Beware of Becoming the Next Victim! The Strange Tokenomics and Governance Horror Stories of TON
Beware of Becoming the Next Victim! The Strange Tokenomics and Governance Horror Stories of TON
#629
GM,
This week, after Telegram CEO Pavel Durov was arrested by French police, a prediction market1 was quickly created on Polymarket, speculating on the likelihood of him regaining his freedom in August. Currently, over a million dollars have been staked, making it the most popular topic on the platform aside from the U.S. presidential election.
Although the probability of Durov’s release currently sits at only 43%, it has been gradually rising over the past few days. Last night, there were rumors that he had been freed, but they were later confirmed to be false. This percentage reflects the conclusion drawn by netizens after compiling information from various sources. So, if your colleagues ask how Telegram is doing now, responding with "increasingly optimistic" would be spot on.
Another indicator reflecting whether Durov will be released is the price of TON, the 10th largest cryptocurrency by global market cap. After Durov's arrest, TON's price plummeted by more than 20%, showing how closely investors associate TON with Durov. This article will discuss what TON is, its rather peculiar tokenomics, and the governance horror stories surrounding it.
Something Fishy
TON has been the most outstanding cryptocurrency performer this year, surging 2.5 times in value over the past year and climbing to rank as the 10th largest by market cap globally. Many who invested in TON did so because of its close ties with Telegram, as TON stands for "Telegram Open Network."
However, if you were to ask Telegram, "What's the relationship between you and TON?" you would get the answer that they are independent entities, operating separately. This response immediately raises suspicions. The reason for this intentional distance is that Telegram has previously paid a heavy price.
In 2018, Telegram launched another cryptocurrency called GRAM, raising $1.7 billion from various venture capital firms in preparation to enter the blockchain space. At that time, I also discussed Telegram's blockchain ambitions2 based on the TON whitepaper. But the project eventually fell apart. Telegram soon attracted the attention of the U.S. Securities and Exchange Commission (SEC), which accused the company of illegally issuing securities. According to a press release from the SEC at the time:
Telegram Group Inc. and its wholly-owned subsidiary, TON Issuer Inc., raised funds beginning in January 2018 for purposes including the development of their own blockchain, the 'Telegram Open Network blockchain,' as well as the Telegram messaging app.
The defendants allegedly sold 2.9 billion digital tokens called 'Grams' at a discount to 171 investors worldwide, including 39 investors in the U.S. who purchased 1 billion Grams. Telegram promised to deliver the Grams to early investors upon the launch of the blockchain... At that point, both the investors and Telegram would be able to sell billions of Grams into the U.S. market. The defendants' failure to register Grams as required under securities laws was illegal.
By 2019, the market had already entered a downturn. Facing the SEC's accusations, Telegram chose to settle by offering refunds and paying fines rather than putting up much of a fight. However, in his farewell post, Durov left a hint of things to come:
For the past two and a half years, we gathered a team of top engineers to develop the TON blockchain and Gram token. TON would have been the next-generation blockchain, inheriting the decentralization of Bitcoin and Ethereum, but far surpassing these 'predecessors' in terms of speed and scalability... Once integrated with Telegram, the TON blockchain could have fundamentally transformed the way people manage assets and communicate. But the U.S. courts have prohibited the launch of TON... I officially announce that Telegram will cease development of the TON blockchain.
Looking back, that post seemed to signal that TON was "going underground." A year later, the TON Foundation was established, claiming to be a fork of the original TON blockchain, with no ties to Telegram. This situation is reminiscent of students prohibited by their parents from dating, saying, "We're just friends, not in a relationship!"
Rising a Phoenix from the Ashes
Starting in 2022, Durov increasingly mentioned TON on his personal channel and, by 2023, even cited a technical review stating that TON was the fastest blockchain in the world. As a result, Telegram decided to integrate TON into its app.
This is merely an excuse. Everyone knows that the key to a successful blockchain is no longer its speed but the richness of its ecosystem. No matter how fast a blockchain is, without wallet support, developers, and exchanges, it remains nothing more than a "zombie chain." However, Durov seems to be going through the motions, drawing the target after shooting the arrow, thereby making TON Telegram's blockchain of choice.
In 2024, Telegram began integrating TON into its application step by step. This includes launching the TON Space wallet, allowing advertisers to pay for ads with TON, and even enabling creators to convert the in-app currency "Stars" into TON for cashing out. Eventually, even Tether announced the issuance of USDT on the TON chain.
A series of positive developments spurred investment enthusiasm, pushing the price of TON to an all-time high. The media started comparing Telegram to China's WeChat, suggesting that, with TON, Telegram could become the next super app, integrating information and financial assets.
Tokenomics primarily revolves around two key factors: supply and demand. Supply refers to who receives the TON tokens, reflecting what behaviors are incentivized. Demand concerns where TON can be used, determining the token's utility. Telegram happens to provide application scenarios, creating demand for TON. But in my research, I discovered something odd about the token supply of the TON blockchain. The timing coincides with the period between 2020 and 2022, during which TON seemed completely dead.
In a TON tokenomics report written in July of this year by Yulin Liu, a senior economic advisor at ChainLink, it was pointed out that TON currently uses a Proof of Stake (PoS) consensus mechanism, requiring a stake of up to 300,000 TON (valued at $1.62 million) to become a blockchain node. But who actually has that much TON?
From July 2020 to June 2022, TON adopted the Initial Proof of Work (IPoW) mechanism, before transitioning to a Proof of Stake (PoS) system. The initial token supply was set at 5 billion TON, with 72.5 million TON (1.45%) allocated to the team. The remaining 4.9275 billion TON (98.55%) had been pre-mined. Research shows that during the IPoW phase, 85.8% of the tokens were mined by a few interconnected miners affiliated with the TON Foundation.
To put it in simple words, if we compare a blockchain to a country, Proof of Work (PoW) and Proof of Stake (PoS) are like defense systems designed to protect against external threats. Miners who help secure the blockchain receive cryptocurrency rewards. But what's odd is that from 2020 to 2022, when the TON chain was largely deserted with no specific applications, there were still people diligently guarding its borders and collecting TON as rewards.
If a barren land is heavily guarded, it naturally raises the question—what treasure is hidden there? Two years have passed, and the TON blockchain remains barren, yet the system has already distributed all its money. This is highly unusual. No blockchain would distribute all its tokens within just two years; otherwise, where is the economic incentive for the future?
Bitcoin's tokenomics are designed to last until 2140, and Ethereum’s is dynamically adjusted, making TON’s design peculiar. Yet it seems as if these early participants had a coordinated plan. By 2022, the TON blockchain had pivoted to Proof of Stake, allowing users to earn passive income by staking TON. The risk of such a highly controlled token distribution is that retail investors are easily positioned to become the “chopped greens” for the harvesting scythes.
Highly Controlled Token Distribution
The chart below shows the change in TON's total supply (blue) and circulating supply (black) over time. You can see that the total supply is almost a flat line, as the vast majority of TON was already in the hands of those who participated in the early mining phase. The amount of newly issued tokens compared to the initial 5 billion is insignificant. However, what I want to focus on is the black line, which represents the circulating supply of TON.
Normally, the circulating supply of a token increases slowly as more tokens are issued by the blockchain or decreases gradually due to burn mechanisms. However, TON's circulating supply has experienced several sharp rises and dramatic drops. A sharp rise could suggest someone hit the jackpot, but a sudden plunge is quite unusual.
It turns out that in 2023, the TON community initiated a governance proposal to freeze nearly 2.4 billion TON tokens belonging to some users, claiming that these funds were "inactive." What? This has to be the most absurd reason for freezing assets I've ever heard. Why should assets be frozen just because they haven't been moved?
You might think this was some sort of internal conflict. But the reality was different from what most people imagined. The TON community held two rounds of voting on this proposal to demonstrate their commitment to democracy. In both rounds, the proposal was overwhelmingly approved. It was as if those whose assets were frozen also agreed that "inactivity" should be punished, or perhaps that money didn't matter much to them. Either way, the proposal passed. The most outrageous part? The media reported this as positive news for the blockchain!
This truly shattered my expectations and upended my values. What kind of strange community is TON, where people can restrict individual asset movements just to avoid a market crash? I believe there’s only one possible explanation—this is a script they’ve written themselves. Only if you lock up your own money from one hand to the other would you feel indifferent about it. And only those people would need to spread the word that the token price won't drop any further. But to some, this might sound like a horror story.
Some might say, "Even if we know TON is held by a few, so what?" Well, the issue is huge. Many people initially believed in TON's potential simply because Telegram supported it, and they aimed to accumulate more TON tokens. But accumulating more TON might be futile. It’s like the housing market in Taiwan—sometimes, it's not that you aren’t earning enough to buy a house, but that the people controlling the economy are working against you from behind the scenes. You control the numerator, but they control the denominator.
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