Potential Solutions to safeguard investors interests
Venture Capital's and Crypto Hedge Fund's role in fostering the cutting edge technology startups of the web3.0 community is invaluable. Considering the changes within the venture capital sector, close attention should be paid to how to address new risks brought about by the novel venture capital or ICO/IDO/IEO funding models and how to effectively protect investors in face of regulatory uncertainty. While regulation should continue to support innovation and the application of beneficial technologies, including blockchain technologies, improvements can be made to the regulatory system by increased regulatory clarity on crypto-centric funds and fund managers.
In absence of effective regulation to safeguard the investors from potential risks it is for the web3.0 community design and implement effective mechanisms in place, which can be:
Independent Custodian for Vested Tokens
In theory, smart contracts can serve as substitutes for the traditional legal frameworks and embed contractual protection for investors. Some examples of possible contractual protection for investors include restrictions on the supply of ICO tokens and restrictions on the transfer of tokens by insiders.These protections are generally mentioned in the ICO’s whitepaper and given effect to by being written into the underlying code of the project. In practice, the opposite is true. An empirical study shows that despite these promises, “ICO code often fails to deliver key investor protections, and sometimes provides founders with significant, undisclosed authority to alter investor rights.” In fact as discussed earlier even SAFT's become unenforceable for small and medium Investors, hence an Independent custodian based vesting of future tokens could be an ideal solution to ensure guaranteed vesting in alignment with vesting schedule of the blockchain project.
Staged Finance
In the current web3.0 funding environment a blockchain project receives all the raised money for the development of the project before the launch of the project or the Token Generation Event (TGE). Ideally these funds are needed for marketing, liquidity, listing fees, development costs and general administration costs of the project which can span over the years. Influx or availability of substantial cash flow can lead to poor treasury management. Further, investors also lose the potential yields on the idle funds vested with the blockchain project. Staged Financing subject to the requirements of the blockchain project development could be an ideal solution.
Escrow Accounts
Staged Financing can create a hesitation among the blockchain startups founders as to the guarantee of the future funds from the investors required for blockchain project development. A change in the mind of the Investor for a better investment opportunity can create trouble for the blockchain startup founders. Hence, Staged Financing through Smart Contract based Escrow Pools would be of an ideal choice, which establishes the trust for both the parties involved.
Independent Validator
The above solutions create question as to who will assess the appropriate implementation of the blockchain project by the founders. Leaving the assessment to investors could create potential difference of opinions in the future leaving even projects which are rightly implemented in doldrums due to rejection of future funds by the Investors. Giving such authority to independent third parties who are experienced in the fields of accounting, audit, blockchain, development, analysis and management could provide reasonable assurance to the both the startup founders and the Investors. Further, multiple validator assessments of a single proposal and approval or rejection based on majority consensus would substantiate the escrow system even further.
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