How the success of block.one is linked to EOS
This article is a repost of the Voice article I published before Voice abandoned their original idea and completely changed directions. I am uploading it to Medium as several people have requested the article. I
Disclaimer: This article represents my own thoughts and not necessarily those of Chintai, EOS42, or any other company with which I do business or share association. It is not based on inside knowledge. This is not financial advice.
Introduction
Lots of people feel very disillusioned with block.one and their business model, especially with respect to the EOS Mainnet blockchain, but if you look at it not from the perspective of a EOS token holder, but from the perspective of a company trying to maximise profits, it can make perfect sense. I am going to share my thoughts on their approach and make some guesses as to the long-term strategies and goals of block.one.
To understand the strategy involved, it is important to understand the true fundamentals of blockchain technology and why it exists. The main reasons to use blockchain are:
- To make information resistant to censorship
- To prove the authenticity of the origin of a transaction
These two specific points are the only difference between a blockchain and a normal database, and it is exactly this fundamental use case for blockchain that is going to reveal the true value of EOS, and form the foundation for my argument on block.one’s strategy.
What is block.one’s motivation?
At the end of the day, block.one is a company, and the main goal of a company is to make profit. I am assuming that this is the case with block.one. However, it is important to remember that block.one is not a public company (Bloomberg), and therefore does not have the pressure to pay fat dividends to shareholders every quarter. If they want to, they can cope with short term losses for long term gains, and the game they are playing is the long game.
So how do they plan to make a profit?
Current thinking is that block.one’s long term strategy to make money comes from speculative investments in Bitcoin and other cryptocurrencies beyond EOS, but I don’t believe this to be the case. So far they have probably made a couple of billion dollars just from buying Bitcoin and watching its price rise, but those gains only matter if they sell the (approximately) 230,000 BTC (Westermeyer and Angermeyer) that they have accumulated, and block.one becoming an asset management firm does not fit with their strength in the technology field.
If they were only interested in maximizing profits by playing the market, why bother to continue development of the EOSIO ecosystem? They currently have a technical team of approximately 98 employees (LinkedIn) working every day on making EOSIO technology better for everyone.
I believe their plan to make profits comes from the fact that they hold 10% of the tokens on the EOS Mainnet, and this combined with the resource model of EOS will be a major way to generate profits for their company going forwards. But for this to make sense, we must first understand how simply holding EOS tokens can earn you money.
How does holding EOS lead to profit?
The powerup model (block.one #1) is the new resource model that has been proposed by block.one. There are plenty of good articles (block.one #2) explaining how this works in detail, so I will not go into too much detail here, but the general idea is as follows.
EOS moves from being a fee-less blockchain to a chain where you must pay a fee in order to push transactions on to the blockchain. Doing this gets you access to resources that allow you to interact with the chain, and then those fees are distributed to whoever owns and stakes their EOS tokens in the network.
In a way, this is similar to how Ethereum works with gas fees, with the key difference being that gas fees are paid to miners, whereas EOS fees are paid to token holders.
This creates an immediate alignment of incentives. With block.one being the largest single holder of EOS tokens, and fees from the network being used to pay token holders, we have a situation where block.one is incentivized to get people to use the EOS Mainnet blockchain.
To put this into perspective, with block.one having 96 million EOS tokens (4 million from the original amount have been used to buy ram), and assuming they could make 5% returns year on year at a token price of $3, then they would have a regular revenue of $14.4 million. This is not much money for a company of their size, but the revenue would scale with the token price, they could consistently make $1 billion a year if they could get the token price to $200, and I intend to show that this is possible and the ideal outcome of their endeavours.
Okay, so why is block.one not doing anything to help adoption of the EOS Mainnet?
This boils down to a matter of perspective, and ultimately comes back to the point of blockchain technology in the first place. Right now, the entirety of the blockchain space has a market cap of approximately $1 trillion. This is nothing in comparison to the $360 trillion dollars in wealth around the world (Credit Suisse).
Most blockchain companies that set up their own chain survive off the tokens that they issued to themselves as founders of the chain, and it is important that they pump a token on a regular basis so that they can dump some of their tokens to keep funding development, marketing, and of course, their salaries. But block.one is not in this position at all. They raised 651,902 ETH, which at the time had a value of $4,197,956,135 (ICO Bench). They do not need to go through the pump and dump cycles that so many other blockchain projects must do in order to survive.
With their ability to focus on the long-term game plan, they can dedicate their resources appropriately to maximise their long-term profits, and this is where it is important to remember the fundamentals of the purpose of blockchain technology:
- To make information resistant to censorship
- To prove the authenticity of the origin of a transaction
There are tons of potential use cases for blockchain based on the above two points, but I want to focus on one that is, in all honesty, a little bit boring: compliance.
Real world blockchain usage
Any company that does any significant amount of business has to do a lot of work to show compliance, pass financial audits, handle taxes, and conform to regulations. This is work that no one wants to do, but is required by the respective authorities of whatever country the company works in. The problem with these requirements is that they are expensive! An average company will spend 5.5 million dollars each year (Kenton) on proving to the authorities that they are not money laundering, that they have declared all their income for tax purposes, and that there is no internal fraud occurring within the company. Blockchain gives a trusted way for a company like this to automate this process and save themselves millions of dollars each year.
Here is the problem though, most blockchain solutions are not scalable. The average company must handle many transactions and running those transactions on a chain like Ethereum is simply not feasible. It also does not help the company at all if some of the transactions are performed off-chain and some are performed on-chain, as this causes a break in the ability to create a full audit trail. Therefore, you need a blockchain solution that scales and allows very large throughput to create a complete audit trail.
The only solution available right now that can handle the necessary throughputs for such a company would be a private EOSIO chain. A company could set this up with the help of block.one’s “Blockchain as a Service” product, and in doing so they can prove the authenticity of the origin of a transaction within their company.
A private chain is, by definition, not resistant to censorship. So although this private EOSIO chain owned by a company can be used to show exactly who did what within the company and rule out fraud, money laundering, and non-declaration of income, it does not stop the administrator of the blockchain from altering blocks after the fact. This is where the EOS Mainnet comes into play.
The company can send their block hashes to a public blockchain that incorporates censorship resistance, and in doing so an audit would reveal a difference between the declared block hashes on the public chain and the actual block hashes on the private chain. This keeps the private company accountable, and as long as you can trust that the public blockchain is safe from censorship, the auditors and regulators can be satisfied that the full audit trail is complete and has integrity.
So how do you pick a blockchain to post your private chain hashes to? Well as a company, you would just post it to the network that the regulators were happiest with, and the regulators will choose the blockchain that has the best resistance to manipulation and censorship. Of all the chains that exist, EOS is the best chain for this purpose.
Why is EOS the most censorship-resistant chain?
There are lots of different protocols to develop censorship-resistant blockchains, proof of work is the original mechanism used by Bitcoin and Ethereum. The problem with PoW is that it is possible for a country to seize and control the hardware within their country and perform a 51% attack. The mining pools that run on these chains could also agree to collaborate to perform a 51% attack. If they do this, then it does not just break Bitcoin, but all PoW chains. Because if someone creates a fork of Bitcoin, and that fork becomes popular, then the bad actor can simply switch from mining on the (now dead) Bitcoin chain to the popular fork, and they will immediately have over 51% of the mining power again. The effect is to dilute the PoW chains and make them all more susceptible to such an attack.
The DPOS system used by EOS however does not lend itself to such an attack, as each of the 21 node validators is selected based on the tokens held by voters within the system. These votes in practice come from a mixture of individuals who want to make positive impacts on the ecosystem by voting for high quality network validators, or by exchanges voting with funds that belong to the users of their products. For a country or bad actor to take control of the network, they have to now either buy 51% of all the tokens (which is prohibitively expensive), or they have to coerce 15 of the node validators. In both cases, a simple fork of the network would allow a new set of node validators to be selected and the money they used to buy the 51% of tokens is wasted, and all efforts would have to start from scratch.
There are more networks than just the EOS network that use DPOS, so why wouldn’t the regulators use one of them instead? The answer is that the public chain would have to also be scalable (basically limiting it to EOSIO), and then of all chains that are EOSIO based you want to one with the largest market cap to make the 51% attack as hard as possible, leaving you with EOS.
There is an ideal future where it gets too expensive to use the EOS mainnet, I will later show that this happens when the token price rises to $1077 per EOS, and in that scenario it would make sense to start spreading the love to other chains that show strong resistance to censorship.
So how does this translate into profits?
The Powerup model is not live yet, so for this next bit I am going to assume that we stick with the current resource exchange model, the point stands and will be the same in both cases, the only difference is the mechanism by which it is done will be slightly different.
Some businesses can probably get away with showing that they have not tampered with their blockchain at certain intervals, like once a minute or once an hour, others will have to show that at no point did they ever tamper with the blockchain. This will depend on the nature and size of the business, with larger businesses or businesses with higher risks or opportunities for money laundering being required to push hashes to the EOS Mainnet every 0.5 seconds.
So, if you needed to do this as a business, you would be making 172,800 transactions a day, and each transaction would probably cost about 500 μs of CPU time, meaning you would need enough resources to pay for a total of 86.4 seconds of CPU time. At the time of writing, this would mean that you would need to have approximately 850,000 EOS staked to your account. As a business, you might choose to buy that as an investment (which incidentally would raise the price of EOS), or more likely you would rent the resources from the REX at a cost of approximately 425 EOS a month. With current REX liquidity, this comes to a profit for each EOS owned of 0.00001845 EOS per year.
This profit from a single business adopting blockchain to fulfil compliance requirements is not the whole story, as the more people who rent resources from the REX, the larger the fee for doing so is, and this follows an exponential curve as you get closer to 100% of the liquidity being used. At this stage, it is difficult to say how the economics of the system would play out. As more businesses would start adopting this strategy to save themselves money, it would lead to the profit for owning EOS increasing along an exponential curve, but then as more profit could be earned, it would lead more people to make their EOS available for renting, thus distributing the profits across a larger pool of EOS holders and pushing the cost of rent back down.
Another factor to consider is that each of these businesses would have to buy EOS to pay for renting resources, this would push the price of EOS up.
So why is block.one apparently not doing anything to help with adoption of the EOS Mainnet? I believe that it boils down to the fact that they are making sure that their technology is ready for the entirety of the business world to be ready to adopt it without flaws or issues. I think they are in talks with exceptionally large players such as Google, who registered as a node validator (block.one #3), to set up infrastructures to allow businesses to adopt this at the click of a button. The people they are trying to market to and onboard are not your standard crypto investors who want to gamble and speculate. They are large, institutional businesses that can eclipse the current market cap of crypto markets all by themselves. These kinds of conversations are not held in public, and they take time. Convincing a large institution to adopt a new technology can take years. But when the flood gates open, there will be a huge demand for EOS tokens.
Consider the following calculation using the current REX system, assuming the following:
- 14% of tokens will be staked and will earn rewards from transaction fees on EOS (more than double what is currently being staked)
- The EOS Mainnet is being used at current rates in terms of transactions, activity, and REX usage.
- There are 100 companies that need to send a hash every block
- There are 1000 companies that need to send a hash on average every minute
Plugging these numbers into the REX price calculation shows that these companies combined would have to pay approximately 47500 EOS per month to token holders to show their compliance to regulators, split amongst each company, that is not a lot of EOS, but now each of these companies is creating a snowball effect on the other:
- As a company uses resources, the cost of all remaining resources increases, both because of the price curve in REX and because the cost per CPU increases as well.
- The next company must pay more for the same resources.
- As these companies buy EOS, the pressure makes the price of the token increase.
- As the rewards for staking start getting larger, more token holders will stake to participate, increasing the scarcity of EOS.
- This further increases the price of the token.
The lack of barriers to each individual company will guarantee that it is cheaper to be compliant by taking this option and storing all company business on a blockchain that links to the EOS Mainnet. This will only stop when the snowball becomes too large and the system becomes too expensive to use, if CPU costs per EOS stays constant and an audit/compliance cost of $5.5m a year, then the cost of EOS would have to be approximately $1077 per EOS for it to be not worth it for the companies.
I do not see the connection with block.one, why are they so quiet?
Because they are not talking to you.
They are preparing the software for true enterprise level adoption; they are talking to the likes of Google and other companies of that calibre to set the stage for true and real mass adoption and mass usage of blockchain technology. When they are ready, they will move hard and fast. They have spent zero money on marketing and advertising so far because if they take their product to mega corporations before it is bullet proof they could potentially miss their shot, so they are moving slowly and carefully. They can afford to do this because no one can compete with them technologically.
When they are ready, you will know about it, because the whole world will know about it.
Blockchain is about to get a real use case, and it is going to redefine the way business is regulated.
Bibliography
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block.one. “The EOS PowerUp Model.” EOSIO, 30 01 2021, https://eos.io/eos-powerup-model/.
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