In-depth investigation: What has happened to EOS in the past five years? Why did Block.one exit?

Source: Wired Magazine

Translation: EOS Ecosystem 4 Billion DAO

Original link: https://www.wired.com/story/eos-bullish-blockone-blockchain/

In 2017, Block.One began the development of the EOS blockchain and raised a record $4 billion in the Initial Coin Offering (ICO). Five years have passed, and now EOS is finally taken over by members of the EOS Foundation (ENF), realizing its decentralization goals.

On a Wednesday morning in November 2021, Yves La Rose, a member of the EOS blockchain community and now one of the leaders of ENF, stated during a virtual gathering for Chinese users: "As it stands, EOS is a failure."

Block.one, a company based in the Cayman Islands, created the original EOS using open-source technology. The white paper indicated that EOS promised to achieve blockchain technology innovations more efficient than any other cryptocurrency network.

Before EOS launched in June 2018, Block.one raised over $4 billion in the largest token sale in history. (The ICO is a method for startups to raise substantial funds in exchange for cryptocurrency tokens on a yet-to-be-built blockchain platform.) At that time, Yves La Rose was dedicated to EOS and took on the significant role of managing EOS Nation, a "block producer" responsible for validating transactions occurring on the blockchain.

In the four years following June 2018, EOS's development took a sharp downturn. Its user base was shrinking, it only supported a few popular applications, its main developers were leaving, and its token (also called EOS) plummeted in value from $10 in June 2018 to $4.40 by the end of 2021. At a virtual conference last fall, La Rose, a staunch supporter of EOS, chose to speak out, bluntly stating that he and others in the community had become victims of Block.one, a company profiting from their work while leaving them with nothing.

"Block.one deliberately weakened their ability to impact the development of EOS," the 39-year-old Canadian entrepreneur said at the conference. "This amounts to negligence and fraud."

To this day, La Rose still believes in EOS's potential. His dissatisfaction is directed at Block.one, and he, along with most supporters, believes that Block.one has messed up the EOS project. Driven by his passion for EOS, La Rose tirelessly proposed a plan to save EOS: he established an organization called the EOS Network Foundation (ENF) aimed at revitalizing the decentralized ecosystem of the blockchain and holding Block.one accountable for the decline of the EOS project.

He hopes that Block.one will leave EOS and return part of the funds it raised under the EOS name.

Block.one has no intention of meeting his demands. In May 2021, Block.one announced the establishment of Bullish, a cryptocurrency exchange, with most of its liquidity coming from the ICO proceeds of EOS. Block.one registered Bullish in the Cayman Islands and set up subsidiaries in the Cayman Islands and other crypto-friendly jurisdictions, including Delaware, Hong Kong, Singapore, and the British Overseas Territory of Gibraltar, planning to merge Bullish with a special purpose acquisition company (SPAC) called Far Peak Acquisition Corp by March 8, 2022, to go public with a registered capital of $9 billion. After two delays, the current deadline for the listing is July 8, 2022.

Bullish has become the flashpoint of conflict between Block.one and the EOS community. Although the legal documents supporting the legitimacy of the EOS ICO state that Block.one can use the funds raised from the ICO at will, it is well known that Block.one has not fulfilled its initial promises. In December 2017, Block.one CEO Brendan Blumer publicly promised to invest $1 billion from the ICO proceeds through an investment division called EOS VC to develop blockchain technology supporting EOS and nurture startups building applications for it. However, Block.one ultimately did not fulfill that promise. La Rose stated that the company invested most of the funds in unknown purposes, completely disregarding its previous commitments to the EOS community. Therefore, La Rose expressed that ENF would hold Block.one accountable on behalf of the community.

Tama Churchouse, who held senior positions at Block.one until February 2021, revealed: "They have been privately planning to open a new exchange, and this work plan started in early 2019."

ENF also discovered signs of Block.one's wavering commitment to EOS in technical updates, as the quality of EOS's code output began to decline in early 2021. This situation worsened after the departure of Chief Technology Officer Daniel Larimer and other senior developers in January 2021. Shortly after leaving, Larimer complained in an interview with Cryptonomist that "Block.one is no longer focused on building and promoting technology that gives people freedom." (Although Larimer declined an interview request from Wired.)

All of this indicates that Block.one lacks the credibility to fulfill its promises.

In November 2021, shortly after La Rose's speech, ENF issued an ultimatum to Block.one: reinvest in the EOS blockchain and grant the intellectual property rights of EOS blockchain technology to ENF. Otherwise, the block producers would halt the planned "release" process of 100 million EOS tokens that were to be gifted to Block.one over ten years. With the support of major nodes in the community, ENF made a slight adjustment to the blockchain code, and now Block.one can no longer access the gifted tokens.

In an email to Wired, Block.one spokesperson Abby Kuhanez pointed to public documents related to Bullish, ERC-20 token sale terms, and the "broad support" for using its technology within the community, along with a token sale audit report conducted in 2019 by Clifford Chance law firm and professional services company PWC. Kuhanez stated, "Many of the assertions in this report seem to be drawn from claims in lawsuits against Block.One," but he did not respond to our request for further clarification.

"Block.one bears primary responsibility for the decline of EOS; they have essentially ruined everything for everyone in the EOS community. They are the bad guys," La Rose said.

Former insiders at Block.one also described another side of the company: a thoroughly failed organization paralyzed by legal issues and unable to complete any projects, except for the billions of dollars in crypto profits it gained during the market upturn.

Block.one was founded in 2016 by Brendan Blumer's Hong Kong real estate company ii5, cryptocurrency technology experts, and some prominent figures in the crypto space, and was first promoted at the Consensus industry conference in New York in 2017.

Subsequently, the team began a global roadshow, selling tokens called EOS in an online auction that lasted 341 days—tokens that could soon be converted into ERC20 tokens for use on the EOS chain (which was still hypothetical at the time). In the following years, this auction attracted close scrutiny from regulators and academia. In August 2021, University of Texas finance professor John Griffin published a study claiming that the EOS ICO showed signs of "wash trading" techniques. He alleged that 21 accounts appeared to act in concert, purchasing EOS tokens in large quantities but selling them within an hour, which Griffin believed would inflate the token prices for other buyers.

Griffin stated that the owners of these accounts hid their actions by passing tokens between multiple wallets between each buy and sell. Block.one stated in a blog post that it did not coordinate these actions and pointed out that the 2019 audit found no evidence of collusion. However, Griffin noted that the audit only examined accounts owned by Block.one and did not investigate accounts related to company executives personally. In any case, uncovering the identities of account owners would require cooperation from the cryptocurrency exchanges they used. "This is as far as it can go," Griffin said. The U.S. Department of Justice has neither confirmed nor denied that an investigation is ongoing.

A former Block.one executive stated that due to the active leadership and arrangement of EOS marketing campaigns by one of the co-founders, Brock Pierce (who is also a cryptocurrency investor, child star, and emerging politician), Block.one raised more funds from the ICO than they had anticipated. The executive also stated that company chairman Kokuei Yuan made it clear from the beginning that Block.one was a "marketing organization for selling tokens: we need to minimize our association with it and then exit in a reasonable time." Another person familiar with the company's situation confirmed this statement. (Most former employees of Block.one requested anonymity due to confidentiality agreements or fear of retaliation.) "The $4 billion fortune was the key reason people paid attention to EOS. We once had high hopes for EOS; we could do more than just sell tokens and then reduce our association with EOS and eventually leave," said the former executive.

Currently, EOS's existing plan is a primary public chain created by Larimer's team, and many promised features from the ICO have not been realized. For example, the company abandoned the goal of processing millions of cryptocurrency transactions per second nine months after the token sale [https://web.archive.org/web/20171105092953/https:/github.com/EOSIO/Documentation/blob/master/TechnicalWhitePaper.md]. The executive also stated that even after determining the promotional features of the technology, Block.one's leadership never considered how to fulfill its defined development vision.

Block.one's executives include Chief Strategy Officer Andrew Lewis, who is a childhood friend of Blumer; Blumer's sister Abby, who is responsible for communications; and Executive Chairman Kokuei Yuan, who is also closely related to Blumer. They co-founded the first joint venture Okay.com in 2015. "Blumer really likes to be surrounded by those who are very gentle with him, who won’t challenge him, and will only flatter him," said the former executive. "But the CEO's job is to make decisions." The former executive stated that the company spent months considering where to open an office in the U.S., finally selecting Blacksburg, Virginia, in October 2018—a town with a population of just over 40,000, which is not particularly known for its technical talent, aside from Larimer. [https://roanoke.com/news/local/block-one-moves-into-big-blacksburg-office-as-national-spotlight-grows-brighter/article_77853219-208f-5b49-837e-199e4f473a46.html].

One former employee described the frustration they felt when asked to create a business plan, which they spent hundreds of hours on, only to have it abandoned without explanation. "They seemed to be doing things that only interested them," the employee said. Several reviews we saw on Glassdoor also reflected this experience among Block.one employees.

Another former employee from Block.one's Hong Kong office (where Blumer has been since he renounced his U.S. citizenship in 2020) said that while Blumer is a talented salesperson, he does not seem to enjoy the role of CEO. "He is rarely in the office; he doesn’t sit there to understand what the issues are and how to solve them. He quickly loses interest in these matters." This attitude ultimately delegated much responsibility to the company's legal team. "Many of the plans made by Block.one were just Brendan's ideas, so we were always trying to figure out how to execute them."

Given the sensitive regulatory environment of the crypto industry, the legal team became overly cautious about every business decision. Between 2017 and 2019, the U.S. Securities and Exchange Commission was intent on suing the company that organized the ICO. Because Block.one was too involved in running the EOS fundraising efforts, these token sales could be seen as issuing unregistered securities. Thus, Block.one was primarily responsible to its shareholders (including PayPal founder Peter Thiel and investor Mike Novogratz), rather than to EOS token holders.

A Bloomberg report from May 2019 quoted a letter from Block.one to its shareholders, showing that early investors received returns of up to 6,567% during the buyback period, and most of Block.one's funds had been reinvested in government bonds and Bitcoin. Investor relations indicated that as of July 2021, Bullish held 141,951 Bitcoins, worth about $6 billion.

After comedian John Oliver's elaborate techno-hippie performance on Last Week Tonight, Pierce also left the company in early 2018. The failure of Voice (a $150 million initiative aimed at building a decentralized social network on the EOS blockchain) was anticipated, but Pierce, one of the former leaders of Voice, attributed the failure to the U.S. Securities and Exchange Commission. "Due to compliance and legal requirements, Block.one struggled to advance the Voice project. Block.one had launched the Voice initiative with great fanfare in May 2019. However, the SEC did not allow it to launch its tokens, forcing Voice to pivot to selling NFTs in 2022."

Block.one's efforts to avoid any legal pitfalls ultimately failed, but that was of little consequence. In 2019, the SEC stated that Block.one had not made efforts to prevent U.S. citizens from participating in the token sale, thus viewing it as an unregistered security, which led to a case that took over a year to resolve. The final settlement result—a fine of $24 million, which is trivial compared to the $4 billion ICO—shocked the entire industry closely watching the matter. "Guys, their lawyers are strong," cryptocurrency investor Katherine Wu wrote at the time here. As part of the settlement, the company did not admit to any wrongdoing.

La Rose believes that while regulatory risks are real, Block.one may have used them as an excuse for inaction. "Block.one uses SEC regulation to evade the commitments it made," La Rose said. He specifically pointed out that several companies in which EOS VC invested—such as the NFT platform Immutable and gaming companies Forte and Playable Worlds—ultimately used other blockchains. More distressingly, the projects Block.one invested in hardly promote the EOS ecosystem, including Bitcoin mining company Northern Data and Pierce's resort in Puerto Rico where he has lived since 2018.

Pierce stated that Block.one simply chose the wrong leadership for its VC program. However, Michael Alexander, who served as CEO of EOS VC from 2018 to 2020, said, "The general partners and those supervising EOS VC were actually more like traders, and venture capital is a very difficult business. Block.one never invested enough funds in the right organization."

Block.one's EOS VC deployed funds by partnering with other investors, including Novogratz's Galaxy Digital Firm, Asian investors Michael Cao and Winnie Liu, London fund SVK Crypto, and German company FinLab. This former Hong Kong employee stated that this approach was "outsourcing" the task to partners rather than taking the time to find companies that would use EOS technology. According to the employee, Blumer believed this would "distract from the work."

"In the crypto space, the companies using EOS are all small, and Brendan is not really interested in making these small venture investments."

Crunchbase data and Block.one's own press releases show that Block.one injected about $675 million into partnerships. However, the whereabouts of some of these funds remain unclear: according to PitchBook data, aside from a $750,000 investment in the crypto trading startup LogoBlock, the $50 million invested in partnership with TomorrowBC (a company run by Derek Rundell, executive director of Eric Schmidt's Tomorrow Ventures) had not been utilized as of 2022. Rundell and Schmidt did not respond to our multiple requests for comments.

After ENF issued its ultimatum, on November 10, Blumer and Pierce flew to Canada to meet with La Rose. In a blog post, La Rose stated that he had been requesting a portion of the ICO proceeds for ENF, but his requests "were swiftly denied every time."

Just before the meeting, Block.one transferred 45 million EOS tokens (worth $216 million at the time) to Pierce in exchange for his shares in Block.one. In November, Pierce told WIRED, "I am no longer a [Block.one] shareholder, which means I have no restrictions, and at this point, I can freely do whatever I think the ecosystem needs." Pierce suggested on Twitter to save EOS by establishing an investment company called Helios, which would be granted the newly acquired tokens here.

However, his status quickly became a point of contention in the negotiations. Most of the tokens used to buy out Pierce were still in the release process. "The network thinks these tokens belong to the network, while Block.one thinks the tokens belong to Block.one," La Rose said.

After weeks of unsuccessful negotiations, on December 7, EOS's block producers executed a script to halt the release of Block.one's tokens, including those sold to Pierce, effectively blocking his buyout. Before making the decision, Pierce told WIRED that such an action would have a "very negative impact on trust within the EOS ecosystem," and he hoped the action would be canceled.

La Rose believes that Pierce did not make the final decision well and was emotionally unstable regarding the matter. "He was clearly unhappy, he was angry, and he issued a death threat to me," La Rose stated. However, in late December, during an interview with a Puerto Rican club for the blockchain news site Bywire News, Pierce did say against a disco music background that he did not remember threatening La Rose, and if he did, he would apologize.

"From Block.one's perspective, this separation is quite clean; they no longer have to worry about public opinion regarding the network. They don't really care about EOS; they think it's a waste of time." Larimer and other senior developers have now begun writing EOS code again under the leadership of ENF. The foundation announced funding for companies creating applications for its network.

In La Rose's view, launching Bullish is Block.one's clever maneuver. "This is basically a legitimate way for them to take away $9 billion."

On February 10, a post on ENF Medium announced that it had hired a law firm with the goal of holding Block.one accountable for its past actions and breaches of promise. La Rose's accompanying tweet emphasized this concept. "Let's explore all possible claims to seek $4.1 billion in damages together! #4BillionDAO is here."

"We are the victims, and the community is gradually regaining control of EOS," La Rose is optimistic about the revitalized EOS community.