Blockchain investors lose billions on projects with "no proof"

Since 2017, investors have lost billions by investing in blockchain and cryptocurrency projects. In an information-hungry environment, exit scams, poorly executed ideas and applications that simply make no sense are able to thrive. A recent study may perhaps shed light on why this happened – and it is happening – in cryptography.

MERL Tech, a research blog focused on the application of technology in humanitarian aid, published an article on November 29 with an additional comment by the author of a study that examined the gap between the statements made from a project linked to the blockchain and the effective and verifiable results. The results were surprising.

According to a study by John Burg et. al., the claims made by many blockchain projects are questionable, and many fail 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 colleague at the United States Foreign Assistance Office (USAID) and having previously worked as a coordinator at the US State Department's Foreign Assistance Division.

The study conducted with his colleagues examined 43 different blockchain projects, in particular those of non-governmental organizations, government contractors and humanitarian aid spaces.

According to Burg, he attempted to examine the veracity of statements such as: "operating costs … reduced by up to 90%" and "acquisition and storage of accurate and protected data". If so, there were verifiable and tangible evidence.

Search results

In his follow-up post on research, he added that many of the statements made by these companies were spurious, with little evidence to show that these figures are legitimate, or even achievable:

"We found a proliferation of press releases, white papers and articles written in a persuasive way, but we did not find any documentation or proof of the results that the blockchain would have stated in these statements."

More worrying, these companies have not used any kind of structure. If these companies were successful or failed, there was no way to objectively assess performance:

"Furthermore, we did not find lessons learned or practical insights, as they are available for other technologies under development."

The most worrying thing, however, was that these projects were completely opaque, or they were not willing to share even the few discoveries they had. Burg investigated all 43 projects, and nobody was willing to share the data:

"Not one [blockchain project] was willing to share data on the results of the program … despite all the clamor about how the blockchain will bring unprecedented transparency to processes and operations in low confidence environments, the sector itself is opaque. "

Such an assessment of the sector is chilling. For a technology that is positioned as a way to introduce transparency, operating in such secrecy is worrisome. As further iterated by Burg:

"There are many … sales pitches available to convince the development professionals of the value that blockchain will add to their work.But there is a lack of detailed data on what happens when … [a project chooses to] uses blockchain technology. "

In most other fields of science and research, new technologies typically undergo a structured iterative evaluation process. This allows major investigators of a technology to build their success and learn from their failures. CryptoSlate turned to John Burg for his further thoughts on blockchain technology, he declined to comment.

In the case of technology assessment in humanitarian projects, the monitoring, evaluation, research and learning framework under development (MERL) is one of many possible frameworks that can be applied.

Impact on interested parties

This lack of structure has far-reaching consequences. It is quite possible that malicious actors use information asymmetry to take advantage of the public. Without clear rules or methods of assessing the merit of a project, a company can raise millions and engage in unscrupulous activities without repercussions, especially in many of the so-called blockchain safe-blocks such as Gibraltar or Malta.

Furthermore, there is alarming evidence to suggest that this has already happened. For example, among the five largest ICOs of funds raised, three acted negligently and defrauded investors. TaTaTu, Dragon and HDAC have raised millions of dollars of investor funds, and all three have wasted these investments on ill-conceived plans, such as the Dragon floating casino in Macao.

Among the three projects, investors who bought a token from these ICOs lost 91% or more of their investment. In total, the three projects alone wasted $ 1.15 billion investor funds.

Satis Group, a STO consulting firm, conducted a study concluding that in 2017:

"Over 80% of projects [by total number of projects] they have been identified as scams ".

A catastrophe of this magnitude is possible because investors do not have a framework to evaluate the validity of the proposals and differentiate between noise and factual information and, consequently, allow scams to thrive in the private sector of information.

Case for 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 that which surrounds artificial intelligence (AI).

In a Wall Street Journal article, the document covered the January Global Intelligence Artificial Conference. One of the main investors in IA technology, Monsanto, hosts a series of over 50 deep-learning projects, according to WSJ. Anju Gupta, director of Monsanto's digital collaborations and contacts, had this important statement:

"[Monsanto] he expects a large majority of his early AI and deep learning projects to fail … "

Yet even with a 99% failure rate, it's acceptable because "that 1% will bring exponential gains," Gupta told the conference.

Even more analogous to the blockchain space is that these failures still bring a lot of backlash from the community, with Gupta continuing to say:

"However, failures in early tests may risk creating a backlash to AI distributions within a company, despite potential gains …".

And, just like the blockchain space, it is still necessary to identify the areas where the blockchain has a "real possibility" of solving problems, and where technology has "clear criteria for success", as stated by William Mark, president of Information and IT services at SRI international.

Mark went on to say that once an area of ​​a company is improved using a new technology like artificial intelligence, or blockchain, then "there is an immediate impact and spreads" .

Outlook in progress

Due to the decentralized nature of many of these projects, there will continue to be exit scams, poorly executed ideas and blockchain applications that clearly make no sense. These problems 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 project control, create new channels of high quality information and for investors to become more aware of what constitutes a reliable blockchain project.

Ultimately, the risk falls on the individual investor. Whether it is buying cryptocurrency or investing in a startup, due diligence is required. Take precautions and check if the statements of the organization in which you are investing are legal, if such company complies with local and international laws and regulations and if this company has in mind the best interests of investors.