Good businesses can be found in the most unlikely places. When people think of good investment records, they think of brand names like Tesla, Apple and Amazon, but you would be surprised how many investors build careers in niche industries like insurance brokers, autoparts and pharmaceutical services. It's often easier to generate returns from good businesses that people aren't speaking about constantly.

We believe token markets offer this type of opportunity with Telegram bots and Banana Gun in particular. Banana Gun is one of the best businesses in the entire onchain economy. It benefits from price-insensitive customers, valuable orderflow, and meaningful economies of scale. The front-end market is one of the largest in the onchain economy. Its fundamentals are often misunderstood so Banana Gun trades at a surprisingly cheap valuation relative to its core business fundamentals.

This article covers the five most important and least understood properties of Banana Gun as a business. Banana Gun has (i) a valuable customer base, (ii) a moat built on economies of scale, (iii) latent pricing power due to the quality of its orderflow, (iv) a larger market opportunity than commonly understood and (v) wonderful fundamentals.

Banana Gun has the most valuable customers in the onchain economy

Banana Gun is a Telegram bot that allows you to trade tokens on EVM and SVM. Anybody who trades onchain understands the difficulty of submitting transactions on even the best onchain venues like Uniswap and Raydium. This makes sense because transacting directly with Uniswap is analogous to transacting directly through the New York Stock Exchange without a front end like Robinhood or Interactive Brokers. Banana Gun offers convenient trades directly from Telegram but it also offers features like sniping (buying a token launch in its initial block), copy trading, and anti-rug protections (which scans the mempool for liquidity rugs and sells ahead of them) among other features. These features are important to Banana Gun's core demographic of traders and require substantial infrastructure expertise and business expenditure, a topic we will come back to later in this piece.

Banana Gun's core customer demographic is speculative traders who are eager to take on large amounts of risk in the hopes of extraordinary returns. These are the most valuable customers in the onchain economy because they are active (read: high volume) and price inelastic (read: high revenue). These customers can turn over a complete wallet many times in a few weeks. They are price inelastic because they are buying volatile memecoins hoping for 100x returns. Paying ~75bps on volume doesn't really matter.

Imagine a memecoin trader and a liquid token fund if only to highlight the importance of customer profile. The memecoin trader has 100K under management but occasionally snipes and rotates into a new favorite position every week. The meme coin trader generates 2M of volume over 3 months and produces 20K in fees. The liquid token fund only trades after an Investment Committee approval and shops around for the best fees. The liquid fund generates 5M of volume over the same 3 months even though it has 30M under management. The fund negotiates and shops around its trades, and only generates 10K in fees.

Banana Gun is on track to generate $7.8B of volume and $60M of cash flow (YTD annualized) with 151K cumulative and ~5K average daily users. That's the value of good customers.

Banana Gun has a deep moat built on economies of scale

Banana Gun's customers are focused on features, customer experience, and trade execution.

Active traders don't switch between Telegram Bots — convenience is the whole point — so it really matters that you are in multiple markets and have all of the features they need. That's why being the largest Telegram Bot on EVM makes it easier to be the largest Telegram Bot on Solana. This is one of the many reasons why it is hard for an upstart to compete.

Active traders are also focused on a fairly large number of advanced features like sniping. The interesting thing about these features is that many of them lead to natural monopolies. Consider sniping, or the process of bidding to be top-of-block on a new token launch. Only one Telegram Bot can secure the top-of-block spot for its users and that will always be the Telegram Bot that pays block builders the most. This means the largest bot — or at least the bot with the most snipers — is most likely to win future auctions. This is exactly how we see the market play out in practice — Banana Gun wins 88% of snipes. The customers of an upstart competitor have little chance of winning a snipe from Banana Gun's customers.

These features also require fairly heavy infrastructure spend. You need good infrastructure to secure best execution as customers expect low latency and high uptime. You also need heavy machinery for valuable features like rug protection, which requires Banana Gun to scan mempools, determine if a token issuer is pulling liquidity, and place a transaction selling its customers tokens above the rug in the next block. We estimate that Banana Gun is spending $3.6M of infrastructure each year. It is unfeasible for an upstart with low market share to spend $3.6M on infrastructure even if they are able to build a comparable product.

All of this adds up to a decent moat for Banana Gun. We were early investors in the Telegram Bot space and have seen dozens of projects come to market with strong cap tables and diligent founders but none of them have taken market share from Banana Gun.

Banana Gun's valuable orderflow gives it latent pricing power

Banana Gun is one of the most important players in the orderflow landscape. It is on track to send $50M of priority fees and bribes to block builders in 2024 and having Banana Gun's orderflow is often the difference between winning and losing a block. Banana Gun is pivotal in ~40% of MEV Boost auctions according to Decentralization of Ethereum’s Builder Market (Yang 2024). Banana Gun's orderflow is the single largest driver of profitability for Titan, the second largest block builder on Ethereum, according to Decentralizing Monopolistic Power in DeFi (Markovich 2024).

Banana Gun does not charge for this orderflow but we believe that will change over time. This may be through orderflow auctions built directly into the Ethereum protocol or it may be through direct deals with block builders. It is too early to speculate but we believe a significant portion of this $50M will return to Banana Gun and its customers over time. Banana Gun is both a profitable business and a systemically important protocol in the Ethereum ecosystem.

Solana + Web Application = Large Market Opportunity

Banana Gun is in process of releasing its Solana instance. Solana is a much more profitable market for Telegram Bots and the competition is less mature. We estimate that the total opportunity on Solana is ~$280M of run-rate revenue (YTD annualized). Trojan — a sophisticated operator like Banana Gun — entered the Solana market earlier this year and is on track to earn over $100M in revenue in 2024. While it is hard to replicate the Trojan experience exactly, we do believe Banana Gun will be able to take share on Solana.

Banana Gun is also building its web application. The idea is to build a web application that looks like Binance to customers but operates completely onchain. It will take a few years to fully build out this product (as onchain financial primitives need to continue to improve) but Banana Gun's team is beginning by launching token trading through a web application with enhanced features.

This is a large market and should benefit from all of the customer and orderflow dynamics we have discussed so far. 40% of all volume goes through frontends in traditional markets and we would expect a comparable result onchain. Ultimately, the team at Banana Gun is focused on a unified mission of controlling as much high value orderflow as possible whether that be on EVM or SVM, on Telegram or a WebApp.

Fundamentals

Banana Gun's team is thoughtful about capital allocation. The business is earning $60M of run-rate revenues and directing 40% of revenues back to token holders as distributions. The token has been cheap for over a year and danced between a 30 - 40% distribution yield for token holders. The remaining 60% of revenues go back to Banana Gun to spend on growth initiatives and cover expenses. However, we believe the team will begin to return additional capital once they have built a sufficiently large balance.

We believe the team vesting schedule partially explains Banana Gun’s success. The team received 10% of Banana Gun's token supply at launch in 2023, half of which vests over five years and half of which vests over eleven years. That's the type of long-term alignment we like to see from our teams. The portion that unlocks over eleven years earns revenue (on the same terms as vested tokens) which gives the Banana Gun team a strong incentive to keep growing revenue and distributions to token holders. The team's vesting schedule is an important input when Banana Gun's market cap.

Our philosophy on market cap is that the analyst should tie circulating market cap to the model period. If a project has $100M circulating market cap and additional $900M of fully diluted market cap in a vault that no one can touch for ten years, then you don't need to consider the additional $900M. If a project has $100M of circulating market cap and an additional $900M of upcoming VC unlocks over the next 18 months, then you definitely need to consider the additional $900M. Most cases lie somewhere in between.

Banana Gun has a fully diluted market cap of $690M, but this figure includes ~64% of token issued to the treasury. This amount was issued early in Banana Gun's trajectory and was seen as a strategic reserve in case the business needed to bootstrap with incentives. This was before the business was earning material revenues. Since then, the team has been consistent in messaging that it will burn these tokens as they vest and has already permanently burned ~26% of these tokens. The team has an incentive to burn these tokens because any newly issued tokens reduce the amount of revenue going to the team and hurts price per token.

We can adjust Banana Gun's market cap from ~$690M to $250M because only 35% of tokens will ever see the light of day. That's a first approximation. We can then add a margin of safety to our estimate and assume that Banana Gun will find a productive use for ~30% of its remaining treasury. This would result in an adjusted market cap of $345M. Banana Gun is trading at ~5.75x P/S (=$345M / $60M) based on this adjusted market cap. These figures already include a material run-up in price since the project announced it would be listed on Binance.

We analysts live for the idea of finding strong moat businesses with good profitability in unlikely places. I am grateful to Banana Gun for the opportunity.