Token Transparency Framework: A Key Step to Promote Healthy Development in the Encryption Industry

The cryptocurrency industry has a history of 15-16 years and is at an important turning point. Although crypto companies are going public, there is a significant issue in the token market that hinders industry development: lack of transparency. Tokens are seen as the future direction of capital formation, but without addressing the transparency issue, progress cannot be made.

Many liquidity Token investors are worried that the Token market is turning into a "lemon market". This term comes from an economics paper in the 1970s, which described the phenomenon in the second-hand car market where a lack of effective signals to distinguish between "good cars" and "bad cars" led to all cars being priced at an average level. As a result, good car owners are unwilling to sell, and the market ultimately ends up with only "bad cars".

The Token market is also facing similar issues. Without a standardized transparent disclosure mechanism, investors cannot assess the quality of projects. As a result, quality projects are unwilling to issue coins, while speculative projects are rampant, leading to a decline in the overall market quality.

In the Token market, investors face many issues that equity investors do not need to worry about:

• Insufficient legal protection: The legal safeguards for Token holders are far less than those for equity holders.
• Multi-Token Issues: Teams often issue a second Token for new business lines, harming the interests of early investors.
• Parasitic equity issue: Token holders are uncertain whether cash flows will go to tokens or equity.
• Founder behavior: Founders may sell large amounts of tokens through over-the-counter transactions during a bull market, achieving personal financial freedom before abandoning the project.
• Foundation abuse: Some teams will transfer project cash flow into the foundation and then withdraw a large amount of funds from the foundation under the guise of consulting fees and other similar charges.

These structural issues have raised the "risk premium" of the Token to 20%, which is much higher than the 5% for stocks. According to the pricing logic of the capital markets, this high premium has led to an 80% discount on the valuation of the Token.

A core structural issue in the current token market is the ambiguity between equity and tokens. For example, the failure of many GameFi projects is partly due to tokens being used to incentivize user behavior, where users invest real money, but the majority of the resulting profits ultimately flow to equity holders, while the value of the tokens themselves may tend toward zero. Token holders are unclear about their rights and do not know the rights of equity holders, leading to potential conflicts of interest and competition.

In response to these issues, there have been some positive changes at both the industry and regulatory levels. For example, Morpho Labs recently announced that it will become a wholly-owned subsidiary of the Morpho Association (a non-shareholder entity), ensuring that value flows to the Token. On the regulatory front, SEC Commissioner Hester Peirce proposed the "Safe Harbor 2.0" proposal, providing a three-year grace period and guidelines for projects transitioning from centralized entities to decentralized networks.

In order to address the serious lack of information disclosure in the industry, a Token Transparency Framework has been introduced, which is an open, standardized self-disclosure template. Project parties only need to fill out this form to clearly communicate their structural information to the market. The framework requires project parties to answer about 20 questions, covering business descriptions, supply timelines, and agreements with exchanges, among other content, and to provide relevant supporting materials. The scoring mechanism assigns different weights based on the importance of the questions, ultimately generating a simple and understandable rating.

The launch of this framework may have an impact on Token prices. Teams that participate and receive reasonable ratings may see their Tokens gain a premium in the long term due to increased transparency. While this change may not be immediately apparent, the enhancement of transparency will attract more attention from liquidity Token funds. If this framework is widely adopted by the market, it could drive more institutional capital into the liquidity Token market, thereby alleviating the main issue of insufficient transparency that hinders institutional capital entry.

In the short term, projects with solid fundamentals that have been overlooked due to market noise, narratives, or hype will become the primary beneficiaries of the new framework. These projects can demonstrate their true fundamentals more clearly to investors by applying the framework to their own tokens and projects and publicly releasing results, thereby enhancing market awareness and attention.

On the contrary, those projects that treat tokens as arbitrage tools, lack real products, or abuse market structures will be sidelined due to a lack of transparency. The emergence of the framework will end the overvaluation of "fraudulent tokens", allowing resources to flow more effectively to projects that truly possess product-market fit.

Overall, the introduction of the Token transparency framework is a key step in promoting the healthy development of the encryption industry. It not only enhances market transparency but also attracts more institutional investors, facilitating the long-term sustainable development of the industry. With the widespread application of this framework, we can expect to see a more mature, transparent, and vibrant encryption market.