The Open Network
DACM Special Situations Report
Summary
- The Open Network (TON) has recovered from early turbulence and is on the path to raise substantial capital whilst building a high-throughput blockchain;
- The TON token has key roles in the protocol, being both the primary gas token used for compute fees and the staking token for validators under the delegated-proof-of-stake model;
- TON has a total supply of 5bn tokens, however, it is noteworthy that the community has recently passed a proposal to freeze c.20% of the supply for 48 months — reducing the effective fully diluted value;
- At a high-level TON appears to trade closely to peer protocols when compared by active addresses and transactions, however, TON has potential to tap into Telegram’s c.920m users which would vastly enhance user metrics at only a fractional conversion rate;
- TON’s ecosystem of applications is still emerging, with Fragment (username marketplace) and @wallet_bot being the most popular to-date, but this looks to be accelerated by EVM adoption and an ecosystem fund;
- Key concerns are that The Open Network will be unable to cement a deeper integration with the Telegram application, their unique programming language may deter developers, validator disputes, and any re-emergent legal issues.
TON Background and Protocol Overview
The Open Network (TON) originated as a decentralized Layer 1 (L1) blockchain initially developed by the Telegram team in 2017. The primary objective of TON was to capitalize on Telegram’s chat app vast user base and enable value exchange through a community-driven economy. However, in 2020, the US Securities and Exchange Commission (SEC) classified the $1.7bn 2018 Initial Coin Offering (“ICO”), run by the Telegram team to fund TON, as a security, effectively stalling the project with the developers agreeing to return funds to investors and pay an $18.5m settlement.
Following this chapter various development teams vied for control of the project, but ultimately, the team led by Anatoliy Makosov forked the original L1 and gained control of the ton.org domain. Telegram CEO Pavel Durov openly supported this new, decentralised endeavor. The TON Foundation, now managed by a community of open-source developers, has made significant progress since its restructuring. In April 2022, TON raised $250m from major exchanges Kucoin and Huobi and another $90 million from other cryptocurrency investment entities to fund two separate ecosystem funds, this was alongside, the Foundation raising 527 million in TON, ~$750m, from 176 independent users as a donation with no incentives attached beyond advancing the ecosystem.
The Open Network blockchain is designed to optimize throughput by utilizing a continuous sharding mechanism, which helps eliminate bottlenecks and process transactions more efficiently. By reducing congestion and enhancing capacity, the protocol aims to achieve a throughput of 1 million transactions per second (tps). To accomplish this, validators must employ advanced hardware similar to that used on Solana and Aptos blockchains. TON’s consensus mechanism began as Proof-of-Work which achieved the TON token distribution in a decentralised fashion but is now a Delegated Proof-of-Stake (DPoS) system, enabling token holders to vote for validators responsible for confirming transactions. Currently, the network comprises 311 validators, each required to stake a minimum of 600,000 TON.
While TON’s high throughput capacity is an attractive feature, it presents significant challenges for developers due to the network’s incompatibility with Ethereum’s Virtual Machine (EVM). The incompatibility raises the complexity of building on the TON network, creating high entry barriers for developers. Consequently, the network is partially reliant on monetary incentives, usually in the form of the native token, to attract developers and offset the challenges of building on the TON network. However, the TON team is aware of this and actively working on an update to support the reading of EVM signatures, which is expected to be released this year. In addition, Telegram’s userbase adds to the alure of developing on a platform, with access to 920m users — far in excess of any existing crypto platform.
In light of the increasing demand for block space, The Open Network (TON) has been thoughtfully engineered to optimize throughput and transaction processing to serve a mass user base. Despite facing hurdles like EVM compatibility, TON has garnered substantial financial support and received backing from investors and the community, making it a potential viable competitor among decentralized blockchain networks.
TON Token Model
The native cryptocurrency of The Open Network is Toncoin (TON), which has two primary features:
- Gas token for smart contract compute and transaction fees: TON is used to cover these costs within the network.
- Staking token for validators: Validators on the TON network must stake TON tokens to earn fees generated by the network and participate in consensus and governance.
The TON token is heavily integrated with the success of the network. As a result, a healthy feedback loop exists between validators and users of the TON network, one in which transaction fees for services on Telegram are paid in TON, creating intrinsic value for the token and incentivizing validators to provide security to the network.
TON Token Supply Profile
In June 2020, almost all TON tokens (98.55% of the total supply) were made available for mining through a Proof-of-Work (PoW) consensus regime, allowing anyone to participate to achieve a decentralised distribution of tokens in exchange for “work” provided to the network. Mining lasted for two years, with approximately 200,000 TON being distributed daily, and now all 5.0bn tokens have been mined. Since then, the network has transitioned to a Delegated Proof-of-Stake (DPoS) system with a permissionless validator set.
TON’s circulating supply is estimated to be 1.2bn, meaning that many tokens belong to the foundation and can be used to fund further developments. Furthermore, in December 2022, TON users voted to freeze a large portion of TON tokens, equating to c. 20% of total supply, which belonged to wallets of early miners of the network that have been inactive for 48 months. These wallets collectively hold 1,081,425,847 TON coins and the proposal was passed in February of this year.
While the precise distribution of TON tokens is not entirely known, it is possible to piece together an estimate based on available information. Based on fragmented data sources, the estimated TON token distribution is as follows:
Total supply will increase with time as the validation process is expected to generate an annual inflation of 0.6%. However, it’s worth noting that this figure may be partially mitigated by the imposition of penalties on validators who engage in misconduct, as well as a forthcoming proposal to introduce a mechanism designed to burn a portion of network commission fees.
Peer Analysis
The Open Network (TON) is currently trading at a mid-range valuation when compared to other general-purpose smart contracting protocol layer assets. Taking into consideration the growth trend of crypto usage and the potential TAM of +100M MAU, The Open Network is uniquely poised to surpass its competitors, including even the most advanced current user-facing tools in the space such as MetaMask.
The total number of accounts and transactions on The Open Network (TON) now sit at roughly 2.88 million and 173 million, respectively. Comparison to peers (over the last 30 days) can be seen below:
TON Fundamental Drivers and Catalysts
The fundamental drivers for the network, like most Layer-1 protocols, are user and transaction growth. Unlike most existing protocols, user growth/access to users is less of an issue for TON due to the universe of users accessible via exclusive integration with Telegram’s messaging application. Generating transactions will require useful, low friction activities.
The Current Use Cases of TON Blockchain include:
- Fragment: Telegram has created a TON-based marketplace called Fragment, which allows users to buy and sell name services (usernames) and virtual phone numbers. These can be utilized for signing up on Telegram without needing SIM cards. Some of these usernames and virtual phone numbers have sold for as high as USD 1.7 million.
- @wallet bot: This Telegram bot enables users to send money (TON, BTC, USDT, TUSD) to one another through the bot wallet within the Telegram platform. Users can also use the bot to exchange these tokens.
- Other ecosystem DApps: The TON blockchain hosts various decentralized applications (DApps), including decentralized exchanges (DEXs), staking platforms, social and game-fi applications, NFT marketplaces, launchpads, and bridges.
Despite multiple attempts to grow the ecosystem, Fragment and @wallet are the only currently attractive use cases for the blockchain; while the rest of the ecosystem remains relatively underdeveloped However, this may change rapidly if The Open Network are able to secure more meaningful integration with Telegram and becoming a more prominent part of the user-experience.
Near term transaction and user growth catalysts:
- Ecosystem development funding: As mentioned previously, in April 2022, TON raised $340 million to form two separate ecosystem funds, alongside 527 million TON in donations (~$750m) from users, to fund further ecosystem development.
- User base projections: With a conservative crossover rate between cryptocurrency and Telegram users, we project that TON could have a user base of 70 million MAUs by 2027.
- EVM adoption: To best attract tier-1 developers, TON are adding support for the EVM which should assist in gaining application-level traction from any ecosystem fund spending.
The Open Network has several present and future use cases that enable it to generate value from network growth. The perfect scenario for TON is to use this user growth to attract top tier developers, reflexively catalysing network activity, causing increased demand for the token. With over 920 million monthly active users, some of whom are already familiar with cryptocurrency due to Telegram’s reputation as a protocol news and communication hub, TON is well-positioned to onboard these users to a familiar platform and product offering.
Key Risks
- The Open Network (TON) is unable to secure deep and/or exclusive integrations with Telegram, resulting in the ecosystem having to explore creative ways to onboard users within the existing format.
- TON’s unique programming language currently lacks compatibility with other blockchains, which could pose challenges in attracting talent and impede the development process. Even with future updates to address this issue, the learning curve and potential delays in upgrades may further complicate matters.
- The Delegated Proof of Stake (DPoS) mechanism in TON promotes decentralized governance by distributing decision-making authority among the validator set, fostering a democratic process. However, it also introduces the risk of leadership fragmentation, which can pose challenges in making critical decisions regarding the future direction of the protocol.
- TON’s prospects could still be hampered by potential legal issues that may yet emerge from the continued collaboration between Telegram and The Open Network. The reemergence of such issues could halt future and current collaborations between the protocol and business, posing a risk to its development and success.
Conclusion
The Open Network, despite being originally developed back in 2017, is only now coming aggressively to market and is one of the few protocols that has a legitimate (albeit far from complete) answer to the question “where do the next one hundred million crypto users come from?”. Relying on Telegram for distribution, TON is able to continue focusing on building a cohesive blockchain ecosystem. It is DACM’s belief that if the TON team can execute on their vision, alongside receiving appropriate collaboration from Telegram, then The Open Network has potential to become the backbone of the crypto “super app”.
DACM’s funds and funds advised by DACM are investors in The Open Network. This DACM Special Situations Snapshot is for general information purposes only and is not intended to be investment advice in any way.
