What Happened to Transparency in the Blockchain?

We can’t let rug pulls and other scams ruin such a promising technology.
Chen Li is the CEO and founder of Youbi Capital.
Chen Li
Expert Contributor
March 31, 2022
Chen Li is the CEO and founder of Youbi Capital.
Chen Li
Expert Contributor
March 31, 2022

For many, the blockchain’s greatest feature is transparency. This is because, in theory, the technology powers transactions that are traceable and unchangeable, thereby enabling parties to trade in complete confidence without an intermediary. The framework bypasses traditional sources of power like banks or governments to decentralize modern life. Taken from this view, transparency in blockchain is game-changing — at least, it is in theory.

In practice, the way blockchain is being applied is less and less transparent. From NFT “rug pulls” to meme coins that deliberately hide backdoors, many projects are intentionally obscuring their operations to scam buyers. In fact, more than $10 billion was lost to DeFi scams and thefts last year.

This lack of validity is fleecing people of their savings and damaging public sentiment. Further, dodgy projects are burying the benefits of blockchain under plenty of unfortunate noise. It begs the question: What happened to transparency in the blockchain? And how can we, as an industry, get it back?

 

The State of the Industry Now

At its best, the blockchain is more than a technology, it’s a movement. Decentralized and yet (ideally) with counting mechanisms that ensure trust, there’s a reason why it has won plenty of attention over the past few years. Done right, the result shifts the balance of power away from centralized sources and lowers technological, governance, organizational, and even societal barriers to entry.

Consider how established blockchain projects balance decentralization with transparency. Bitcoin and Ethereum have been around for years and enable buyers and sellers to follow the transaction chain. It is possible to chart how the nodes and hash rates are distributed and to list the holders with their respective token ages and initial cost. As a result, these major cryptocurrencies enable transactions that do not require trusting the counterparty. Instead, traders have confidence in the tried-and-tested decentralized framework.

On the flip side, many blockchain projects launched in more recent years remain highly centralized. And this centralization of power can lead to issues. For example, “rug pulls” — a malicious maneuver where crypto developers abandon a project and run away with investors’ funds — are made possible by bad actors holding too much power. Such scams trade transparency for hype, often providing a small group of people high returns to create “success” stories. Especially without visibility into the ledger, people are then encouraged to invest in the hype-driven project which in turn pushes market volatility to a new level.

Read More About Security and Crypto on Built In’s Expert Contributors NetworkThreshold Digital Signatures: How to Keep Your Crypto Secure

 

To Restore Transparency Is to Restore Trust

Clearly, the blockchain needs to restore transparency to restore trust. So, let’s look at three ways that the industry can redouble its efforts and stop bad actors in their tracks.

How the Blockchain Community Can Restore Trust

  1. Transparency reports need to be the industry standard.
  2. Listen to feedback from the larger ecosystem: exchanges, research agencies, and VC funds.
  3. Welcome governmental regulatory efforts.

First, transparency reports should be the industry standard. These self-reported overviews give projects a way to open up and share information with the community. Further, these reports create a readily available and authentic source of truth to educate new members. For example, Algorand and Solana used transparency reports to successfully address criticisms in the early days of their existence and boost credibility over time.

Second, listen to what the blockchain ecosystem has to say. External parties like exchanges, research agencies and venture capital funds are all resources of transparency information. They scrutinize projects, communicate deeply with teams, and often identify scam projects early. So listen to them. Investors should incorporate these sources into due diligence checks and make sure that the projects they want to invest in are cross-referenced and validated.

Third, regulation. While it remains to be seen how governments will regulate blockchain and cryptocurrency in the long term, intervention could serve as an effective temporary solution to protect investors. In March, US President Joe Biden signed an executive order that gives regulatory agencies more authority over blockchain projects in terms of transparency and reporting. The executive order also paves an exciting path for cryptocurrency to be further legitimized and organically integrated into the financial market. If achieved, this would offer market exposure to regular investors without the looming fear of scams.

 

Making a Better Blockchain for Tomorrow

As someone who has followed the industry since its inception, I’m disappointed to see one of the blockchain’s greatest features — transparency — become one of its weakest elements. Of course, this is largely down to swindlers and scammers entering the scene. Going forward, I’m hopeful that our industry can come together to root out bad actors and create a better blockchain for tomorrow.

In this way, it’s heartening to see some projects lead by example and voluntarily detail their tokenomics, team permissions, and transparency. One can only hope that we see more of this in the future.

In short, my expert advice for all blockchain projects is to build their product around what made the technology so great in the first place. If companies can best leverage transparency and integrate it into their project, they can increase trust and attract users who are there for more than a quick profit.

Read More About Crypto and the Blockchain on Built In’s Expert Contributors NetworkCryptocurrency for Change: How Token Economies Are Upending Markets

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