David Z. Morris: The Bear Case for Bullish is Spelled E-O-S

David Z. Morris: The Bear Case for Bullish is Spelled E-O-S

There was a wave of what I’ll call bemusement in crypto circles last Friday when blockchain firm Block.One and investors including Peter Thiel announced they would take the cryptocurrency exchange Bullish public. The listing would take place via a special purpose acquisition company (SPAC), or a merger with a listed company, at a valuation of $9 billion. There are a number of uncertainties swirling around the plan, not least because the exchange doesn’t exist yet.

David Z. Morris is CoinDesk’s chief insights columnist.

In fact, Bullish was nearly invisible until May of this year, when Block.One announced that it was committing bitcoin and EOS tokens, then worth nearly $10 billion, to create a large liquidity pool for the exchange. The exchange itself is expected to launch later this year – when it will go up against a half-dozen far more established players in the U.S. exchange market, even as exchange activity trends downward as a bear market sets in.

All that is reason enough to question the wisdom of Bullish as an investment. But the real eyebrow-raiser for my money is the involvement of Block.One and its downtrodden smart-contracts platform EOS. Given years of consistently disappointing results from the company and affiliated projects, and a strange push to use EOS in the operation of the otherwise fully centralized Bullish, many crypto longtimers immediately wondered whether building a profitable crypto exchange is the only motive for the SPAC.

The brief, tragic history of Block.One and EOS

Block.One was founded in 2016 as a launchpad for EOS, a would-be “Ethereum killer” that raised a record $4.1 billion via an initial coin offering in the first half of 2018. Like many ICOs, that raise was later deemed an unregistered security offering by the U.S. Securities and Exchange Commission. Block.One paid a $24 million fine in 2019 – seen by many at the time as a comically paltry slap on the wrist relative to the amount raised.

Despite its massive war chest, EOS has failed to become even a remotely credible competitor to Ethereum, largely thanks to a failure to address deep design flaws. EOS was conceived by Dan Larimer, a co-founder of Block.One along with CEO Brendan Blumer, using a “delegated proof-of-stake” design that Larimer touted as the next generation of blockchain tech. But that didn’t really pan out: Within months of EOS’ launch, it became clear the voting process for selecting validator nodes was being aggressively gamed by cartels looking to capture block rewards.

That led to a “brain drain” as engaged, grassroots node operators were effectively pushed off the network. The problems also turned off developers: EOS currently hosts only one of the top 25 distributed applications (dapps), according to DappRadar. No EOS dapp has daily volume over $100,000, while Ethereum has at least 25 dapps with daily volume over $1 million. The Binance Smart Chain, Tron and Polygon systems have all attracted more activity than EOS, even though BSC and Polygon launched more recently.

Larimer joined that brain drain in January when he announced his departure from Block.One and EOS to work on “personal projects.” That continued a trend for Larimer, a once-prominent cryptocurrency leader who over time gained a reputation for moving on swiftly from projects he founded. That’s what happened at both BitShares, Larimer’s first big project, and Steem, a decentralized media project. BitShares is now essentially dormant, and Steem has struggled after Larimer’s departure.

Those missteps and failures led to abjectly awful bull market performance by the EOS token, which sank by more than 30% over the past 12 months in BTC terms. Since its peak in May 2018, the token is down nearly 95% versus BTC. Formerly a top 10 token, EOS has sunk to rank 27 by market cap, according to CoinGecko. EOS, remember, is Block.One’s reason for existing.

Block.One, Rewarded

Block.One said in May that the exchange would use “EOSIO and the EOS Public Blockchain to produce a cryptographically validated, provable, and immutable audit trail of all transactions processed on the Bullish platform.”

This has led to some confusion that Bullish will be a decentralized exchange, or DEX – a category that has seen explosive growth over the last year. But Bullish would be just as centralized as Coinbase, with the slight addition of writing receipts to EOS. That could have some transparency benefits, but doesn’t make the exchange meaningfully decentralized.

But the architecture does hint at a possible secondary motivation behind Bullish: Whether it turns out to be a successful exchange or not, Bullish’s use of EOS for recordkeeping will make EOS seem more successful, or at least promising, by creating on-chain transaction volume as well as fees and other revenue. Block.One currently holds just under 6% of all EOS, worth roughly $250 million, according to EOS Authority.

(Transaction costs on EOS are quite a tangle. Some transactions are nominally free, but costs are arguably just moved around into staking requirements and RAM fees for onboarding dapp users. Last year Block.One introduced a pay-as-you-go fee option.)

Those fees and costs would ultimately be paid by Bullish users – to the benefit of Block.one. In other words, Block.One is creating a spin-off that will in essence be its own long-term customer, for a service of unclear utility.

The MicroStrategy Theory

Another compelling angle on Bullish came Friday from Sam Bankman-Fried, FTX co-founder, who in a Twitter thread focused on the $6 billion in crypto reserves that Block.One and other investors have injected into Bullish. Those reserves amount to about two-thirds of the proposed value of the Bullish SPAC.

That led SBF to speculate that, rather than a competitor to Coinbase or Bakkt, “Maybe Bullish is really another MicroStrategy.” In other words, maybe the real investment here is not in any innovation Block.One and Peter Thiel might bring to crypto exchanges, but in Bullish’s crypto reserves. The public listing will, like MicroStrategy stock, be investable by some entities that can’t directly buy crypto, such as (in theory) institutions. As the Grayscale Bitcoin Trust has shown , some investors are willing to pay a premium for these crypto-equity workarounds, though the near 50% markup on Bullish’s holdings might be a bit steep. (Grayscale is a CoinDesk sister company.)

Another key distinction is that while MicroStrategy has been laser-focused on bitcoin, the reserves behind Bullish will be much more of a mixed bag. The $10 billion supplied by Block.One to stand up Bullish in May (which has since declined in value) was over 90% bitcoin, but also included 20 million EOS tokens, or about 2.5% of the total. (It’s unclear whether these funds have already been moved from Block.One’s EOS wallets). As an exchange, Bullish would also wind up holding an assortment of other coins.

Crypto exchange Bullish to go public via $9bn Spac

Cryptocurrency exchange Bullish is set to go public at a $9 billion valuation through a merger with a special purpose acquisition company (Spac) run by former Nyse president Thomas Farley.

Bullish plans to list on the New York Stock Exchange later this year, via the merger with Far Peak Acquisition Corporation. Farley will take over as CEO.

Bullish was set up earlier this year by Block.one - the blockchain software firm backed by Peter Thiel - to launch a blockchain-based crypto exchange that will offer automated market making, lending, and portfolio management tools to its users.

Bullish will run a private pilot programme to test its platform in the coming weeks ahead of a launch later this year. The exchange will utilise Block.one’s EOSIO and the EOS Public Blockchain to produce a cryptographically validated, provable, and immutable audit trail of all transactions processed on the platform.

The business has already received an initial capital injection by Block.one of $100 million and digital assets comprising of 164,000 BTC and 20 million EOS, and completed a previously announced $300 million strategic investment round.

The combination with Far Peak has a pro forma equity value at signing of approximately $9 billion at $10 per share. The proceeds include net cash in trust of approximately $600 million and $300 million of committed private investment in public equity anchored by EFM Asset Management.

Says Farley: “We’re only in the first or second inning of the cryptocurrency market and I’m thrilled to be joining the Bullish team as we revolutionize the future of digital assets through cutting edge financial technologies.”

Bullish plans $9 billion SPAC merger

The news: The crypto exchange will merge with SPAC Far Peak Acquisition Corporation and list on the NYSE by the end of the year, per Business Wire.

The SPAC is surprising: In a very bold move, the SPAC was announced without Bullish actually being live.

Bullish was set up as a subsidiary of blockchain software company Block.one in May and is planning to run a private pilot program in the coming weeks before its public launch later this year—we assume before the listing.

It will use Block.one’s EOS blockchain to automate crypto trading services like portfolio management tools for institutional and retail investors.

Is the valuation justifiable? Bullish will have little to go on to entice investors.

Since the exchange will likely launch just a few months before the listing, it will not have a long history of revenues and user growth to attract investors. By contrast, Coinbase , which launched in 2012, disclosed record growth in 2020 and Q1 of this year ahead of its direct listing.

In lieu of this, Bullish will need to rely on investors’ bullishness for crypto markets and its parent company’s and Far Peak’s reputations to lure them. Block.one is backed by high-profile venture capitalist Peter Thiel, per Business Wire, and EOS is a major blockchain platform. Far Peak is backed by ex-NYSE president Tom Farley , who will take over as Bullish’s CEO after the merger.

Looking ahead: More crypto exchanges are expected to go public via SPACs this year to capitalize on the crypto frenzy while it lasts.

SPACs tend to be a faster route to going public than IPOs, which works well for crypto exchanges like Bullish still hoping to cash in on cryptos’ popularity. Other crypto firms that have already announced SPACs include Bakkt in January and Circle earlier this week.