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:

1. Concentrated Supply and Scarcity Value in being a Comparatively Underowned L1

2. Sound Circulating Tokenomics

3. Clear Go-to-Market Strategy and Greenfield Growth Opportunities

4. Plenty of Greenfield Growth given Current KPIs

5. Tangible Crypto-Specific Catalysts

I. Concentrated Supply and Scarcity Value in being an Underowned L1

After a shakey start following an SEC run-in between 2018-2020, TON was relaunched and by June of 2020 all 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 increase 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).

Token Distribution by Giver Smart Contract Type

Large Miner Groups Split by Mining Duration

TON therefore has a lower float than advertised given that ~50% of the supply locked in both the Believers Fund (see below) and inactive miner wallets. Given the nature of the launch, nearly ~86% of mined coins are controlled or at least affiliated to the TON foundation.

Couple this with the fact that majority of attention as well as locked OTC coin investments were done by Asian participants suggesting that EU/US participants are offside - TON therefore makes for a great opportunistic long. (See figure below for cumulative futures returns)

The large run up over the last few months was fundamentally Asia driven

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.

Sound Tokenomics In a Sea of Low-Float, Overvalued New Launches

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.

The 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.

Locker Smart Contract on TON

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:

• MEXC Ventures making an ‘eight figure’ investment in TON - October 2023

• Animoca Brands invests in TON Network becoming the largest validator - November 2023

• Mirana Ventures backs TON coin with $8m - March 2024

• Pantera ~$250m - May 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.

Fee Burn Mechanism akin to EIP-1559 Live on TON

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.

Clear Go-to-Market Strategy and Greenfield Growth Opportunities

TON’s grand vision of building the Web3 SuperApp straight from the convenience of your own phone 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. TON has also garnered strong 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.

Goal of the Open League Incentive Programme is to Funnel and Maintain a Sticky On-chain TON User-base

Whilst traction thus far has been immense, there is considerably more potential for growth given that currently there are ~3.5m on-chain 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.

The result of TON Foundation’s current efforts is an increase in block-chain activity across all metrics including (see figures below):

• Transactions increased by 10x: Since March 2024 transactions have ranged between 2-4m tx/day up from 200k tx/day last year

• Number of on-chain activated wallets increased by 3.6x: From 600k addresses in January 2024 to 3.5m in end of April 2024.

• Daily Active Wallets (DAWs) increased to six figures: DAWs are now ~160k up from 30k earlier this year

• TON fees per day ranging between $50k-$250k: Half of the TON fee is burned

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 narrative trade.

Risks and Mitigants

• 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.

• 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

• 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..

• Supply unlocks with the Believers Fund beginning to unlock October 2025 albeit this vests over the course of three years.

• 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..

N.B. I wrote a full piece on TON originally mid-late April, and all numbers are correct at that time. I think TON is still pertinent two months on given it is my belief that it is a full cycle hold or at least until locked coins begin vesting (post October-2025). Hence I am presenting this summarised outlook as my application to BidClub. The full article can be found here:

https://mirror.xyz/0x0d2065e3Ed3E36919b2AD12FDA8E428Da91bb28D/EJvHq4OqZqhtuqbF0zhRNl5ZQRYFa6U9rdRI1bIQ6yA