Stacks: The $260M utility token built on a network with less than 10,000 verified users

Quick Take

  • Blockstack hopes to raise $28 million through its ongoing Reg A+ token offering, selling its Stacks tokens at $0.30 each to the general public (implying a market cap of $260 million based on the current distributed supply)
  • These tokens will be used as a medium of exchange for apps, services, and name registrations on the Blockstack network
  • Since its inception in 2015, the Blockstack network has gathered only 9,555 verified users, an increase of approximately 55 new users within the last two months
  • The network is heavily reliant on the upkeep provided by Blockstack, a company which has faced serious financial trouble with “substantial doubt about its ability to continue as a going concern.”

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Blockstack commenced the first SEC approved Reg A+ token offering on Thursday, selling its Stacks tokens to the public at $0.30 apiece (implying a market cap of $260 million based on its distributed token supply of 867 million). Given the current fledgling state of the Blockstack network, which has less than 10,000 verified users, this raises serious concerns around the token’s valuation.

Lack of users

Blockstack has been developing an open-source, peer-to-peer network for decentralized applications it calls the Blockstack network. The network went live and started accepting new users in 2015. Three years later, the company introduced the Stacks Token, a utility token which would work as the “economic unit enabling ecosystem members to transact and align incentives” for the Blockstack network.

Source: Blockstack

However, user growth has been unimpressive. Detailed in its offering circular, the company claims to have gathered 115,780 user accounts since inception, of which only 9,555 were verified with a working social proof. This was only a slight improvement from the 9,500 verified accounts the company had reported two months prior.

Rather than focusing on user growth, the company has been mainly prioritizing the build out of its app ecosystem. Gina Abrams, growth partner at Blockstack, noted that within the past six months, the number of apps on the network has grown from 34 to over 170. This can largely be attributed to the company’s efforts to bootstrap the market via its App Mining program which began in December 2018. Through the program, Blockstack rewards $100,000 every month to the best apps on the network as voted by a select group of reviewers.

Despite the recent boom in apps available, user adoption has been rather lackluster. The total number of app in aggregate is around 50,000, meaning that out of the 115,780 user accounts, more than half have yet to download a single app. Of the 172 apps available, less than 10 had more than 1,000 downloads.

Financial struggles

Between 2017 and most of 2018, the company was battling to stay afloat. Blockstack was generating limited revenue, and accumulated losses were piling up since inception. According to the circular:

“Blockstack’s unrestricted cash and cash equivalents balance as of December 31, 2017, were barely sufficient to cover Blockstack’s budgeted operating activities for the year ending December 31, 2018, but not sufficient to cover Blockstack through January 30, 2019 or August 31, 2019. We were therefore required to disclose substantial doubt about Blockstack’s ability to continue as a going concern.”

To date, nearly all of Blockstack’s revenue has come from the issuance of Stacks tokens. The company recognizes it as research and development arrangements under ASC 730. Between November 2017 and February 2018, Blockstack obtained $47.5 million in aggregate through private placements of Stacks Tokens. A small portion of the funds was recognized as revenue when incurred. However, most of the capital was locked behind two performance-based milestones that the company agreed to with its investors. 

Fortunately, the company was able to unlock approximately $36.8 million in revenue in November 2018 as it achieved the first milestone under its private token sale documents after successfully developing a live, operational network with token functionality. After expenses, the company had $21.1 million in unrestricted cash by year-end 2018, which management believed to be enough to sustain itself until July 2020.

To complete the second milestone and unlock the $7.4 million in associated revenue, Blockstack will need to to have 1 million verified users registered on the network by Jan. 30, 2020. However, this seems unlikely given the company only has 9,555 verified users currently. Upon failure, the company would be forced to return that capital back to its investors.

Source: Blockstack

Excluding the $8.3 million of impairment of digital securities recognized for the year, Blockstack incurred $10.4 million in operating expenses for 2018. Moving forward, management expects its expenses to increase substantially as it continues to grow the business. The circular noted that the company would be “reliant primarily on future token sales to fund their operating expenses and generate future revenues.” It went on to add that “these conditions raise substantial doubt regarding the Company’s ability to continue as a going concern.”

Although Blockstack intends to make the network fully decentralized, the network is currently heavily reliant on the financial resources and efforts of the company. Blockstack employs all of the network’s core developers. Management even noted that it was only aware of “two employees who possess the necessary technological skillset to develop the backend infrastructure for the Blockstack blockchain.” Given the company’s financial issues, this poses a serious concern for the development of the network.

Tokens sold at a premium to independent valuations

Through its ongoing token offering under Regulation A+, the company is selling up to 60 million tokens to the general public at $0.30 apiece. According to the offering circular, this price was based off of advice from “unsolicited preliminary oral indications of interest from its existing investor base,”an investor base whose purchase price was significantly lower than current levels.

In the past, the company received two independent valuations from Foresight Valuation Group. Both valuations came at a significant discount to the current public sale price with Blockstack selling millions of tokens to its subsidiary and early investors shortly after.

It’s first valuation came in September 2017 where Foresight valued the tokens at $0.00012 each, although this was prior to any significant development of the Stacks token. Based on this price, the company sold 36.3 million tokens to Blockstack Employee LLC, a subsidiary of the company, as well as over 287 million tokens to its founders and early investors.

The second valuation came a year later in September 2018 which priced Stack tokens at $0.0132 each. Using this valuation, Blockstack sold 38.2 million tokens to Blockstack Employee LLC. It claimed that the purpose of these tokens were to provide bonus and compensation awards for employees and contractors. At the time, management stated that these purchases were made at what it deemed to be “fair value.”

Also at a discount to the public sale price of $0.30 a token, the company is offering tokens through its “voucher program” at $0.12 a token (a 60% deduction) as part of its Reg A+ offering. In order to reward early community members, they were given vouchers and were told to indicate their level of interest in the offering between May 17 and May 28. Based on previous filings, the company had indicated that it was willing to offer up to 215 million Stacks tokens through this voucher program. However, only 78,333,333 tokens ended up allotted for the rebated tokens due to a lack of interest, a bad signal for the company’s ongoing public sale.

Reg A+ tokens subject to holding period while early investors can unload

All tokens sold through the Reg A+ general offering are subject to a “time lock” where the Stacks tokens cannot be burned or transferred. Over time, these tokens will progressively get released after a set amount of blocks have been processed. The company estimates that it would take approximately one year and 11 months for investors to get all of their tokens released from the holding period.

While those who purchased through the public sale wait for their tokens to slowly become accessible, investors from previous Stack token sales will have the ability to unwind their holdings. As of June 10, the company stated that approximately 229 million of the 866 million Stacks tokens distributed would have been released from their time locks with more being released each month.

The company will also have the ability to dilute current token holders by raising funds through future token sales during this time period. Based on a total supply of 1.32 billion Stacks tokens created in the genesis block, Blockstack will be able to sell the 110 million tokens it has in its treasury as well as any unallocated tokens left over after its ongoing token offerings (approximately 231 million if the full allotment gets sold).

Conclusion

In an attempt at building a “New Internet for Decentralized Applications,” Blockstack has struggled to keep itself afloat as its expenses pile up. With only enough cash to sustain itself for another 12 months, the company has decided to conduct a $28 million digital token offering, selling its Stacks tokens for $0.30 apiece to the general public (implying a market cap of $260 million based on the current distributed supply). Although being the first company to receive SEC approval for a token offering under the Reg A+ framework has given the public sale a veil of legitimacy, it’s uncertain whether the $0.30 price tag for the Stacks token is warranted given the significantly lower price the company deemed as fair value approximately nine months ago coupled with the network’s lack of users.