The Telegram ICO: Next Big Revolution or a Two-Billion-Dollar Heist?

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Genesis – Once upon a time, there was a line of code

Two of the popular cryptocurrencies – Bitcoin & Ether have been at the heart of and almost synonymous to cryptocurrencies since quite some time now, the soaring prices and strong reactions being proof of underlying investor sentiment and behaviour. Both, BTC & ETH have grown majorly on the back of intrinsic utility. Bitcoins’ claim to fame has been through the novel idea of rapid, anonymous and trustless underlying technology – blockchain. At the same time, Ether has gained popularity and traction basis its highly-efficient smart-contracting mechanism supported by Ethereum as a technology.

A common trait for both cryptos is that none of them are dependent on organizational fortune, rather the tokens have an intrinsically determinate value which is driven by the demand for underlying tech. However, a smaller quantum of adulteration by speculators can’t be ruled out.

ICOs – Mostly a well-cut Halloween pumpkin: looks pretty but nothing’s inside, mostly.

Of late, there has been a significant bout of ICOs being launched with outrageous PR pomp & grandeur. Initial Coin Offerings (ICOs) have been the new means to raise money from across the demography right from unsuspecting wishful-investors to speculative pump-and-dump biggies.

The year 2017 alone witnessed almost $5 billion raised through ICOs, out of which ~$900 mn was in Nov’17 only.

The number so far in 2018 has almost touched a billion dollars raised by 42 projects.

Now, with the number of VC firms, Private Equities and Angel Investors growing by the day, why would a company raise funds through an ICO?

Simple, ICOs are by far the simplest route to crowdfunding a project. Negligible regulatory oversight coupled with the absence of need for a concrete product, viable plan, customer-base or for that matter any proof of the project/company being in existence makes this a very convenient route to raise money. In fact, this phenomenon has been widely dubbed as “two geeks and a whitepaper” where almost anyone can publish a fairy-tale using excessive jargons like blockchain, DLT, Ethereum, forks and a few heavy-promise words like disruption, mass-utility and revolutionary to raise almost whatever amount the campaigner wishes for.

The limited entry to barriers and absence of concrete regulation makes this a public park where anyone comes with any equipment of his choice to play whatever game he wants only to be joined by bystanders and joggers who have never even heard about the game.

Having said that, it would be unfair to generalise and construe that all ICOs are backed by unscrupulous promoters. We are way ahead of time to fathom how many of these hundreds of projects see the light of day.

Fault lines spread across the entire storyboard for ICOs

For the few genuine ones where the promoters genuinely believe in the appreciation of their tokens, there lies a structural flaw. Like we had observed in the case for BTC and Ether, the tokens derived its value in a free-flow manner where market forces decide the price. However, with many of the ICOs, there’s no real underlying product or technology instead just a decent grafting of blockchain (maybe just the word) with existing business. Now, the problem with such an ICO is that the appreciation is derived from operating margins, a part of which is distributed to token-holders.

One can think of this as a shareholding, only token-holders have no enforceable right or ownership in the project and are not protected by regulatory frameworks. Essentially, if the company promises to share a certain percentage of its operating margins and forgets the sweet promise when it hits a million in profits, there’s practically nothing you can do about it.

From the “Russian Facebook” to the most popular encrypted messaging service and now, the biggest ICO in history – here’s what the Durov brothers are up to

Pavel & Nikolai Durov have somehow always been on the right side of tech. Before building telegram, the brothers had launched “VKontakt” which has been touted as the “Russian Facebook”. Early this year, they exited the business with close to $3 bn in their briefcase. Meanwhile, Telegram has been growing consistently since 2013 and is expected to have a user base of almost 200 mn by the end of this quarter.

In recent news, Telegram has raised ~$850 mn from private anchor investors through their ICO. The ICO is for Telegram Open Network (TON) which is described to be a breakthrough use-case for blockchain technology which includes quite a lot of structural improvisation to boost efficiency & effectiveness. The proposition is that while Telegram lists its own cryptocurrency, it may also facilitate digital transactions for fiat.

So, just to understand the plan better, let’s go through a rather basic illustration–

Let’s say there’s a company called telephone (which is, out of pure coincidence, an instant messaging application) and it decides to foray into the field of P2P crypto-payments and smart contracts. Now note, the messenger is run by a not-for-profit organisation and intends to be so.   For all practical purposes, it has no revenue model.

Telephone decides to ask the public to “invest” in the company so that they can continue paying salaries and perhaps try to build the dream-product they really wish to. In exchange, the investors receive a token which, in future, gets converted into a cryptocurrency and is expected to be valued at a price higher than what’s paid for the token.

Investors buy in expecting handsome returns on their investment or out of sheer fear of missing out.

For this dream to turn into a reality, three situations need to come together –

1. Telephone must earn profits to increase the value of the token which ideally would be driven by the profitability of the underlying project
2. The cryptocurrency (the one that the token graduates into) must be accepted by more people who would be willing to trade it and provide necessary liquidity
3. The blockchain project must take off successfully and should be a preferred platform for all the use-cases it intends to serve

This is basically like what one can expect from the telegram ICO. Think of it as the lovechild of Paytm and WhatsApp Pay who grew up in the hood where cryptocurrency and blockchain meant respect.

 The good, bad & ugly about the Telegram ICO

For the ones who have missed out on telegram’s whitepaper, click here to view the full version.

First, here are a few good signals about the ICO–

• Telegram can leverage a significant user-base

Telegram has a captive user base of almost 180 million. This will provide Telegram with a meaningful jumpstart in terms of ICO subscription, product cross-sell and cryptocurrency adoption. The fact that telegram continues to be the preferred medium of communication for crypto-investors and enthusiasts strengthens the case for Telegram.

Telegram can piggyback on its almost half-a-decade old reputation to garner trust and faith from the community.

• There’s an A-team to bank on

While the founders have meaningful experience as successful entrepreneurs, the team of developers at Telegram appear to be of extreme-skilled pedigree. The fact that the promoters are passionate about the product and they can afford to hire expensive talent adds sufficient heft to the kind of team behind the application.

• The plan sounds interesting

The fact that blockchain and Ethereum still have a long way to go in terms of efficiency where blockchain can process seven transactions per second as against Visa which can process a million.

The TON proposal wherein Telegram aims to create something that is somewhat like ‘blockchain on steroids’ gifts a hope where the efficiency contributes to bringing cryptocurrency to mainstream.

The whitepaper outlines a four-point plan which includes:

-TON Services: A platform for third party services to facilitate decentralized apps and smart contracts

-TON DNS: Think of this as a browser but with features to maintain anonymity

-TON Payments: This is to ensure micro payments. This may be off-chain but the security can be expected to be at par as with on-chain transactions.

-TON Blockchain: This is the blockchain on steroids they are talking about. It has mentioned methods and tech to ensure that blockchain processing gets faster, cheaper and more efficient.

• Proof-of-Stake instead of Proof-of-Work

Traditional blockchain utilised the proof-of-work system and required thousands of miners to consume huge amounts of electricity only to be the first one to compute and solve complex mathematical functions and get rewarded.

However, Proof-of-Stake will just require the crypto-currency holder to lock-in their cryptocurrency to prove that they own it and rewards will be distributed basis how much has been locked for how long.

This cuts computation requirement drastically and consequently, electricity consumption. Alongside, the lock-in will lead to scarcity and help push prices higher.

These are a few reasons which add considerable heft to the promise; however, there are a few concerns that could raise a few eyebrows –

• Telegram has no revenue model

Telegram is a self-funded, not-for-profit organization and intends to remain the same. Though it has a good product, meaningful user base and quite a market-share, as long as there’s no money flowing in, there’s going be no wealth creation for anybody.

• Asking much more than needed

Why would a messaging & blockchain platform need $2 billion? Whatever the size and scale be, this amount is definitely out of proportion. Even the budget (in the whitepaper) claims a need for total spending of $620mn over four years to reach a billion active users. Telegram has already raised ~$850mn only through private placements.

• Is this a cash-grab trap?

We know that telegram is self-funded and we also know that money is never infinite. The team at Telegram does not even have a line of code ready yet and has commanded a pretty steep valuation for practically nothing but the sheer idea of coming up with something. There is a high probability that the proceeds of this ICO would first go towards meeting existing operational needs and the novel idea gets marginalised.

• Clouds of doubt around homegrown security

While Telegram takes immense pride in the security and encryption it offers on its messaging app and proposes to offer in the upcoming venture, there are some serious concerns around the efficacy.

The FAQ section on Telegram mentions that it utilises a homegrown security protocol known as MTProto protocol which, for all practical reasons, have not even been subject to proper testing and scrutiny. Surprisingly, a student named Susanka found quite a few ‘not-professional’ codes in the encryption which raises some doubts around the strength of the encryption. He has also been sweet enough to publish this on his blog- click here.

•  Experienced capital has stepped away from this one

Many known investors in the crypto-space have swayed away from this ICO. The ones backing this are relatively newer capital firms and individuals who missed the earlier rides. There’s a strong smell of typical FOMO in the lobby where the token-holders stand.

• A landmine of scams before the ICO

A certain gramtoken.io managed to dupe excited investors to the tune of almost $5 million under the pretext of selling tokens for the Telegram ICO before vanishing from the internet. Alongside, there has been a flurry of websites posing as hosts to offer tokens to the ICO. These names include tgram.cc, gramtoken.tech, ton-ico.com and similar more.

While such landmines of scams surrounded the internet around the time of the pre-ICO sale, the palpitations are evident as Telegram has started rolling out prospective allocations and these future commitments have started flipping in the pseudo-derivative market already.

 The Final Word

While many crypto-investors are already experiencing a strange sense of anxiety and euphoria coupled with FOMO, it is strongly advisable to sit in the stands and wait till the ICO rolls out and there is some real allocation and at least a line of code written. Obviously, there’s a bright chance you lose out on the listing gains, but hey! If you do believe in the massive value-unlocking story, it’s okay to buy at a few pennies higher. For those who can’t hold onto their pockets, make sure to put in only the amount you can forget about.