Close

March 17, 2019

Blocknet: Struggling to Gain Traction Amidst Competitive Pressures

BLOCK Token Audit Score: 36 out of 50

To date, despite impressive technical credentials and product design talents of team, Blocknet has been unable to gain traction with users and external contributors. Future outlook challenging due to competitive marketplace for decentralized and P2P exchange solutions. Real value in teams ability to create usable products for non-technical users.

Check out the tearsheet summarizing our Blocknet Audit.

Overview of the process used to create the tearsheet and conduct the audit. 

Cryptoeconomics (4 points out of 5)

Block has a sound cryptoeconomic foundation. Tokenization is defensible because it employs Proof of Stake as its security mechanism. Incentivizing the community of stakers production of valid blocks by rewarding them for acting in the best interests of the network.

Scarcity is a concern as Blocknet currently has a 9% inflation rate. It is unclear if this primarily to ensure liquidity as the network gets going or it’s viewed as a permanent feature. No intent to reduce the rate once certain milestones have been achieved has been communicated to date.

Value is generated from transactions flowing across different blockchains using Blocknet’s protocol. Functioning as a communication standard for inter-blockchain data transfer and sound mechanism for generating potential network effects amongst users.

Investability (3 out of 5)

Capital allocation is conducted via service nodes (effectively masternodes) voting on proposals. The process appears well structured. It is hard to assess the level of discipline amongst voters as this information is not readily accessible.

Demand is unproven and appears to have plateaued at the low level it sits at currently. Staking via staking nodes and service nodes is the primary mechanism for value generation.

Blocknet has developed a brand as a functional solution for transferring value between cryptoassets for non-technical users. Its wallet is designed to be easily installed and run from a variety of computing environments including mobile with automatic syncing across platforms.  It has also positioned itself as an effective contributor to the 0x ecosystem which is a well-established brand in the area of decentralized exchange.

Defensibility is a challenge for Blocknet as the project is open source and forkable. Anyone can fork the project and remove the Block token as a requirement for access. It is also competing for users in two highly contested spaces. Inter-blockchain communication protocols and decentralized exchange.

Distribution (2.5 out of 5)

No formalized insider skin in the game. 6 million of 10 million pre-mine allocated to founders / early investors / advisors could be immediately sold after the initial token offering.

Given the +9% inflation policy token holders are ill-advised to passively hold their position and see its value erode over time. Users are incentivized to spend their tokens to increase transaction volumes or stake their tokens to earn a return.

Only 40% of the pre-mine was sold via the ITO with the remainder retained by the founding team or allocated to pre-ITO investors and advisors. Post-ITO there have been no additional allocations on preferred terms to any investors.

Supply is minimally limited as high inflation rate dilutes existing holders. Making it easier for new users to obtain tokens further broadening distribution of supply.

Team (4.5 out of 5)

Blocknet’s project lead Dan Metcalf has a background well suited for technical success in building a cryptoasset network, having spent 5 years as a Bitcoin core developer prior to launching Blocknet. The team at blockchain includes members with backgrounds in design, marketing, and operations to compliment Dan and other contributor’s technical skills.

The team’s inclusion of multiple members focused on usability makes them unique in the crypto space. Where the ability for people to easily use protocols often takes a back seat to technical elegance.

The team has exhibited consistent and transparent behavior in its interactions with the broader community. More detailed financial reporting would be helpful to fully evaluate the project.

Project (5 out of 5)

The projects decentralized exchange is live and has users as a relayer in the 0x ecosystem. Well written and high-quality white paper outlining the vision of the project and how it will achieve it. Open source highlighted as a priority early on in it.

The project understands it is trying to acquire users in highly competitive spaces, decentralized exchange and inter-blockchain communications. Going into great detail on how it is positioning its solution to provide a superior user experience leading to a higher share of customers than competitors.

Its unique value proposition is the combination of decentralized exchange paired with the ability to transfer assets across blockchains. Arguably this disadvantages it versus pure play solutions in these spaces. But, it is not hard to envision a world in which this combination allows users to interact with multiple blockchains seamlessly while not being exposed directly to the challenges Blocknet is solving with their technology to make this happen.

Scalability (4 out of 5)

Project leads can hire and develop talent. What started initially as two founders and an advisor has grown into a global team of 19 members.

The roadmap is clear, prominently displayed on the homepage, and easily interpreted. With the team visually distinguishing what’s been achieved versus what is being worked on and when it is targeted for completion.

Minimal developer interest, there appear to be ~10 contributors outside of core project team members. Usage is distributed geographically with a particular focus on P2P connections between North American and East Asian users.

The mechanisms to propose and obtain funding are robust and transparent. Given funds are periodically replenished from superblock rewards the project should be able to scale as usage demands.

Securability (4 out of 5)

The Blocknet network has ~300 – ~400 nodes securing it via staking at any given time. Node activity is widely dispersed across geographies with ~45% in Europe, ~35% in North America, and the remaining ~20% split across East Asia, Africa, and South America.

Votes and bounties are routinely held to identify and fix bugs using the self-funding proposal system and superblock rewards. Rewards are tiered with service nodes (masternodes) receiving 70% of the block reward and staking nodes receiving 30%.

The BLOCK token is easily stored securely in the Blocknet wallet. The wallet is easy to use and set up via a variety of desktop and mobile options auto-syncing for users in the background.

Decentralization (3.5 out of 5)

Minimal external contributors. Core team is driving the project forward.

Governance is already decentralized. Anyone can make a proposal and have the work funded via superblock rewards pending a successful vote amongst active stakers of the project. Nodes are being run and wallets used globally.

The project should be able to function normally without its creators given the decentralized governance model. Because of minimal external contributors the core team is vital to the project moving forward currently.

Ownership is relatively unconcentrated. ~10% is held by the project treasury. Holders 2 – 10 have approximately 25% ownership, this appears to be mostly with the project leads, and holders 11 – 20 have an additional 20%. Leaving 55% of tokens held outside the top 20 and the potential for more dispersed ownership given the high inflation rate.

Engagement (2 out of 5)

There appears to be minimal adoption of the protocol by developers. Extensions of functionality into new areas driven by core project team.

The project is commented on in Reddit. Activity is inconsistent due to low user base (<2000). The situation is similar in Discord. Where the channels are consistently monitored but the conversation can be limited due to the low number of active users.

Twitter sentiment is positive. Downtrend in google trends of particular concern given the projects recent hitting of milestones and related announcement activity that naturally followed

Risk Management (3.5 out of 5)

Project code is formally audited by third parties prior to release. Anti—fragility untested due to low transaction volumes. Funding risk elevated as rewards are held in native BLOCK token prior to disbursement to successful proposals.

Master node system reduces attack risk as a substantial number of tokens would need to be acquired on the open market before an attack could take place. Secondary staking operations serve as an additional deterrent as a would-be attacker would need to control over 71% of service node capacity to initiate their attack.

Regulatory risk below average, not clear they are decentralized enough to be fully in the clear. The pursuit of multiple avenues of development along with the set up of a 0x relayer with active users reduces their risk compared to pre-product peers with more centralized solutions.

Legal Information and Disclosures
This review expresses the views of MPower365 as of (3/16/2019) and such views are subject to change without notice. MPower365 has no duty or obligation to update the information contained herein. Further, MPower365 makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.

This review is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.

MPower365 believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

This review, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of MPower365

*Principals of MPower365 do not currently own a position in the BLOCK token and may initiate one in the future.

The following two tabs change content below.
Is a CFA® Charterholder and founder of Crypto Jungle. A site devoted to helping people integrate cryptoassets into their investment portfolios. The CFA designation is globally recognized and attests to a charterholder’s success in a rigorous and comprehensive study program in the field of investment management and research analysis.

Visit the site to subscribe to the newsletter and stay up to date on his latest research into cryptoasset investing.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Latest posts by Steve Miller (see all)

Leave a Reply

Your email address will not be published. Required fields are marked *