Smart Contracts, Dumb Money: Open Source Lemons

Abstract

Why does a market structure built on radical transparency paradoxically foster the proliferation of low-quality assets? Open-source crypto markets make information public but not necessarily usable. We develop a model in which investors allocate scarce attention before deciding whether to verify project quality. Technical complexity reduces the informativeness of processed public disclosure, while narrative assets can build salience through attention feedback. As a result, complex projects may fail to enter the verification set even when they would be valuable conditional on evaluation. Financing then falls because visibility expands market reach but only screened projects convert attention into capital. The model delivers a transparency paradox: more public information need not improve allocation when investors cannot process it at scale. Low-dimensional narrative assets can crowd out high-quality innovation, generating a complexity trap. The results imply that disclosure policy may be ineffective when it increases information volume without improving processability. Market regulation requires disclosure to be standardized, machine-readable, and certifiable, so that public information can be converted into valuation-relevant signals.