Blockstack: Simple Token Economics & the Institutionalization of Decentralized Crypto Ecosystems
The marriage of the Venture Capital model with the Utility Token model
Written by Johnny Antos, Joe Schermer and Carlos Guzman
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Blockstack: Simple Token Economics and the Institutionalization of Decentralized Crypto Ecosystems
Google Sheets Link: Illustrative Blockstack Token Distribution and Valuation
While reading through the Blockstack Form 1-A released the morning of Thursday, April 11th, we started doing some back-of napkin math to calculate some basic figures, returns, and the capital structure of Blockstack. We later realized that these calculations are likely useful to frame discussion around Blockstack’s token valuation, token economics, token ownership distribution, equity ownership distribution, and general (potential) decentralized token ecosystem feasibility.
The purpose of this analysis is to use public information available to present a clear, transparent view so that the Blockstack community and the broader crypto community has a shared basis for which to engage on items such as token ownership distribution, the relationship between equity and tokens, etc.
In the coming days and months, many in the crypto and perhaps broader investment communities will conduct various private and public analyses of Blockstack’s token ecosystem, technical architecture and governance structure. We are certain that many of these will provide analysis that we have explicitly not included in the scope here. We do not intend to provide an exhaustive analysis of Blockstack’s token ecosystem — in fact, this is merely intended as a jumping off point so that semantic debates about numbers and the like do not weigh down what will hopefully be carefully-considered and well-reasoned open debate.
However, we do feel that the analysis here is displayed in a clear way that should be a useful point of reference for those in the crypto community who are itching to dig into the details of Blockstack’s potentially standard-setting contemplated Offering. We list and discuss various assumptions as required, as well, throughout this article.
In the spirit of OSS, we have made the simple model open and available in Google Sheets for motivated readers to change assumptions and tinker with.
We are not experts on Blockstack’s decentralized ecosystem by any means, so if you see any errors, typos, mistakes, or busted logic, please notify us and we will adjust the document accordingly, if the suggestion has merit.
Table of Contents
- The Institutionalization of Decentralized Crypto Ecosystems: The marriage of the Venture Capital (VC) liquidity model with the Utility Token funding model
- Simple Blockstack Token Distribution and Valuation: Discussion of Functionality and Assumptions
- Illustrative Token Capital Structure
- Illustrative Token Ownership Distribution
- Illustrative Token Supply Curve through 2050
- Illustrative Equity Ownership Distribution
- Illustrative Valuation Metrics
1. The Institutionalization of Decentralized Crypto Ecosystems: The marriage of the Venture Capital liquidity model with the Utility Token funding model
The contemplated Reg A+ and concurrent Reg S offering (Blockstack’s “Offering”) of compliant utility tokens is intriguing for a myriad of reasons and due to many characteristics, including:
- Blockstack PBC, although established as a Public Benefit Corporation, is a centralized entity that raised multiple rounds of seed and venture capital investment from Angel Investors and Venture Capital firms (see below and Angelist Funding History, for the curious)
- Blockstack spent an estimated $1.8m on the legal and accounting fees, plus printing costs in connection with the Offering, implying that this is likely the most money that has been spent on legal & accounting costs to ensure regulatory compliance of a Utility Token issuance to date
- While other crypto / blockchain firms have previously initiated Regulation A or A+ processes (for example, AW Blockchain Mining), Blockstack appears to be the first firm that is attempting to construct and pioneer a roadmap where a centralized entity gives birth to a decentralized ecosystem through a Regulation A+ offering of compliant Utility Tokens
- Fundamentally, the outcome of the contemplated Offering will be an intriguing barometer for whether there is general investor (and more broadly, stakeholder, user and developer) appetite for tokens issued by a centralized entity that is backed by VC firms and Angel investors. Namely, this sort of token offering is incredibly different than Bitcoin or Grin’s immaculate conception, but it is also fundamentally different than the pre-network, pre-user ICOs/IEOs that have occurred and continue to occur where the basis for investment was essentially a Core Team, a whitepaper and a dream
Selected List of Venture Capital Firms and Angel Investors in Blockstack Equity
- Y Combinator
- Blockchain Capital
- Digital Currency Group
- Dorm Room Fund
- SV Angel
- Union Square Ventures (USV)
- Naval Ravikant
- Rising Tide
- Foundation Capital
- Lux Capital
- Michael Arrington
- Kevin Rose
Selected List of Token Holders / Investors
Over 800 individuals and funds, including:
- Union Square Ventures
- Foundation Capital
- Lux Capital
- Winklevoss Capital
- Blockchain Capital
- Digital Currency Group
- Kevin Rose
- Michael Arrington
- Qasar Younis
Note: These lists are not exhaustive and you should check out the below links for more detail on the full existing investor base. Our main point here is that there are a plethora of VC and Angel investors invested in Blockstack.
Note: Sources include Angelist, Blockstack Blog, Crunchbase and Coindesk.
Simply put, it seems that a major win for Blockstack would be a major win for VC and Angel investors, as well.
Furthermore, Blockstack has a respected market presence across Twitter and appears to have built a real community of developers and users. As prior articles written about Blockstack have noted, Muneeb Ali and Ryan Shea (note: Shea has since departed) have always tried to do things a bit differently than others in the crypto ecosystem.
Though Blockstack has previously received much positive press for not conducting an “ICO pre-sale,” the analysis presented in this article and the illustrative returns that prior existing shareholders and tokenholders stand to realize (on paper or through the possible eventual development of a secondary market) from Blockstack’s contemplated Offering may be a further subject for debate in the community over how to conduct an “equitable” or “fair” token price when there exists a capital structure with the presence of certain insiders who were previously privy to proprietary sourcing networks and access (namely VC firms and Angel Investors, although some of the rounds also included Blockstack Employee LLC, making it a bit difficult to get to who owns which tokens and the respective potential returns of various specific VC firms, Angel Investors and Blockstack Employees).
We do not jump to any premature conclusions or make any prescriptive judgement about the token distribution or the structuring of the contemplated Offering. We simply aim to provide clear, understandable information to the market so that everyone can make their own judgement and engage in rational debate.
We remain more interested in the broader phenomena discussed above. Open questions for future research include:
- Are the hardcore proponents (whether they are investors, developers, etc.) of decentralization put off from Blockstack by the fact that it went through a somewhat traditional Angel and VC funding track? Does this represent a bastardization of decentralization where centralized firms try to ride a decentralization “valuation halo effect” when tapping the broader retail / public capital markets?
- In the future, will there be more venture-funded startups who bootstrap a decentralized network to some degree and then conduct compliant public token offerings (whether through Reg A or Reg A+)? If so, does this represent a practical smelting together of the VC-model and ICO-model where VCs still fundamentally drive the industry, but are able to reach liquidity events in an accelerated, yet still compliant, manner?
- Are crypto ecosystem stakeholders willing to accept some degree of initial centralization (e.g., Blockstack having a corporate entity and raising previous equity capital) that eventually births a decentralized network?
On the last point, specifically, our sense is that there are innovative use cases, products and services that must be done in a fundamentally organic, grassroots-esque bootstrapping from scratch (e.g., Bitcoin) because the path dependency of its bootstrapping necessarily informs the type of value (or utility, in the field of economics) that stakeholders receive from the network. There are also likely innovative use cases, products and services that could initially be bootstrapped by centralized traditional startups creating platforms that eventually grow up to become decentralized in nature. Hardcore proponents of decentralization may stick their noses up at this second category, but if Blockstack’s contemplated Offering proves successful (on various time horizons — it will also be interested to see what happens regarding MV=PQ considerations for Stacks tokens over time and the what happens to the magnitude of relative growth rates and covariance between PQ and V over time. See Cryptoasset Valuation: Introducing Beta of Velocity if curious), this “blended decentralized model” that at its core seems to represent a compromise between various centralized and decentralized aspects / factors may create value in ways that a purely decentralized or purely centralized model never could. If this is the case, then Blockstack’s Offering may come to represent a watershed event in the evolution of the crypto space and in venture capital liquidity considerations.
Note: We avoid referring to Stacks tokens as “Security Tokens” throughout this article, as to date, that term has usually implied the tokenization of real assets or property. To be precise, Stacks tokens are really Security tokens that (hopefully) morph into being non-Security tokens (e.g., Utility Tokens) over time when and if the network achieves sufficient decentralization. There is some discussion of this in the Form 1-A for those curious.
2. Simple Blockstack Token Distribution and Valuation: Discussion of Functionality and Assumptions
Note that for the specific source of each hard-coded value (in blue), please see the embedded notes for each cell in the Google Sheets link.
We try to avoid useless summary and restatement of the numbers in this article and let sophisticated readers make their own judgement by viewing the Google Sheets Model. However, we try to provide helpful context for some of the base assumptions (that are currently flowing in the Model).
Please note also that we tried not to make any further assumptions about Blockstack’s Capital Structure or Token Distribution beyond what is disclosed in the 1-A filing. This is why some values are “NA” or blank for certain prior tranches of investors / stakeholders.
Illustrative Token Capital Structure
It’s tough to tell which specific previously referenced investors are in each tranche, but note that Union Square Ventures, Foundation Capital, Lux Capital, Winklevoss Capital, Blockchain Capital, and Digital Currency Group are likely somewhere in the October 2017, November 2017, or December 2017 tranches of token issuances.
The main discussion point that’s likely to gain popular media attention in the Capital Structure is the 287,135,373 tokens that were sold to existing shareholders of Blockstack PBC (we speculate that this includes VCs from the December 2016 preferred equity round, as discussed below). Initially, the $0.00012 / token price sticks out, given that the contemplated Offering is at $0.30 / token. There has already been some conversation around this on Twitter.
Muneeb Ali responded with the below screenshot (the same information was also included in the 1-A filing).
Other reports, for example, this one from the Block have been inadequate at presenting a clear picture beyond topical, surface-level discussion of Blockstack’s capital structure and/or implied returns to previous shareholders / tokenholders.
From our best estimate, the $0.00012 alone likely doesn’t tell the entire picture. Our assumption is that it’s probable that when multiple VCs and Angels invested in Blockstack’s $4m seed round in December 2016, investors received preferred equity along with the right to future tokens (e.g., SAFT-like embedded features). Given the phrasing and language around an independent third party determining the valuation of the tokens specifically, this is perhaps an accounting move due to the need to separate the cost basis of the tokens from the preferred equity, potentially. Given this, we built in a simple model switch between running the cost basis of these 287,135,373 tokens at either $0.00012 or instead using the total $4m. If the initial $4m investment initially bought a packaged unit of both preferred equity and tokens, there’s really no way to get at the “true” cost basis meaning what investors paid specifically and purely for the tokens separate from the preferred equity.
4/13/19 1:50pm EST edit: It appears that others have been trying to parse their way through this issue as well, namely through the below series of Tweets:
We were unable to find other sources online to tie to the $5.1m referenced by Muneeb and in the FAQ section.
It is also still a bit unclear whether the $5.1m from investors from prior rounds preferred equity should be included in calculating the token returns from this tranche of token purchasers. The phrasing of the FAQ seems to lean towards the $5.1m being separate from the new option to purchase tokens at $0.00012 / token that was given to these investors, so we adjusted the Model inputs to make it additive, not mutually exclusive. The Case switch for the cost basis has been updated to include the $5.1m figure.
We included in the Model a way to play around with what the illustrative returns to each tranche of tokenholders would be on various time horizons and token prices (all assumptions flexible, feel free to play around based on your own price expectation curve).
It’s also perhaps worth mentioning that in the base case shown, we use the assumption from the 1-A filing that 215,000,000 tokens will be sold through Vouchers. In reality, there’s no way of knowing ex-ante how many will actually redeem Vouchers in the Offering. We also included a simple case switch to run a case where only 161,666,667 tokens are sold through Vouchers. This clearly has an effect, albeit a small one, on the weighted-average token price of the Offering (~$0.02 / token).
We don’t include or consider any heterogeneity in other features across different token tranches such as, but not limited to, token lock-up, liquidity restrictions, refund-ability, etc. and if you’re curious about how those apply for the various tranches of tokens, please refer to the 1-A Filing.
Token Ownership Distribution
There aren’t really any major assumptions that had to be made here, it was almost directly driven by Page 122 of the 1-A Filing.
The one adjustment that we made was to make sure that when we added up the total, we weren’t double-counting Albert Wenger (who, as per a footnote, “…may be deemed to share voting power and investment control over the shares…”) when trying to get to the Total Concentrated Token Ownership. Effectively, it seems that ~21% of the Fully-Diluted Tokens Outstanding will be controlled by seven individuals / entities, pro-forma for the Offering.
We also calculated the Implied Token Value of each individual’s stake at the Reg A+ Offering Price.
Token Supply Curve through 2050
After incorporating various time lock features as well as an estimated schedule for tokens released from mining (this is also modeled out in granular detail in the Google Sheet, for the curious), Blockstack’s distribution of token ownership over time is intriguing.
Due to the lock-up period for the prior existing allocated tokens (prior to the Contemplated Reg A+ and Reg S Offerings), the majority of issued and outstanding token supply through September 2019 is concentrated across tokens issued through Reg A+ through Vouchers, issuance to the Public (non-Vouchers), and the App Mining Program (that’s part of the Offering — there’s a separate continuation of the App Mining that is included in “Other Future Mining.”
Once the time lock and transfer restriction features fall off and Stacks tokens are no longer classified as “restricted securities” the token ownership breakdown looks much different, with the token stake collectively owned by VCs, Angels and Founders amounting to 682,318,559, or ~19% of the Fully-Diluted Tokens Outstanding in December 2025.
Essentially, a substantial number of tokens will be issued over time through Other Future Mining (“native mining”in the 1-A), which is composed of:
- Proof-of-burn mining (“native mining” or “leader election mining”)
- App mining (continuation of program specified in 1-A, post-Offering)
- Web-of-trust mining (“user incentive programs”)
Note that the categories include the following token tranche classifications (for those tying numbers to the Form 1-A) are the following:
- VCs, Angel Investors and Founders: Tokens previously issued / sold to Shareholders of Blockstack PBC (in Private Placements), Tokens previously issued / sold via equity interests in Blockstack Token Fund AI, L.P. and Blockstack Token Fund QP, L.P., and Tokens previously issued / sold through SAFTs, and Founders Muneeb Ali and Ryan Shea
- Blockstack Employees: Tokens issued / sold to Blockstack Employee LLC
- Other Future Mining includes the mining sub-categories stated above
The other categories are fairly self-explanatory.
One key assumption that we had to make throughout this analysis (really the only assumption that wasn’t largely tied to documentation that Blockstack issued directly) was the release schedule for the 220m Web-of-trust mining (“user incentive programs”). We assumed that the 220m are released on a straight-line, monthly basis over a 5-year period. For now the start of this 5-year period is synced with the launch of all native mining on the Stacks blockchain, but this assumption is flexible.
It’s also interesting to look at the illustrative Token Supply curve over different time horizons (2025 and 2050 shown below).
If using the 2025E token supply, Blockstack’s Offering price of $0.30 / token implies a token market capitalization of ~$1.1bn and when taking account of equity market capitalization and subtracting cash, a Total Enterprise Value of ~$1.1bn.
If using the 2050E token supply, Blockstack’s Offering price of $0.30 / token implies a token market capitalization of ~$2.0bn and when taking account of equity market capitalization and subtracting cash, a Total Enterprise Value of ~$2.0bn.
Later on, we’ll take a look at what these imply for valuation metrics on a per / user basis.
Interestingly, a token market cap of ~$2.0bn would put Blockstack as the 13th largest cryptocurrency / token network, ahead of Binance and behind DASH.
Looking at Blockstack’s inflation rate over time, it starts out high and comes down over time. This is due to the time lock features falling off of previously issued token supply, as well as the issuance of new tokens from the three mining mechanisms.
Blockstack’s Reg A+ and Reg S Offering together is for 375,000,000 Stacks tokens, or ~10% and ~6% of 2025E and 2050E Tokens Issued and Outstanding, respectively.
Equity Ownership Distribution
We initially started looking at the potential equity market capitalization of Blockstack because we were curious to determine the total Enterprise Value of Blockstack (including Token value), which we explore in the next section.
The only real piece that merits explanation here is that we use $3.18 / share as Page 118 notes “ From January 1, 2013 through the date of this offering circular, Blockstack PBC has issued and sold an aggregate of 9,115,945 shares of common stock prices ranging from $0.00001 to $3.18 for aggregate consideration of $13,216.29.”
Without a public market for the common stock, it’s impossible to know which price should be used. We use $3.18 to be conservative, as, per the Filing, there was an actual sale executed at that price.
It’s also perhaps worth discussing that as per a note on Page F-27 of the 1-A Filing, each share of preferred stock is convertible into one share of common stock.
If the Offering is successful, assuming an illustrative token price of $0.30 and common equity price per share of $3.18, the sum of Muneeb Ali’s token stake and equity stake would be around~$39,831,282, at least on paper.
Valuation Metrics
Thus, if using the 2050E Stacks token market cap, the implied token market cap / current registered Blockstack user comes out to ~$19,350 / current registered user.
Thus, if using the 2025E Stacks token market cap, the implied token market cap / current registered Blockstack user comes out to ~$10,264 / current registered user.
Thus, if using the Stacks token market cap calculated from the Fully-Diluted Tokens Outstanding (but not necessarily issued) post-Offering, the implied token market cap / current registered Blockstack user comes out to ~$3,554 / current registered user.
Enterprise Value Calculation:
Enterprise Value = Market Value of Common Equity + Market Value of Preferred Shares + Market Value of Tokens + Non-controlling interest — Cash and Cash Equivalents
The only items worth noting are that upon examination and consideration, we don’t think it is logical to include the $7.373m of non-controlling interest (from the Balance Sheet) in this Enterprise Value calculation. This is because Page F-11 notes that “Employee LLC currently holds agreements for Stacks Tokens that have been sold to employees and those that are reserved for future awards to employees. These tokens are held on behalf of holders of Employee LLC’s Class B units, of which the carrying value is classified within non-controlling interest.”
Considering that we are already including the Tokens issued to Blockstack Employee LLC in the Token Market Capitalization line, we believe this would be double counting. However, it’s possible that there are other undisclosed items included in the non-controlling interest balance sheet line item besides the 74,509,321 tokens held by Blockstack Employee LLC. If this were the case, then we are likely slightly underestimating Total Enterprise Value.
The 100% growth rate assumptions for the various types of Blockstack Users are illustrative placeholders. This is very tough to get at with any high degree of certainty, ex-ante.
It’s worth noting that we use the Treasury Stock Method to calculate the potential number of dilutive shares from the issuance of shares from employee stock options. This is partly why the 14,902,763 fully-diluted shares outstanding as of December 31, 2018 that we use in the Equity Market Capitalization calculation doesn’t tie to the 15,701,994 shares outstanding as of March 31, 2019 that is used for the Beneficial Ownership calculation on page 121 of the 1-A Filing.
It will be particularly interesting to eventually observe the covariance of the return to the tokens (and the price of the common stock eventually) and the return to common equityholders, given that tokens don’t include any binding governance rights to tokenholders. Governance (at least until the point where decentralization is achieved) is effectively held by Blockstack, the Company.
From Page 86 of the Form 1-A:
Non-binding polling: We intend to let holders of Stacks Tokens participate in non-binding polling regarding upgrades to the network proposed by us. Participating in this polling will require holding Stacks Tokens and may additionally require the tokens to be burned or transferred to a third-party depending on the type of polling used.
If the common equity begins publicly trading at any point in time before the governance is transferred over to the decentralized network of stakeholders, it will be particularly intriguing to see how both tokens and equity trade, given that governance would effectively trade separately from the underlying utility value that a token provisions to its holder.
Governance in the Blockstack ecosystem merits longer and more thorough / nuanced analysis, so we leave that to future work and perhaps motivated readers.
As always, please let us know if you have any comments, questions, concerns, and most importantly, corrections to this illustrative analysis.
