed data about what happens when… [a project chooses to] use blockchain technology.”
In most other fields of science and research, new technologies typically undergo a structured process of iterative evaluation. This allows the principal investigators of a technology to both build their success and learn from their failures. CryptoSlate inquired with John Burg for his further thoughts on blockchain technology, he declined to comment.
In the case of evaluating technology in humanitarian projects, the Monitoring, Evaluation, Research, and Learning-in-development (MERL) framework is one of many possible frameworks that can be applied.
The Impact on Stakeholders
This lack of structure has far-reaching consequences. It is quite possible that malicious actors are using information asymmetry to take advantage of the public. Without clear regulations or methods of evaluating the merit of a project, a company can raise millions and engage in unscrupulous activity without repercussion, especially in many of the so-called blockchain safe-havens like Gibraltar or Malta.
Additionally, there is alarming evidence to suggest this has already happened. For example, out of the five biggest ICOs by funds raised, three acted with negligence and defrauded investors. TaTaTu, Dragon, and HDAC raised millions of dollars of investor funds, and all three wasted these investments on ill-conceived plans, such as the floating Dragon casino in Macau.
Between the three projects, investors who had purchased a token from these ICOs lost 91 percent—or more—of their investment. In total, the three projects alone squandered $1.15 billion of investor funds.
Satis Group, an STO advisory firm, conducted a study concluding that in 2017:
“over 80% of projects [by total number of projects] were identified as scams.”
A catastrophe of this magnitude is possible because investors have no framework to evaluate the validity of proposals and differentiate between noise and factual information, and, consequently, allowing scams to thrive in the information-deprived industry.
Case for the High Failure Rate
There is still a case for the high failure rate in the blockchain space. In many respects, the nascent-state of blockchain technology is similar to the hype surrounding artificial intelligence (AI).
In a piece by the Wall Street Journal, the paper covered the Global Artificial Intelligence Conference in January. One of the leading investors in AI technology, Monsanto, hosts a slate of over 50 deep-learning projects, according to WSJ. Anju Gupta, director of Monsanto’s digital partnerships and outreach, had this relevant statement:
“[Monsanto] expects a vast majority of its early AI and deep-learning projects to fail…”
Yet, even with a 99 percent failure rate, it is acceptable because “that 1 percent is going to bring exponential gain,” said Gupta at the conference.
Even more analogous to the blockchain space is that these failures still bring a lot of backlash from the community, with Gupta going on to say:
“Still, failures in early tests can risk creating a backlash to AI deployments across a company, despite the potential gains….”
And, much like the blockchain space, it is still necessary to identify areas where blockchain has a “real possibility” of fixing problems, and where the tech has “clear criteria for success,” as said by William Mark, president of information and computing services at SRI international.
Mark went on to say that once one area of a company is improved using a new technology like AI, or blockchain, then “there is an immediate impact, and it spreads.”
Outlook Going Forward
Because of the decentralized nature of many of these projects, there will continue to be exit-scams, poorly executed ideas, and applications of blockchain that plainly do not make sense. These issues are, at the moment, exacerbated by regulatory uncertainty and the partially anonymous nature of cryptocurrency.
In the future, if regulators want to protect the public, it will be important for them to increase their scrutiny of projects, for new high-quality information channels to arise, and for investors to become more aware of what constitutes a trustworthy blockchain project.
Ultimately, the risk falls upon the individual investor. Whether purchasing cryptocurrency, or investing in a startup, due diligence is necessary. Take precautions and check whether the claims of the organization you are investing in are legitimate, whether that company is compliant with local and international laws and regulations, and whether that company has the best interests of investors in mind.