Best-selling novel Bad Blood is a cautionary tale about the ways that the abundance of resources and lack of ethical standards led to the fall of Theranos, which was led by Silicon Valley darling Elizabeth Holmes. It recounts the story of the way the company’s “proprietary” technology continued to secure tranches of funding from eager investors despite its unproven and shoddy foundations. While the book recounts the story of a health tech company in Silicon Valley, it is a relevant lens for understanding the developments for the blockchain industry in 2018.
The industry’s development from the discovery of blockchain technology to its crash in 2018 was certainly chaotic. However, amidst this chaos I saw a chance to put together an all-star team and crew of advisors to cut through the noise together. In early 2018, I founded Panony—a blockchain consultancy firm and an unbiased news media source based out of Shanghai, China. The company’s mission is to bring professionalism and stronger industry standards to a rapidly maturing blockchain industry.
For the last year, the Panony team has been endeavoring to build and share best practices with the most experienced talents in this nascent industry. Our team includes those who have worked and engaged closely with Apple, Infosys, Overstock and other industry leaders. We are proud to work with a well-established advisory board that has worked in the blockchain industry for years; members of our board are well-known as the brightest leaders in Asia and include companies like Stellar, Qtum, David Johnston's very own Yeoman's Growth Capital.
Regardless of their personal achievements, the team can rally around the potential for blockchain projects to bring real value and their desire to facilitate growth. At the same time, early adopters have seen the consequences of short-term thinking firsthand for advancing blockchain and its use cases. It is this underlying belief in the potential of many blockchain projects, along with an understanding of current industry problems that led us work together.
So, we got to work. Since Panony’s start, we have reviewed and turned down more blockchain startups than we have accepted because so many of these projects choose to proceed with their projects with the easy way rather than the right way. Moreover, through these experiences, we have gained a deep understanding of the industry’s advantages and pitfalls. Given these insights, we were not surprised that the crypto-market became bearish in 2018.
How Many Legitimate Blockchain Projects did We Actually Review?
The Panony team conducts the strictest levels of due diligence with our team’s diverse skillset. The team includes everyone with backgrounds from finance to tech - members have previously worked in the field as investment bankers and blockchain developers. Before proceeding, we review each project closely to determine comprehensively whether a project is a go or no-go.
According to our calculations, in the projects we’ve reviewed in the last year, under 3% of the projects were considered. Our reason to deny these projects? Most have yet to figure out the most basic of questions: why their projects require blockchain technology or what problems they are aiming to solve. Moreover, many of their mission statements and business models remain underdeveloped.
Project management faces challenges due to inexperienced teams and members who are totally irrelevant to the product. Simply adding blockchain into a project does not mean that the core business plan is no longer relevant. Blockchain technology cannot magically turn coal into diamonds. Moreover, many companies simply outsource the technological development.
Until now, the nascent blockchain industry has allowed this lax standard to survive and even thrive.
Speculators and Conspirators
Many involved with token funds in the blockchain market engage in irresponsible and at times downright humorous behavior. Co-investment, lead-investment and recommending one's own portfolio to other venture capitalists is a common practice among investors. This practice is fundamentally built on trust within these circles.
Namely, it is built on the trust that each fund will still conduct rigorous due diligence before validating any deal. This includes a thorough vetting of the project’s potential. According to my observations of token funds in the blockchain industry, this vetting is not as thorough as it needs to be.
Case in point: many managing partners at funds casually “check around” and ask others for good investment deals, without taking a second look. In part, this is because the market was so lucrative that funds did not need to conduct a high level of due diligence. Funds flowed and projects were abounded.
Ultimately, however, this shoddy foundation fueled a vicious cycle. The investments from token funds signaled credibility to retail traders. Rather than examining the product, coin speculators focused on hypes, blinded by the fortune to be made through easy investment.
Speculators neglected the most basic level of due diligence and blindly invested in the projects that funds endorsed. Effectively, a market lacking clear standards resulted in brazen entrepreneurs who pitched increasingly under-developed business ideas. Perhaps most importantly, these irresponsible early entrepreneurs have walked away with money.
A similar issue of quality management occurred among blockchain media sources around the world. These publications which call themselves “news” neither set up nor maintained a semblance of journalistic ethics. At the height of the crypto market’s prosperity, thousands of WeChat publication accounts registered to publish blockchain-focused content.
Most of them did not hire a single in-house journalist or even a copywriter. These outlets simply seized on a chance to profit from promoting whatever blockchain project would pay to play. Many articles were published with no promotion tag or sponsored tag on the published content. Laymen were clueless about these behind-the-scenes arrangements between media and projects, and assumed the articles were curated by a knowledgeable team.
Vicious Cycle in Blockchain, illustrated by Ren Shen with copyrights owned by PANONY LIMITED
Is it Too Late to Learn the Lesson?
A famous Warren Buffett quotes goes like “You only find out who is swimming naked when the tide goes out.” This quote is an apt one for the current blockchain industry. I believe those who survive are those who have not been “swimming naked” and will be those aiming to pursue the greater good. Without acknowledging industry’s missteps as a whole, it will be difficult to imagine the market will become bullish simply through luck.
In the wake of 2018, the idea of an ICO has become almost ironic. With the current bearish state of the market, many funds are either “putting things on hold” or have even gone broke. At the same time, projects are seeking another round of fundraising in equity. In light of this situation, many of the aforementioned media have closed shop.
Around 70% of the initial players in blockchain media have stopped updates about the industry or expanded to cover non-blockchain news. Perhaps most interesting of all, the short-sighted mindset of early players in the blockchain industry may have resulted in a situation where a significant number of qualified players have quit the game.
A Perspective on China for 2019
Now more than ever, it is crucial to choose a trustworthy partner that can keep an eye on compliance issues when strategizing market entry for global projects. Chinese policies and regulations in China continuously in flux. While the Chinese government is strict on ICOs for good reason, it has largely remained pro-blockchain technology. The government is even providing direct funding to blockchain technology.
With its population of over 731 million, China holds great market potential. The potential for use cases are infinite, and I am gearing up for a rise in the number of attempts to enter the Chinese market in the coming year by blockchain projects globally. In sum, 2019 will be a year where the industry will reckon with and should thoroughly rectify the ghosts of its past.
Moreover, the industry should move forward by choosing the right way instead of the easy way. This means focusing more on reason over speculation and professionalism over inexperience. An eye on these issues will allow projects and funds alike to fail fast and succeed faster, remised on a strong commitment to make important changes.
