May: EOS Raised a Record Breaking $4 Billion

Michael Ippolito | December 28, 2018

The Story

Software company Block.one closed out a year-long crowdsale of their EOS token, managing to raise a staggering $4.2 billion. EOS represents the largest ever raise conducted through an ICO, more than doubling the $1.7 billion Telegram raised in March.

EOS is billed as a decentralized operating system designed to support industrial-scale applications. The platform is similar to Ethereum, but allows for higher transaction throughput by utilizing a ‘delegated proof of stake’ consensus mechanism.

There were several technical issues with the launch, resulting in the network briefly being shut down from June 11th to the 17th.

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7 Months Later:

EOS may or may not be the “Ethereum killer,” but it’s worth taking note of. The launch was worth paying attention to for several reasons in addition to the amount of capital they raised, including:

1. Most of the money won’t go towards developing the protocol

It’s unclear how much of the $4.2 billion Block.one raised will go towards network development, but at least 25% of the funds will be directed elsewhere.

Less than one month after the close of its crowdsale, Block.one announced “EOS Venture Capital,” an investment arm whose stated agenda is “to further develop a focus on the decentralized applications that will use the EOSIO Blockchain.”

There are two issues with Block.one using their funds like this. 1) There has been no transparency about how they are managing investors capital and 2) there are no covenants to protect investors against downside risk.

Generally, when an investment is made, there is a well understood and agreed upon plan for how to allocate the capital (i.e, if you invest $100 dollars in my lemonade stand, I first outline that I will spend a certain amount on raw materials for the stand, construction labor, employee wages, a supply of lemons, etc…).

Block.one’s crowdsale was ostensibly to fund the development of the network, and it’s now clear that a significant portion of that capital is being directed towards an entirely separate endeavour.

Now maybe the venture fund does well and everyone’s happy, but maybe it doesn’t, and that’s where the second problem comes in — lack of covenants.

As Meltem Demirors has pointed out, there are two established routes for corporate financing — debt and equity.

If you raise money for a new venture, that cash finds its way onto your balance sheet as an asset. Value can’t be created out of thin air, however, so that asset is balanced out with a liability for the money owed.

If we go back to our lemonade example, I would now have a $100 liability on my balance sheet corresponding the amount of capital I borrowed from investors (you) to start my stand.

Token issuances might look like a fancy new way to create money out of thin air, but they aren’t. If you raise $4.2 billion in an ICO, there is an implied $4.2 billion liability that goes on your balance sheet as well, which is the estimated cost of building and maintaining the network.

Now you can see why it’s problematic that EOS is using this money for an entirely separate set of operations. AND, because there are no investor covenants, you have no recourse if the network goes belly up.

2. Governance issues

If you were following EOS’ launch earlier this year, you may have heard of some of the developer infighting that was one of the reasons things got delayed. Both the Wall Street Journal and John Oliver had less than glowing opinions on the whole process that went on.

The bickering introduced two fundamental issues with blockchain governance:

  1. governance is a very human process
  2. despite claims of decentralization, these decisions are still being made by a very small group of people.

For a good summary of the issues with blockchain governance, watch this panel from ZCon with Jill Carlson, Vitalik Buterin, Zooko Wilcox and Jameson Lopp. Long story short — governance is a messy, human process that we all want to believe can be elegantly translated into code, but most of the time that’s just not the case.

Take a look at bitcoin, a project many would say is decentralized, which is actually directly controlled by a small (<20) group of core developers.

These issues with decentralization belie an even larger question: “do we want to create a more truly decentralized form of governance, or can significant, consequential decisions not be effectively reached by a large group of people in an automated way?”

3. The network never technically “launched”

As Jackson Palmer (founder of Dogecoin) pointed out, the EOS mainnet technically never launched. The “launch” that occured on June 10th was just Block.one making EOS’ code openly available — at that time, there was no active network.

What’s truly amazing about this is not only was almost every major media outlet misinformed, but no one really seemed to care about this distinction.

One of the fundamental improvements blockchain networks offer over open source code is an active network to build on and not just software blueprints.

To borrow an analogy that is becoming increasingly popular, open source software is like getting the blueprint to a house.

It’s useful, but still requires resources to actualize (i.e hire a contractor, skilled labor, building materials, etc…). Blockchain networks are like cities — the infrastructure like roads and utilities are already functional and available for everyone to use.

The distinction is important, and was almost completely ignored during EOS’ “launch.”

Moving Forward

Most of these issues are not specific to EOS, but they are notable due to the scale of the project.

It’s one thing if a $2 million ICO never manages to go live in a meaningful way, it’s quite another if $4.2 billion vanishes in a puff of smoke.

EOS remains an interesting project to watch in 2019, and has an enormous amount of potential.

Ultimately, it’s too early to say for sure if EOS will be the dominant smart-contract platform or if it will be a cautionary tale of FOMO investing.

The question of EOS’ valuation reminds me of a quote from Eric Schmidt after YouTube was acquired by Google for $1.65 billion in 2006. When asked during a town hall meeting after the acquisition if $1.65 billion was the right amount, Schmidt replied:

“No it was not. It was either way too high, or way too low, but we won’t know for 10 years.”
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Michael Ippolito

Co-Founder of BlockWorks Group