Blockchain blunders are mistakes or pitfalls that can undermine the security, efficiency, or value of blockchain applications. RWA and tokenization are two related concepts that involve the representation of real-world assets (such as real estate, securities, or commodities) as digital tokens on a blockchain. Here are seven blockchain blunders to avoid:
Ensuring the integrity and ownership of underlying assets is pivotal when tokenizing RWAs. Authenticity, legal ownership, and accurate valuation are imperative. Failing in this verification process could lead to tokens that inadequately represent asset traits, potentially leaving users vulnerable to fraud or entangled in legal disputes.
In 2019, a company called Bitsonar claimed to offer a tokenized investment fund that would use AI to trade cryptocurrencies and generate high returns for investors. However, the company turned out to be a scam, and the founder disappeared with $2.5 million worth of investors’ funds. The tokens that the investors bought were worthless and not backed by any real assets [1]
When tokenizing RWAs, it is also important to ensure that the assets are securely stored and transferred in accordance with the token transactions. Failing this could render tokens unsupported by real assets, compromising their credibility and functionality.
In 2018, a company called QuadrigaCX, which was Canada’s largest cryptocurrency exchange, announced that its founder and CEO had died unexpectedly and that he was the only one who had access to the private keys that controlled the exchange’s cold wallets. As a result, the exchange lost access to $190 million worth of customers’ funds, which were stored in the cold wallets as a security measure. The customers could not withdraw their funds or exchange their tokens for fiat currency. [2]
When tokenizing RWAs, it is necessary to comply with the relevant laws and regulations that govern the assets and the tokens. Otherwise, the tokens may face legal challenges, restrictions, or penalties that may affect their usability or value.
In 2017, a company called Tezos raised $232 million in an ICO, which was one of the largest at the time, to create a decentralized platform for smart contracts and governance. However, the project faced multiple lawsuits from investors and regulators, who accused the company of violating securities laws, misrepresenting the status of the project, and mismanaging the funds. The lawsuits delayed the launch of the platform and eroded the value of the tokens. [3]
When tokenizing RWAs, it is desirable to enable the tokens to interact and exchange with other tokens or platforms on the blockchain. Otherwise, the tokens may be isolated or incompatible and may limit their potential or functionality.
In 2020, a project called SushiSwap, which is a decentralized exchange that allowed users to swap tokens and earn rewards, launched as a fork of another project called Uniswap, which was a similar but more established platform. However, SushiSwap faced several technical and operational issues, such as bugs, exploits, and migration failures, that affected the functionality and security of the platform and the tokens. The issues also caused a loss of trust and confidence among the users and the developers and resulted in a significant drop in the value and liquidity of the tokens. [4]
When tokenizing RWAs, it is advisable to use smart contracts to automate and enforce the tokenization process and the token transactions. However, smart contracts are not flawless and may contain bugs, errors, or vulnerabilities that may compromise their security or functionality. Therefore, it is important to test and audit the smart contracts thoroughly and have contingency plans in case of failures or disputes.
In 2020, a project called Yam Finance, which was a decentralized protocol that aimed to create a stablecoin that was pegged to the US dollar, launched as an experiment in the DeFi space. However, the project had a fatal flaw in its smart contract code, which prevented the protocol from rebasing its supply and maintaining its peg. The flaw also made it impossible to fix the issue through governance, as the voting mechanism was also affected. The flaw rendered the tokens worthless and caused a loss of $750,000 worth of funds. [5]
When tokenizing RWAs, it is important to assess the costs and benefits of tokenization and compare them with other alternatives. Tokenization may offer advantages such as increased liquidity, accessibility, efficiency, or transparency, but it may also entail costs such as infrastructure, development, maintenance, or security. Therefore, it is important to evaluate the trade-offs and the feasibility of tokenization and choose the appropriate platform and architecture accordingly.
In 2018, a company called Civil, which was a decentralized platform for journalism, attempted to raise $8 million in an ICO, to create a tokenized ecosystem that would reward quality journalism and combat misinformation. However, the ICO failed to reach its target, as the investors found the tokenization model too complex and unclear. The company had to refund the investors and rethink its strategy. [6)
When tokenizing RWAs, it is important to adapt to the changing market and technological conditions and respond to the evolving needs and preferences of the users and the society. Tokenization is a dynamic and innovative process that may face new opportunities or challenges as the blockchain technology and the real-world assets evolve. Therefore, it is important to monitor and update the tokenization process and the tokens and seek continuous improvement and innovation.
In 2017, a project called Bancor, which was a decentralized exchange that used smart contracts to create and trade tokens, raised $153 million in an ICO, which was one of the largest at the time, to create a new standard for token creation and exchange. However, the project failed to keep up with the changing market and technological conditions, as it faced competition from other platforms that offered faster, cheaper, and more user-friendly services, and it suffered from security breaches, regulatory uncertainty, and low adoption. The project lost its relevance and value over time. [7]
1 https://www.bloomtech.com/article/blockchain-use-cases
2 https://ubc.digital/blockchain-use-cases-and-real-world-examples/
3 https://www.theblock.co/post/28568/after-tezos-case-disputed-discovery-court-ruling-is-a-compromise
4 https://www.theblock.co/post/28568/after-tezos-case-disputed-discovery-court-ruling-is-a-compromise
5 https://decrypt.co/104848/yam-finance-safeguards-3-1m-treasury-governance-attack
6 https://qz.com/1426382/consensys-bought-most-of-the-cvl-tokens-in-civil-medias-disappointing-ico
7 https://blog.bancor.network/this-analysis-of-bancor-is-flawed-18ab8a000d43
