Enough with the platitudes. Give the community transparency.
By Rakesh Sharma
Cryptocurrency foundations are having a midlife crisis. According to Aya Miyaguchi, executive director of the Ethereum Foundation, it is time for them to evolve — or devolve, as the case may be. “We need to subtract our power,” she said last week at the MIT Business of Blockchain conference in Cambridge, Massachusetts. Her foundation had already downshifted to become a “super small” part of the Ethereum ecosystem, and is continuing to “shift” its role, Miyaguchi said.
This is not the first time Miyaguchi has publicly made the case for change. In a March interview with Coindesk, she said the foundation would focus on communicating Ethereum’s brand, and would no longer serve as a hub for projects and research. Her remarks may have been specific to Ethereum, but Miyaguchi has highlighted a larger problem pertaining to the role of foundations within the crypto ecosystem. And her opinion is not a lonely one.
Understanding the Role of Crypto Foundations
While it may have seemed haphazard and organic at the time, the commercialization of internet technology in the early ‘90s was, in fact, methodical. The Internet Activities Board (IAB), a unit of DARPA, brought together vendors, end users and inventors to transfer and diffuse knowledge about TCP/IP, the network protocol underlying the Web. Entrepreneurs who started companies on the new medium were accountable to venture capitalists and private equity companies, who provided the necessary fuel for startups to develop innovative applications on the new medium.
The evolution of cryptoassets and blockchains, which seek to reinvent the internet’s existing centralized structure, has been different, for understandable reasons. The mechanics of a decentralized world are inherently different. Startups must access funding from lay investors instead of wealthy VC firms. Decision-making is a collective affair in which all stakeholders have an equal say. New protocols intended to garner the lion’s share of economic benefits accrued by the new ecosystem required developing innovative methods of venture financing, such as initial coin offerings (ICOs) and foundations. Cryptocurrency foundations raise money from lay investors through ICOs and then distribute it to stakeholders — including projects and research teams — within their ecosystem.
Ethereum raised money for its foundation through an ICO in 2015. The Switzerland-based foundation has powered much of Ethereum’s growth in the last couple of years, funding research and startup initiatives and communicating with the general public about its goals and projects.
Following Ethereum’s lead, other cryptocurrencies have also set up foundations with aspirations ranging from the lofty to the mundane. Singapore-based Litecoin Foundation makes vague and idealistic claims about advancing the blockchain “for the good of society.” The Cardano Foundation has five bullet points on its website enumerating prosaic activities like growing market share and establishing partnerships.
Crypto Twitter is regularly flooded with longwinded debates about the ethics, value and purpose of these institutions.
As is often true with crypto, there is a fundamental disconnect between some of the grand visions espoused by the blockchains and cold, hard reality. While investors and founders never lose an opportunity to harp on the transparency and decentralization benefits of cryptoassets and blockchain, the foundations responsible for growing their ecosystems are remarkably opaque in their operations.
Consider, for example, the starring roles accorded to celebrity founders such as Ethereum Co-founder Vitalik Buterin, and major investors, such as Roger Ver, on the advisory boards of Ethereum and Bitcoin Cash, respectively. Among the top five cryptocurrencies, Bitcoin is the sole exception to the hierarchical-structure approach because its inventor, Satoshi Nakamoto, continues to remain anonymous (though is still a celebrity in his/her own right).
The arrangement has converted stakeholders and lay investors into bit actors, as founders and prominent investors engage in acrimonious battle. The former director of the Cardano Foundation resigned at the behest of a founder who is not even listed as an official team member on the foundation’s website. The founders of Tezos, meanwhile, came under fire for engaging in a costly battle with their investors. The supposedly decentralized world of cryptoasset foundations is beginning to sound a lot more like the centralized world of Wall Street.
But these skirmishes pale in comparison to the real crisis at hand: Crypto foundations are notoriously lousy at providing adequate disclosures about their operations and finances.
Consider the Ethereum Foundation. Since its launch, the foundation has provided only random updates in the form of tweets and Reddit posts by Buterin. Last May, Buterin announced on Reddit that the foundation had approximately $15 million in fiat currency, 500 Bitcoin, and $800,000 worth of Ether, the blockchain’s native cryptocurrency. He also stated that the foundation had 40 full-time employees and total expenses of between $250,000 and $300,000. By October, however, the total headcount increased to 90 full-time employees and Ether holdings had declined to $660,000. Another complicating statistic: Miyaguchi, the foundation’s director, announced it disbursed $25 million in grants last year.
How should one make sense of these figures? Did Ether holdings bankroll an increase in employee headcount? Or did its Ether holdings decrease due to an increase in grants?
We don’t know, and neither Buterin nor the foundation are under any legal obligation to tell us anything. While U.S.-based nonprofits have to make financial disclosures, those in Switzerland, where the organization is headquartered, do not. The European country also imposes minimal tax liabilities on nonprofit holdings.
Bankruptcy and Nepotism
That absence of accountability in cryptocurrency foundations would be less of a problem if they were run like well oiled machines. But they are not.
The swells and ebbs of the cryptocurrency market have direct effects on a foundation’s bottom line, because they depend on a significant stash of cryptocurrencies to fund their operations. A boom market in cryptocurrencies, as in 2017, could instigate profligate spending in an organization tasked with a wide array of responsibilities. A bear market, on the other hand, could significantly diminish their cash reserves and send operations haywire.
NEM, which had a peak capitalization of $15 billion and was among the top 10 cryptocurrencies in January last year, is down to $427 million, as of this writing. The cryptocurrency’s foundation was reported to be planning layoffs across its 150-person staff in January after becoming “nearly broke.” “Basically, we realized we had a month to operate due to mismanagement of the previous governance council,” President Alex Tinsman told Coindesk. The foundation has since revamped its organizational structure.
There’s no telling how far the secrecy — and potential for deception — really goes. Critics have alleged that the defunct Bitcoin Foundation, which counted Mt. Gox CEO Mark Karpeles among its board members, knew about the Japan-based exchange’s bankruptcy, but kept silent.
Some critics have also charged foundations with nepotism, accusing them of advancing the personal causes of prominent community members. Ethereum Co-founder Joseph Lubin’s for-profit outfit Consensys, for instance, has received prominent billing at the Ethereum Foundation’s events, no matter how allegedly “bizarre” his appearances have become.
Reinventing Cryptocurrency Foundations
Some blockchains have made notable efforts toward new levels of transparency. For example, Zcash’s foundation has opted to fund itself using cash contributed by its founders. Each founder has agreed to donate 1.44 percent of all zcash that is ever mined to the foundation. Further, Zooko Wilcox, the blockchain’s founder, has agreed to recuse himself from the foundation. But, as the Cardana Foundation predicament illustrates, his official absence from the foundation is no guarantee he won’t have a say in its workings.
Cryptocurrency foundations have played a pivotal role in growing the crypto ecosystem and educating users about its innovations. But it’s time for the community to stop using “transparency” as an empty buzzword, and begin giving it meaning and substance. Transparency about operations and finances — even limited transparency — will go a long way towards boosting the credibility of cryptocurrency and blockchains, now and in the future.