In part two of our Foundations of Transparency series, we examine ways in which cryptoasset investors can answer a crucial question: how is the business performing?
In addition to knowing the initial asset distribution and the wallets in which those assets are being held, there’s another major benefit that comes with real time transparency (RTT): the ability to gauge the company’s performance in real-time.
For investors looking to assess the performance and health of a publically-traded company, quarterly earnings are crucial. Most of us are familiar with the common headlines that accompany earnings season: “Twitter stock gapped higher this morning after a stronger-than-expected quarterly report,” or “GE stock took a dive today as Q1 earnings showed disappointing year/year growth.” While the equities and specific news may change, the underlying theme is the same: “the stock’s price experienced a big move today after investors collectively gained insight into how the company has performed over the past three months.”
Post-earnings price fluctuations underscore an important limitation of traditional equities: there is a substantial lag between the current performance of an organization, and the time when investors can react to that information.
Crypto-businesses that employ RTT will never fall prey to this problem. Up-to-date information is always at investors’ fingertips, meaning that changes in the company’s fortunes can be priced in just as rapidly. With an updated performance dashboard, they’ll be able to make a better-informed buy/sell decision.
So – how can a blockchain-based business leverage RTT to provide investors with instant insight into the company’s health?
The most important step is to reveal the incoming and outgoing wallets that the organization uses. If the incoming wallet is publically known, then users can see – in real time – how much revenue the business is generating. In cases where the number of addresses sending to the incoming address is increasing or decreasing, insight might even be provided into whether the service is gaining or losing users.
As all of this information is available on demand, market participants will have a much clearer picture of the company’s health. Instead of waiting three months to find out how the business did, they can know in real time how the business is doing.
How might this work in real life? Well, let’s consider the following:
The enterprising Alice, after previously ICO’ing a cryptoasset related to her Ethereum-based DApp, decides that she’d like to provide investors with deeper insight into her company’s performance. She believes in the long-term success of her business, and is confident that there’s nothing to be lost by being completely transparent about the organization’s revenue.
She structures her DApp so that all incoming payments for her service are fed to just one address, and makes that address known. In an effort to be even more transparent, she also provides details about all the company’s expenses: salaries (paid in ETH or an Ethereum-based asset), server hosting (also paid in an Ethereum-based asset), and so on. In the case where expenses such as rent require a fiat payment, she withdrawals the fiat equivalent value of the corresponding cryptoasset, and labels the transaction as “rent.”
These steps provide investors with the ability to monitor the financial performance of Alice’s DApp in real-time. However, in an effort to paint an even clearer picture of what’s happening, she releases monthly financial statements. Investors can then correlate their own blockchain-based observations to Alice’s published information, and ensure they match.
Like any public company, blockchain-based businesses with corresponding cryptoassets would benefit from releasing their own financial statements so that investors can see if the statements match up with the blockchain and possibly gain more insight into the company. In the traditional equity world, statements regarding an organization’s performance are released each quarter. DApps aren’t held to this timeframe; it’s up to them to decide how frequently to release detailed statements. If a company wanted to aim for maximum transparency – an effort that could instill additional confidence in investors – they could even release daily or weekly finance statements that correlate with what the blockchain says.
Once a cryptoservice creates an asset, it falls on the community to ensure that the blockchain data matches up with the statements put out by the company. If investors are not diligent about demanding to see financial statements that match up with the blockchain, odds increase that malicious actor could manipulate and falsify data.
Gaming The System
Could a system of incoming addresses by gamed? Absolutely. For example, it wouldn’t be difficult for a malicious DApp owner to artificially boost their profits by sending their own funds to the incoming revenue address. Real-time performance tracking is not a panacea or a foolproof safeguard against fraud. Nonetheless, an organization adhering to transparency best practices – while also following RTT – would provide a lower risk profile than a service that did not follow these measures. Additionally, the blockchain can also be leveraged to answer questions such as: is the DApp “recycling” profits in order to artificially inflate its revenue.
A trend toward increased openness is already afoot. Non-crypto companies are beginning to employ “radical transparency” in an effort to provide a clearer picture of their fortunes. On the crypto front, projects like Factom are emerging which allow for trustless verification of transaction data. Similarly, the developing field of Triple Entry Accounting could provide yet another layer of trust for investors.
Real-time performance tracking is a powerful concept. Its successful implementation would provide clear signals about legitimacy and profitability to investors – especially when combined with other elements of blockchain transparency. In our next article, we’ll examine the powerful role played by open-source code and clear, accessible information about DApps and their business models.