Relative to some of the OGs lurking out there I’ve been involved in DeFi/crypto for a relatively brief amount of time, perhaps nearing 2 years. In that period, not only do I feel as though I aged 50 years thanks to the volatility of DeFi and the crypto markets more broadly, but I think I’ve seen it all. The degeneracy, the gambling, the leverage, the beautiful feeling of edge and the cope and seethe by counterparties on the way up, but also the crushing downswings, the liquidations, the acute schadenfreude and soulless rugs/exploits on the way down. Thats why I believe I am well-placed to put this traditional-financesque memo out on a crypto-currency which might speak to some of the fund managers out there but also the retail degens that are just looking to make it big. I hope to have the time to continue making a few more of these pieces as well as separate exploratory numerical analyses, as long as 1) crypto-alt markets remain interesting and more importantly 2) if I notice that (anglophone) Twitter is proportionally under-representing a specific project/play, as it has done with TON and its eco-system.
This specific piece will focus on TON - The Open Network and is essentially a distillation of disparate sources that cover the blockchain project from a variety of angles including the history of the project, current supply-demand dynamics, its idiosyncratic tokenomics and more with a healthy dose of my own commentary. The memo was written on the 29th April, a week before the headline news of Pantera purchasing locked TON at an undetermined price, marking it as their largest investment. None of the analysis changes as a result of this development, although it does mark the investment somewhat less ‘underowned’.
Executive Summary
TON is a Proof-of-Stake blockchain indirectly backed by Telegram Inc through the TON Foundation. It boasts horizontal scaling through a schema called infinite dynamic sharding and as a result managed in a test environment to garner over 100k tps (vs Solana 60k). We believe the native token for this chain is currently undervalued given its:
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Concentrated Supply and Scarcity Value in being a Comparatively Underowned L1
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Clear Go-to-Market Strategy and Stellar Distribution Channels
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Plenty of Greenfield Growth given Current KPIs
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Tangible Crypto-Specific Catalysts
Overview of TON
History of the Chain
TON, previously known as the Telegram Open Network, has its roots dating back to 2018 when Pavel and Nikolai Durov, the Telegram founding brothers, began exploring blockchain solutions for Telegram Messenger. During that year, they raised a total of $1.7bn in the ICO of TON tokens (previously known as Grams), followed shortly by the release of the TON whitepaper and the first TON testnet in Spring of 2019. Following a series of regulatory challenges, culminating in the SEC suing Telegram for conducting an unregistered securities offering in October 2019, Telegram agrees to return funds raised from its investors and pays a $18.5m settlement fine by May of 2020.
Whilst the Telegram team ostensibly ceased development on the chain, a new group of developers under the name of NewTON (which latterly rebranded into TON Foundation) coalesced around the project and continued its development in earnest focussing on remaining faithful to the design principles set forth by the whitepaper, namely its ‘blockchain of blockchains’ structure. Simultaneously, by June of 2020 all of the available TON coins became available for mining via ‘Giver’ smart contracts using a Proof of Work (PoW) system, with CPU mining continuing from 2020 to 2022. We note that whilst this distribution method was meant to promote decentralisation and increased fairness, research clearly indicates that a vast portion of the supply was mined by insiders or TON-foundation related addresses, with only 248 strongly connected addresses mining 85% of the coins in a space of 2 months (Jul-Aug 2020).
The TON Foundation, played a significant role in influencing the price of TON token thus far and is pivotal to the success of the project. Since its formation it has received its funding from grants derived from these initial mining efforts, but also via recent locked OTC sales to professional investors. Enhancing its strategic direction, the TON Foundation announced a partnership with Telegram in September 2023, led by a core team under the guidance of Anatoliy Makosov. This collaboration marks a pivotal step in TON's ongoing development and market positioning in the broader crypto space and strengthens the bull case for TON, providing a coherent and central driving force that is effectively influencing and boosting the token price. .
Current Ecosystem
TON currently comprises of four major components. These are: TON Blockchain, TON Payments, TON Proxy and TON Storage (decentralised Storage). TON Blockchain is the general purpose blockchain containing a standard execution layer that allows for permissionless transactions. TON Payments is a minimal-fee platform micropayments channel, allowing instant and fast payments between peers. It can currently be accessed via the @wallet bot on Telegram benefitting from in-app convenience. TON Storage allows for storing and distributing files on TON akin to a decentralised Dropbox. Finally, TON Proxy ensures censorship resistance by allowing users to run .ton sites independent of fixed IPs / centralised domains. All four components have a rich roadmap ensuring cross-compatibility and connectivity well into the future.
The chain has benefitted from a cambrian explosion in activity in recent weeks as a result of a concerted and coordinated effort by TON foundation, Telegram and partners to push the on-chain ecosystem. Most notably, we have seen Tether in April announce direction integration within TON allowing for mint-redeems natively which allows for deeper DEX liquidity and on-boarding of further capital. The TON Foundation is also running a variety of liquidity mining incentives including 11m TON (~$50m) earmarked for DeFi LPs. In addition to the DeFi specific incentives, the foundation is running broader on-chain incentive programme totalling over 30m TON. The result of which is an explosive rise in TON-denominated TVL, with 30m in Apr-2024, a 6x increase from the start of the year (see figure below). We do note that DeFi TVL is in general quite mercenary, and likely some of capital will churn once rewards run out in June 2024.
Given that DeFi liquidity mining is ultimately a solved game, and have seen multiple iterations of it in past alt-L1s we believe that the real value in these incentives lie in other, more orthogonal and niche ways in which Telegram can incentivise app-users to interact with TON. The current incentive scheme, awards projects for attracting users via viral gaming mechanics such as one popularised by NotCoin (a simple yet addictive clicker app with over 3.5m Daily Active Users). These incentives are followed by rewards for completing in-app quests such as minting NFTs and DNS names and lastly the aforementioned liquidity mining for the largest DEXes on TON. The ultimate goal here is to utilise the distribution channel readily available to TON to slowly and gradually introduce and familiarise a captive Telegram audience to the on-chain ‘workflow’.
The result of this is dedicated effort is an increase in block-chain activity across all metrics including (see figures below):
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Transactions increased by 10x: Since March 2024 transactions have ranged between 2-4m tx/day up from 200k tx/day last year
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Number of on-chain activated wallets increased by 3.6x: From 600k addresses in January 2024 to 3.5m in end of April 2024.
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Daily Active Wallets (DAWs) increased to six figures: DAWs are now ~160k up from 30k earlier this year
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TON fees per day ranging between $50k-$250k: Half of the TON fee is burned
Whilst these heightened numbers in and of themselves are likely a symptom of in-organic and non-sticky on-chain participation, the velocity and the rapid growth of the ecosystem for a historically small incentive reward programme (compared to Avax’s $180m 2021 programme e.g.) is notable, whether this level of activity and TVL is sustained post the incentives period should be monitored.
Tokenomics Overview
Fundamental to the thesis are the sound tokenomics featured. Whilst the valuation is relatively high at FDV $24bn and circulating market cap of $16bn, the large supply currently tightly held by TON foundation and affiliates, the low inflation rate for validating the network and the methodical OTC sales used to distribute supply to investors are positives.
Current total supply is 5,105,734,318 (5bn issued at launch) with an initial split of 85% tokens to users and 5% to validators. The chain inflates at a rate of 0.6% annually, with the rewards being paid to validators to maintain consensus. Digging a little deeper, we note that ~1.3bn coins are in the Locker Smart Contract (named the Believers Fund), locking over >20% of TON supply until 12 Oct 2025, vesting every month for another 3 years post cliff period. The total comprises ~1 billion TON locked by users and 284 million TON donated for rewards.
In addition to the locker contract, the TON foundation also deactivated ~1.1bn TON held by large early miner wallets that have not had a single outgoing transaction for 48 months. The result of both of these initiatives is the removal of ~47% (2.4bn coins) TON’s supply from circulation for the foreseeable future. Effective circulating market cap therefore is ~$8.5bn.
On the other hand, it is much harder to place a dollar value on the amount of locked OTC coins that have been sold however, based on public announcements there seems to have been at least $30m worth of tokens at least that have been sold to venture and professional investors:
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MEXC Ventures making an ‘eight figure’ investment in TON - October 2023
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Animoca Brands invests in TON Network becoming the largest validator - November 2023
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Mirana Ventures backs TON coin with $8m - March 2024
Given that TON remains in a nascent stage in terms of adoption, the coin has a somewhat weak value accrual narrative around it. However, this should pick up as on-chain activity continues to grow through the burn mechanism in which 50% of all TON fees are burned.
More importantly, Telegram is actively developing utility features for the TON token, which serve as "token sinks" to enhance its value. For instance, Telegram recently announced that it will exclusively use the TON token for ad payments. In this setup, advertisers fund their marketing campaigns using TON, with revenues being split equally between Telegram and content creators. Additionally, Telegram has begun to accept TON for payments related to Telegram Premium, which boasts 5 million subscribers, through the Fragment Store,. These initiatives demonstrate a deliberate effort by the Telegram team to ensure that TON remains a token with practical utility and clear mechanisms for value accrual directly linked to Telegram’s services.
Investment Rationale
Concentrated Supply and an Underowned L1
Moderately low inflation at 0.6%/yr (lower than BTC) with comparatively low float for the medium term given ~50% of the supply locked in both the Believers Fund and inactive miner wallets, combined with the fact that ~86% of mined coins are controlled or at least affiliated to the TON foundation.
Further, majority of attention as well as locked OTC coin investments were done by Asian participants suggesting that EU/US participants are offside (See figure below for cumulative futures returns)
From a technical perspective, the coin is now trading between 2-3x from the start of the year and the 2023 lows. Compared to gains in similar comps such as SOL, AVAX and NEAR, the run up has been fairly muted which allows for much more defined downside risk.
Clear Go-to-Market Strategy and Long Term Vision
Grand vision of building the Web3 SuperApp straight from the convenience of your own phone that can potentially compete with WeChat. This marks a fundamental shift away from the status quo of the slew of crypto blockchains and DApps serving speculators and the tech savvy, which by their very nature are a much smaller TAM and as a result should garner lower valuations. Soft backing by Tether with their integration announcement and of course de facto backed by Telegram with a robust roadmap across TON Blockchain, TON Proxy, TON Payments and TON Storage
Greenfield Growth Opportunities
There is considerably more potential for growth given that currently there are ~3.5m onchain activated wallets compared to Telegram boasting 800 million monthly active users (MAUs), with projections to reach 1.5 billion in the next five years. This represents a substantial yet natural upper bound total addressable market (TAM). TON Foundation is strategically aiming to onboard 30% of Telegram’s MAUs within the next 3-5 years. If Telegram manages to convert even 0.2% of its 200m daily active users), it would surpass Ethereum's current DAU count of approximately 400,000. There’s clearly a huge opportunity for user base expansion.
Crypto-Specific Positive Catalysts
TON has been doing daily $170m+ of volume over the past few months, a spot Binance listing could derisk the investment significantly and provides some upside as well as more downside protection given increased liquidity. Also as ETH continues on its sharding roadmap expect TON to gain further mindshare, given its dynamic sharding architecture, although this is more of a tenuous comparison.
Risks and Mitigants
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Questions surrounding whether the project can sustain its current valuation. It’s an ambitious project that seems to be almost fully valued. At these levels, the chain and native gas token should act as money rather than as a vehicle for tech speculation. Monetary premiums are much harder to obtain than tech premia which are inherently more fleeting.
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Details around TON’s OTC deals would need to be explored further as funds that could potentially be marginal price setters opt into buying discounted OTC tokens instead, reducing open market buy pressure
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Developer engagement is lower than other chains given the somewhat esoteric programming language (FunC) with 39 FT developers, and around 120 monthly active Devs. By comparison ETH has 2,4k FT devs and 7.8k monthly active developers..
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Supply unlocks with the Believers Fund beginning to unlock October 2025 albeit this vests over the course of three years.
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Regulatory risk remains a factor. However, we believe much of that has been derisked given the prior run in with the SEC. Telegram are clearly looking to integrate the token into the platform, there is a reasonable expectation that Telegram has conducted thorough legal due diligence to ensure that their current and future operations with TON abide by necessary legal rules..
Summary
We believe that the vast majority of TON’s growth will not come from already captive on-chain users of EVM and Rust based blockchains. TON is paving a more orthogonal future, carving out its own niche of consumers that value ultra fast, extremely convenient decentralised solutions which prioritise freedom of capital movement and a censorship resistant neo blockchain. In the long-run, an upper bound comparable for TON is BNB at $90bn which is a reasonable and realistic target given the outlined strengths of the investment, providing clear upside and room for BTC outperformance.
Sources
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https://dedust.io/pools/EQA-X_yo3fzzbDbJ_0bzFWKqtRuZFIRa1sJsveZJ1YpViO3r
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How to shard your TON smart contract and why - studying the anatomy of TON's Jettons