It seems that some of the company’s investors are up for a big payday: The earliest backers could expect a hefty 6,567% return on their initial investments, while Michael Novogratz has already managed to secure a much more modest, though still profitable, 123% return.
Earlier this week, it was revealed that EOS developer Block.one is attempting a 10% buyback of its stock, reportedly the second one in less than a year.
But why would Block.one buy its shares back in the first place? It appears that the startup’s executives are confident about the future of their network – and a marketed announcement scheduled for June 1 could be one of the reasons.
What is Block.one?
Block.one is a private company known for developing and publishing the EOS.io protocol. It is registered in the Cayman Islands, lead by CEO Daniel Larimer and chief technology officer Brendan Blumer.
EOS.io, in turn, is a blockchain-powered smart contracts protocol for the development, hosting and execution of decentralized applications (DApps). In other words, it’s a decentralized alternative to cloud hosting services.
EOS.io is supported by its native cryptocurrency, EOS, currently the fifth-largest by total market cap. The tokens can be staked for using network resources: As per the project’s white paper, DApp developers can build their product on the top of the EOS.io protocol and make use of the servers, bandwidth and computational power of EOS itself, as those resources are distributed equally among EOS cryptocurrency holders.
The platform was launched in June 2018 as open-source software, with its first testnets and original white paper emerging earlier in 2017.
Notably, Block.one holds the absolute record in terms of funds raised during an initial coin offering (ICO): It has managed to gather around $4.1 billion – or about 7.12 million ether (ETH) – worth of investments for EOS.io after fundraising for nearly a year. The second-biggest campaign of the sort, the messenger Telegram, has raised less than half the amount – i.e., $1.7 billion.
What is the purpose of the new buyback?
Having raised a record-breaking amount of money last year, the EOS.io publisher is now performing a 10% buyback of its shares.
A Block.one spokesperson has confirmed to Cointelegraph that the stock repurchase is “closing”, and hence at the final stage. The company’s representative also said they are unable to reveal the participants.
“Buybacks are a normal activity for many companies”, the spokesperson told Cointelegraph. “Block.one is confident of its growth prospects and industry opportunities. We are pleased with the support from investors, and that they have been able to benefit from, and participate in, the success of our company.”
Notably, this isn’t the first buyback for Block.one. As per Bloomberg, this stock repurchase offer comes “less than a year” after the initial buyback, in which Block.one reportedly aimed to acquire 15% of its outstanding shares at $1,200 each, but gathered a total of 13.8% in the end, which equaled around $300 million.
The new buyback, in turn, values the company at around $2.3 billion, up from about a $40 million valuation in 2017. The repurchase price being offered is reportedly even higher this time, at $1,500 per share – up 6,567% from the original price of $22.50.
Later backers – including PayPal co-founder Peter Thiel, crypto mining hardware billionaire Jihan Wu of Bitmain, as well as hedge fund managers Louis Bacon and Alan Howard, who all bought into Block.one in July 2018 – could also be in for a massive payoff, if they agree to sell.
According to Bloomberg, Bacon and Howard have declined to specify whether they are going to sell their shares, while Thiel is not responding to messages. Cointelegraph has reached out to Bitmain to clarify whether Wu is planning to participate in the buyback but has not heard back as of press time.
Nevertheless, there is at least one confirmed investor who has agreed to participate in the stock repurchase. Novogratz’s crypto merchant bank, Galaxy Digital, accepted the offer and sold shares in Block.one for $71.2 million – securing a 123% return on the initial investment.
In an accompanying press release, Novogratz stressed that “substantial outperformance” from Block.one had contributed to the decision and that his bank will continue to work with the startup. “We continue to work closely with Block.one as a key partner across a number of our business lines, including the Galaxy EOS VC Fund, which invests in companies building on the EOS.IO protocol, and remain excited about the EOS.IO protocol,” the Galaxy Digital CEO said.
Later, Novogratz took to Twitter to reiterate that Galaxy Digital is still a shareholder in Block.one as well as a “large holder of $EOS tokens.” To explain why his crypto merchant bank sold the shares, he stated the following: “Took profit to rebalance our portfolio.” The investment bank had a net loss of $272.7 million in 2018 – evidently due to the bear market – and the recent deal might be an attempt to mitigate those losses.
According to a Blockforce Capital analyst Charlie Smith, the most likely scenario is that Block.one believes it is worth more than the price it is buying back at. In an email to Cointelegraph, Smith wrote:
“By buying back shares from investors, Block.one can clear some names off the cap table and establish more centralized decision making. Even if the investors that sold shares had no say in the direction of Block.one, by clearing them off the cap table, Block.one can focus more on its own interests.”
What is Block.one planning to do with all that money?
Block.one’s total assets, including cash and investments, amounted to $3 billion at the end of February, according to Bloomberg, who reportedly obtained that number from a March 2019 email to the company’s shareholders.
$2.2 billion of this was held as what the company called in its email “liquid fiat assets”, with most of it invested in U.S. government bonds. The letter also reportedly revealed that the company’s crypto portfolio had halved to around $500 million during the crypto winter. However, in a more recent email sent out in May, the company ostensibly said those losses were “more than fully recovered”, given that bitcoin has been on a rally over the previous months.
The new buyback as well as the “few outward signs of progress since the sale of EOS tokens”, as Bloomberg puts it, raise the question: What is Block.one’s plan, and why does the startup need all that money?
“Basically, Block.one raised a massive fortune with the EOS ICO, and most of it just sat there”, Mark D’Aria, founder and CEO of Bitpro Cryptocurrency Consulting, told Cointelegraph. “They used some to fund development of the ecosystem but as the Bloomberg report points out, there was never any need for billions of dollars to create something like EOS.”
Blumer, CTO of Block.one, strongly disagrees with the idea that his company has not largely advanced since the ICO phase, citing an earlier Bloomberg article penned by Alastair Marsh to prove his point. “I guess taking 48% of active Dapp users in market share in its first year is what Alastair interprets as showing ‘Little signs of progress,’” he wrote in the official EOS Telegram group chat, adding:
“Last year’s buyback was to make room for new investors without unnecessarily inflating our balance sheet. This round included highly strategic shareholders such as Peter Thiel, Alan Howard, and Louis Bacon, and was a very positive thing for the company. This year’s buyback positions us for the same, and we also expect it will be another milestone for us.”
According to Blumer, this information, “along with a lot of other material”, was presented to Bloomberg’s Marsh, but “facts were chosen and arranged deceitfully and with poor journalism standards.”
When asked by a Telegram group member to specify why Block.one needs to make room instead of doing equity dilution, Blumer replied:
“Block.one was a VC funded startup and after so much growth it’s prudent to allow liquidity to earlier investors to make room for larger more strategic ones.”
According to Larimer, who also joined the Telegram chat to address investors’ questions regarding the stock repurchase, Block.one couldn’t have chosen to buy EOS tokens instead, because the company cannot own more than 10% of the total supply, which it has already maxed out. “We … want eos to remain decentralized”, the CEO added. “We keep our non-EOS treasury in a blended portfolio of Crypto and Fiat.”
Is centralization a problem for EOS?
Notably, decentralization might be one of EOS’ weakest spots. In November 2018, its governance model was exposed, as evidence suggesting that some confirmed transactions were reversed surfaced on social media, which puzzled some pundits as well as ordinary crypto enthusiasts.
Around the same time, blockchain-testing company Whiteblock published the results of “the first independent benchmark testing of the EOS software.” The investigation came to several conclusions about EOS, the most bold of which was that “EOS is not a blockchain, rather a distributed homogeneous database management system, a clear distinction in that their transactions are not cryptographically validated.”
Further, in October 2018, allegations arose accusing the platform’s major Block Producers (BPs) – entities that essentially get to “mine” the EOS blockchain after being elected – of “mutual voting” and “collusion”, suggesting that the entire model of governance might be corrupt.
However, full decentralization is not necessarily paramount to the project’s success at this point, D’Aria of Bitpro acknowledged to Cointelegpraph:
“Yes, EOS is unequivocally more centralized than Bitcoin or Ethereum. Decentralization has a tremendous cost in terms of performance and efficiency, and EOS gets around those limitations by simply being less decentralized. It’s not fully centralized, it’s just further down the spectrum than ETH. So then the question becomes, ‘is EOS decentralized enough’? For a lot of use cases, I do believe it is.”
In D’Aria’s view, EOS has a high chance of effectively competing with Ethereum as the main platform for DApps, which seems to be Block.one’s current primary aim. D’Aria opined, “If you asked me whether ETH or EOS would ultimately be more successful 10 years from now, I’d have a really hard time answering that question because they’re both legitimate competitors for that space.”
EOS’ future is looking bright – at least in the eyes of its creators
Notably, Block.one’s leaders appear to be confident about the future of their product. “We sold a product, a place on a snapshot list that could be used by the community to create the highest performance and most used blockchain”, Larimer wrote in the Telegram group chat. “We sold the community tools that enabled them to create $6b in value.”
“If we had not sold our funds on an ongoing basis we would have inflated Ethereum to the moon and then crashed it when exiting”, Blumer also wrote in the chat. “One day btc will probably run on eosio chains.”
Also, Block.one has scheduled an event for June 1, which will take place in Washington, D.C. While the company has not revealed what product might be presented there, the most common prediction is that it could be a social media platform.