Will Telegram ICO (TON) become the world’s first mainstream cryptocurrency?
According to the leaked Whitepaper of Telegram Open Network (TON), the answer is “Yes”.
“Integrated into Telegram applications, the TON-Telegram wallet will instantly become the world’s most adopted cryptocurrency wallet”
With 200 million monthly active users and $1.7 billion raised through the ongoing ICO the chances are good, or are they?
In this review we will have a look what has happened so far around the Telegram Open Network (TON) Coin Offering, what we already know and what remains uncertain. Before we have a look at the Team, Product, Technology and Investor Information, according to the Ultimate Guide how to review an ICO, let’s recap what happened so far:
- December 2017: it was first leaked that Telegram is working on their own blockchain platform Telegram Open Network (TON) including a native cryptocurrency called Gram.
- February 2018: Pavel Durov formed the TON Issuer Inc. and raised $850 million from 81 investors.
- April 2018: it has been reported, that Telegram raised another $850 million from 94 investors.
Until today, the only official information available about Telegram’s ICO are these two documents filed with the SEC. You can have a look on it here (first private sale) and here (second private sale)
Although these are the only official information out there, three other sources of with information were leaked, fueling speculations and discussion about Telegram’s plan in the crypto-world and beyond.
There is a 1:50 minutes long video out there, supposedly the promo video of Telegram.
A 23 pages long Whitepaper, you can have a look at here and a 132 pages Technical Whitepaper, here.
This review will be a bit different to our others, since it is based on leaked information. However, after reading you will have a good overview about Telegram’s plans and my opinion on it.
🤼 1. Team
1.1 Track Record
The brothers Nikolai und Pavel Durov are the heads behind Telegram Open Network (TON). Pavel’s entrepreneurial career started in 2006, when he launched VK — “Russia’s Facebook”.
In April 2014, due to a fall-out with another major shareholder and a conflict with the Putin-led government, Pavel was forced to leave the company and resigned as the CEO. A main issue of this conflict was Pavels public refusal to hand over data of Ukrainian protesters to Russia’s security agencies. This conflict is still ongoing as Russia just recently banned Telegram as they refused again to give them access to their encryption keys.
Mid 2014, Pavel left Russia with $300 million and 2,000 Bitcoins and bought the citizenship of St. Kitts and Nevis. At that time, the social network had 100 million active users, mainly from Russia and Ukraine. Ever since his ouster, he focussed on the launch of his next company — Telegram. Using his payout from VK, he completely self-funded Telegram until the latest cash injection of $1,7 billions from the already mentioned private sale.
Pavels brother, Nikolai Durov is the technical brain behind Telegram and TON. He was the lead developer at VK and since 2013 the CTO at Telegram for which he developed the MTProto protocol. Nikolai is regarded as a mathematical and programming genius. He won several gold and silver medals in the International Mathematical Olympiad and International Olympiad in Informatics.
In the leaked Whitepaper, which Nikolai is believed to be the author of, Telegram states that it
“has a world-class team of 15 developers that were selected from thousands of contenders over the last ten years. To become part of the team, each of its current members had either to win in the world’s top programming contests or to take the first place in one of the nationwide multi-level coding competitions held by the founder of Telegram.”
Furthermore, the Whitepaper claims that the core team members all worked before at VK, and that all networking, cryptographic, and database engine software running on Telegram servers is custom-built by these developers.
Outside Telegram’s own perception on their skills and abilities, there are a whole range of critical voices among well known experts regarding the team.
Nick Tomaino, Founder of 1confirmation who manages Peter Thiel’s and Marc Andreessen’s backed cryptocurrency fund said he will not invest into TON as he is skeptical that the team will be able to deliver on its promises.
“The teams that will win are teams with deep historical context who have been tinkering with consensus mechanisms and scalability for several years. It’s more like science than entrepreneurship,…In my mind, [Telegram doesn’t] have the talent to do that.”
1.2 Advisors
In the Whitepaper there are no advisors mentioned.
1.3 Investors
In the two private funding rounds Telegram raised a total of $1.7 billion from 175 accredited investors, which makes by far the biggest ICO up to now.
And the fundraising might not stop there.Telegram claims in the 2nd SEC filing, that “the issuers may pursue one or more subsequent offerings”. Thus, it will be interesting to see how much more money Telegram can raise from investors before launching a public sale (if there will be any at all).
Although Telegram was able to raise this huge amount of money, it is noteworthy that the money came only from investors new to the crypto space. VC’s experienced in crypto all passed on Telegram.
The ones participating include Silicon Valley giants such as Kleiner Perkins Caufield & Byers, Benchmark Capital, Sequoia Capital, and the investor Yuri Milner, according to the Financial Times
Early investors in the cryptocurrency space, such as Union Square Ventures, Andreessen Horowitz, Greylock and Polychain Capital are not investing, as the New York Times reported.
Given reasons from those not investing are mainly related to the huge scope of the project, tough competition and missing experience of the team in regards to blockchain technology.
For the proponents, Telegram doesn’t face significant new technical challenges and is instead innovating by leveraging its user base of 200 million, building a consumer product to bring cryptocurrencies to the masses. These investors see the potential for Telegram to facilitate widespread adoption and own the decentralized application ecosystem. The project is bold, but the potential rewards if the it succeeds are immense.
✅ Expertise in encrypted, distributed data storage
✅ 10-year experience in building applications at scale
✅ Experienced dealing with difficult situations
✅ Strong support from established VC’s
❌ Experienced crypto VC’s are sceptical regarding the team and overall feasibility
🏆 Team Score: 32/40
🚀 2. Product
Telegram Open Network wants to do it all.
It not just offers one product solving one problem, but tackles most of the biggest challenges many blockchain projects are working on since years.
TON’s 4 main products include:
TON Storage — the Decentralized Dropbox
TON Storage is a distributed file-storage technology, accessible through the TON P2P Network and available for storing arbitrary files, with torrent-like access technology and smart contracts used to enforce availability.
TON Services — the Decentralized App Store
Telegram will offer a searchable registry of decentralized services from its applications, providing a list of the most popular apps, as well as recommendations based on the user’s history of choices. These steps can make Telegram a gateway to blockchain-based projects for the masses — similar to how Google Play and the App Store currently work for centralized applications.
TON Payments — Micropayment Currency
TON wants to solve all problems other cryptocurrencies such as Bitcoin and Ethereum are still facing. Namely, speed and scalability that allows for processing millions of transactions per second and accommodating hundreds of millions of active users and millions of applications. And an intuitive user interfaces that enable an average user to easily buy, store, and transfer value, as well as use decentralized apps in a natural way.
TON DNS — Decentralized Web
TON DNS is a service for assigning human-readable names to accounts, smart contracts, services, and network nodes. With TON DNS, accessing decentralized services can be similar to viewing a website on the World Wide Web.
Moreover, Telegram states that “all these services can be integrated with third-party messaging and social networking applications, uniting the centralized and the decentralized worlds.”
Looking at Telegrams ambitious goals, it will be exciting to see if the intended scope of the project will make TON to one of the major players in the crypto world, setting up a new decentralized infrastructure and turning Telegram from a messaging app into a decentralized platform hosting a whole new wave of decentralized services. Or if they overstretched it.
2.1 Value Proposition and USP
One of TONs biggest advantages over competitors in the blockchain sphere is its existing product, namely Telegram. With Telegram and their previous company VK, the Durov brothers achieved mass market adoption.
The Telegram Team claims that they can “rely on its 10-year experience in building user-friendly interfaces for tens of millions to create light wallets, exchanges, and identification services that will allow users to get on board with cryptocurrencies in an intuitive way.”
If they manage for their already existing 200 million users to “easily buy, store, and transfer value, as well as use decentralized apps in a natural way”, that will be their number one USP.
But in order to solve this problem, TON needs to overcome the same challenges that big players like Bitcoin and Ethereum are trying to fix for years — insufficient speeds, high transaction costs, price volatility and therefore the demand for crypto-assets mainly coming from investors, not consumers.
2.2 Competition and Market
Since Telegram wants it all, the range of competitors obviously is huge and widespread.
In each area Telegram wants to tackle, there are already big players in the field, in and outside of the crypto world.
TON Storage
With cloud storages run by Apple, Dropbox and Amazon this market is highly competitive.
Competitors running decentralized services are not less active. Popular file storage services such as Storj, Sia and Filecoin are already in place with Filecoin conducting the largest ICO so far — raising $257 million.
TON Services
Functionality and adoption of decentralized apps are still in their infancy. Ethereum as the biggest player out there in this field hosts more than 1.200 DApps running on the their blockchain (according to State of the ÐApps).
Next to Ethereum other platforms like NEO, Lisk, EOS and Cardano are keeping strong competition alive.
TON Payments — Micropayment Currency
No cryptocurrency went mainstream yet, and centralized solutions like Visa/Mastercard continue to dominate the market.
In the blockchain space TON faces enormous competition of various coins, all striving to become the world’s most adopted currency and overcoming the still existing hurdles to outcompete centralized services.
On top of this, Telegram also faces strong competition from their own ranks. Messaging platform and rival Kik wants to implement its own cryptocurrency and decentralized ecosystem of digital services for daily life. Kik has 300 million users and raised $100 million in their ICO conducted in September 2017.
Whoever will solve the puzzle of being decentralized, secure, scalable and user friendly in the same time, will make the race in these areas.
2.3 Traction & Community
This is TON’s biggest asset.
With 200 million users, Telegram has a perfect starting position for testing its new decentralized services in an already existing ecosystem. Obviously, this increases its chances to get adoption by a critical mass. Telegram’s users will not have to go through a complicated process opening a new wallet and learning how to buy, store, and send their coins. Instead, the TON-Telegram wallet will instantly become their wallet within an environment users already know and feel comfortable with.
Another big advantage of Telegram is its huge adaption from the global cryptocurrency community. Telegram is already the most used messaging app with 84 percent of blockchain-based projects having an active Telegram community — more than all other chat applications combined, as Telegram states in their Whitepaper.
2.4 Bullshit Bingo
No Bullshit Bingo possible since there are no official statements at all.
✅ 200 million existing users
✅ Proven ability to build user-friendly software for tens of millions
✅ Great adoption by the crypto-community
❌ Highly competitive market
❌ Scope of the project is too big
🏆 Product Score: 12/20
⚙️ 3. Technology
3.1 Technical Solution
In the (short) Whitepaper of TON, an overview is given of which technology is applied:
TON Blockchain
At the core of the platform is the TON Blockchain — a scalable and flexible blockchain architecture that consists of a master chain and up to 292 accompanying blockchains. Below are some notable design choices that allow the TON Blockchain to process millions of transactions per second.
Infinite Sharding Paradigm
To achieve scalability, TON has built-in support for sharding: TON blockchains can automatically split and merge to accommodate changes in load. This means that new blocks are always generated quickly and the absence of long queues helps keep transaction costs low, even if some of the services using the platform become massively popular.
Instant Hypercube Routing
TON blockchains use smart routing mechanisms to ensure that transactions between any two blockchains will always be processed swiftly, regardless of the size of the system. The time needed to pass information between TON blockchains grows logarithmically with their number, so scaling to even millions of chains will allow them all to communicate at top speed.
Proof-of-Stake Approach
TON uses a Proof-of-Stake approach in which processing nodes («validators») deposit stakes to guarantee their dependability and reach consensus through a variant of the Byzantine Fault Tolerant protocol. This allows TON to focus the computing power of its nodes on handling transactions and smart contracts, further increasing speed and efficiency.
2-D Distributed Ledgers
TON can «grow» new valid blocks on top of any blocks that were proven to be incorrect to avoid unnecessary forks. This self-healing mechanism saves resources and guarantees that valid transactions will not be discarded due to unrelated errors.
The reactions to Telegrams claims in regards to the outline above and the more detailed Technical Whitepaper were mixed.
Many cryptography and blockchain experts are sceptical about the feasibility of Telegram’s proposal. Critics state that it is short on technical details and missing explanations related to its implementation (e.g. no giving any description how they will be able to process millions of transactions per second).
Other feedback points out that the outlined technologies in the Whitepaper aren’t currently deployed by other blockchain projects, so they will require some time for development and it is not clear yet if they are working.
Coming from the opposite angle, other critical minds claim the lack of new technologies in the Whitepaper. The Verge interviewed Matthew Green, cryptographer and professor at Johns Hopkins University who said, that
[… the white paper reads like someone went out on the internet and harvested the most ambitious ideas from a dozen projects and said ‘let’s do all of those but better!’ It feels unachievable, at least at the scale they’re aiming for now.”]
The fact that Telegram will control a majority of its currency (52%) and therefore being a central authority until they change the distribution of their Grams is another point of criticism.
Emin Gün Sirer, a professor at Cornell, expert on distributed systems said in an email to The Verge:
“Yet Telegram ICO’s appeal stems from its reach to 200 million users, and its central vision over the future of the platform. If the owner folded, there would be little value to what remains. So their adoption of a blockchain, in fact, a whole family of blockchains, seems spurious.”
Last but not least Telegram’s lack of openness is seen as a problem as well. Charles Noyes from Pantera Capital, which describes itself as the first US Bitcoin investment firm, declined to participate in the Telegram ICO, citing reservations about the project’s lack of transparency:
“When you operate the way they do, which is closed, with secrecy, not subjecting yourself to peer review, you basically open yourself up to the possibility that there is a trivial bug in it that destroys the network.”
Reviewing the feedback Telegram received, it is apparent that some of the criticism is contradictory itself (e.g. blaming Telegram for not providing innovative approaches vs. blaming them for using existing, but not yet tested concepts). Both will be hardly possible.
We have to be patient to get a better idea if the technological scope of Telegram’s vision is feasible or not. Not just with TON, but for all blockchain projects out there it is not clear yet which set of technology will serve the crypto world best. Add to that the fact that the Durov brothers didn’t bother to respond to any of the received feedback yet.
✅ 132 pages long Technical Whitepaper
✅ Promising conjunction of several technological approaches (e.g. sharding, proof of stake etc.)
❌ Usage of not yet successfully tested and implemented technologies
❌ Lack of transparency
❌ Centralized control from Telegram (at the start)
🏆 Technology Score: 8/20
💰️ 4. Investor Information
4.1 Token Sale Information
Yet, It is not clear if Telegram will offer any of its 5 billion Grams to the public during their ICO. Looking at the successful private sale so far it would be no wonder if Telegram sticks to this proven approach. Raising money from the public would be much more work as Telegram would have to go through a know-your-customer and anti-money laundering verification process with every investor.
One point of criticism regarding the Token Sale is focussed on the huge discounts which Telegram apparently granted to early investors. Reports are circulating that some discounts exceed 70 percent of the final token price which already is driving early investors to sell their tokens to cash in.
4.2 Usage of Funds
Telegram states the following in the Whitepaper:
Funds raised during the Telegram ICO will be used for the development of Telegram and TON and for the ongoing expenses required to support the growth of the ecosystem. More than 80 percent of collected funds will be spent on equipment, bandwidth, colocation, and user verification costs. The rest will be allocated for wages, offices, and legal and consulting services.
4.3 Token Distribution
The TON Foundation wants to keep more than half of the tokens in their possession. In the Whitepaper it says, that “… at least 52 percent of the entire supply will be retained by the TON Reserve to protect the nascent cryptocurrency from speculative trading and to maintain flexibility at the early stages of the evolution of the system”.
Telegram will reserve 4 percent for the developer team and the remaining 44 percent can be sold to investors.
In regards to the Token Distribution, Telegram received most criticism for keeping the control of the majority of its currency — acting as a “benevolent dictator”, as some voices are claiming. This obviously contradicts with the idea of a decentralized system, but also gives Telegram the freedom to solve early stage problem way more easy.
4.4 Vesting
Telegram states in the Whitepaper, that 4 percent of the supply (200 million Grams) will be reserved for the development team with a 4-year vesting period.
With a current team of 15 developers and final public sale price targeted at $0.97 (according to the prospectus), this would make up nearly $13 million for each member over the whole vesting period.
Since Telegram offers enormous discounts to early investors, there will be also a lock-up period in place for those who enjoyed the largest price deductions. According to an article in Techcrunch, this could range from three to 18 months dependent on the discount.
✅ Investors and team are vested for a long period
✅ Keeping 52% gives Telegram control to improve the product as they please
❌ Keeping 52% means no decentralization (at the start)
❌ Very high compensation for the Telegram team
❌ Huge discounts offered for big investors, driving early speculations
🏆 Investor Score: 8/20
⚗️ Conclusion
Telegram proposed an impressive plan how to establish the first mass-market cryptocurrency and build a whole decentralized ecosystem around their messaging app.
The vision is big and the potential for a cryptocurrency inside an established app used by more than 200 millions is definitely enormous. Having a working product in place isn’t something many blockchain projects can claim for themselves and gives Telegram huge leverage.
The team of Telegram is well experienced, working together since more than 10 years and knows how to deal with difficult situations.
However, for the huge scope of the project the existing team of 15 people seems pretty small and competitors in the crypto space have much more experience working with blockchain technologies, consensus mechanisms and scalability. Furthermore, Telegram is entering a highly competitive market with strong players in the field.
When is comes to the technological feasibility of Telegram`s vision, opinions are sharply divided between those who praise Telegrams Whitepaper and its proposed solutions and critics who state that neither are their concepts new, nor are the mentioned ones yet successfully tested. Overall, many critics find the Whitepaper lacking in technical details.
The perception within the venture capital world is also divided. While traditional venture capitalists see in TON a good entry gate into the crypto-economy, venture firms that did several crypto investments in the past are more sceptical about Telegram`s approach and rather stay away from the hyped ICO. Nonetheless, Telegram already raising $1.7 billion remains a strong statement on its own.
Until we see the first tangible results still some time will pass. Telegram plans the launch of its wallet in the end of 2018 and for the beginning of 2019 the implementation of TON Services, TON Storage, and TON Proxy. By 2021, Telegram plans to step back and rename TON to ON with the network managed by its foundation.
So, a lot of time for having more debates and speculations about this project.
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