Big Money, Murky Governance: Kicking the Tires of Telegram's Token Sale

Pitched as a game-changer for the cryptocurrency industry, Telegram's initial coin offering could be a lifesaver for the company.

Launched in 2013 by Russian brothers Pavel and Nikolai Durov, the company has never executed on the vague proposals it has floated to monetize its messaging platform. And with hefty annual operating expenses ($70 million in 2017 alone, according to the token sale primer obtained by CoinDesk), Telegram has likely burned much of the Durovs' personal fortune, which is the project's sole known funding source, people familiar with the situation said.

But if successful, the forthcoming sale of cryptographic tokens known as "grams" would leave Telegram flush again, with $1.2 billion. And if the tokens hold their value over time, the company would have a recurring source of funds from the 52 percent of the 500 billion total grams created that its new foundation is keeping.

Those are big ifs, of course.

Heralded as the most ambitious token sale the industry has ever seen, the ICO would finance development of the Telegram Open Network for inexpensive real-time payments and eventually, a platform for decentralized identity, storage and more

But while the offering has piqued widespread interest among hedge fund managers excited about the idea of Telegram bringing crypto to the masses (the company reports its messenger app has 200 million users), others are skeptical about the prospects.

"There's a serious challenge to building the infrastructure," said Evgeny Vigovsky, the chief operating officer at crypto depository Saifu, which is launching an ICO soon, and an alum of Russian security giant Kaspersky Labs. "In my opinion, they are trying to take a swing at something with which they have a lack of competence."

For one thing, as far as CoinDesk was able to ascertain, there isn't even an alpha version of the product yet.

And further, the company's approach to encryption has long been questioned by professional cryptographers worried about the security vulnerabilities inherent in its tech, Vigovsky said.

While the Telegram team has denied all such vulnerability claims in the past, Vigovsky continued:

"This raises concerns about the security of the new project."

Telegram has not responded to multiple requests for comment from CoinDesk.

Yet perhaps more important is that the documents obtained by CoinDesk regarding the Telegram ICO do not explicitly outline why the company is seeking such a large haul.

The reserve
It's not unusual for token issuers to hold some of the tokens they create in reserve for use by the company later on.

The hope is that the network proves enticing enough that, once the tokens start trading on the open market, they go up in value, giving the company another pool of capital (some of which it can sell later) that can keep its operations going.

And sometimes, management of those reserve funds is put in the hands of foundations, and this is indeed the case with the Telegram ICO.

According to the white paper, management of the reserve tokens will be handed over to the non-profit TON Foundation, and the foundation will hold off on any further sale of grams while the platform goes through its early development.

Telegram's staff will keep 4 percent of the token supply, as an incentive to continue iterating on the platform, thereby theoretically increasing the value of their own pool of tokens.

The TON Foundation also sets out a predictable formula for the sale of its tokens, with the very first token selling for 10 cents, and each subsequent token sold from the reserves sold for no less than one-billionth more than the last gram sold for.

According to a deal summary sheet attained by CoinDesk, participants in the private sale will have access to a fixed price of $0.308 per gram, for the first $600 million in grams sold. The price for those in the public sale will increase as the sales go on, following the formula described above. If the team succeeds in raising another $600 million in the public sale, the average price paid for buyers in that sale will be $0.969 per gram.

The Foundation "reserves the right not to sell any of the remaining grams at all, or to sell them at a higher price, but never at a lower price (taking into account the uncertainty of quickly changing exchange rates)," the white paper explains.

Co-founder of Turing Capital and token economics expert Siddhartha Kalla ran the numbers of the pricing scheme defined by the white paper. Following the white paper's formula, as the token price increases, Telegram and the TON Foundation would bring in something like $14.7 billion, Kalla said.

He added:

"The last gram would be sold at $14.84, which would value the five billion gram supply at $74.21 billion."

That's years away and it assumes the project goes well and the TON platform attains widespread use. As MIT professor Christian Catalini told CoinDesk, "Reserves are worth nothing until the coin is allowed to float in the market."

Durov control
While the economics behind the gram token prioritize stabilizing the money supply, Catalini noted that it's unclear, right now, whether it will have the intended outcome.

Plus, Catalini is worried about governance on the platform.

According to the white paper, "The TON Foundation will have a majority of votes during the first deployment phase of the TON Blockchain, which may be useful if a lot of parameters end up needing to be adjusted, or if the need arises for hard or soft forks."

Neither of the documents that CoinDesk has seen go into detail about governance, but this implies that grams equal votes over the development of the protocol. For such a large project, it's especially strange that even something as simple as voting isn't clear. Other ICO projects go into considerable detail about how governance will move forward, settling disputes and voting schemes. The TON project is opaque on all these points.

For an industry that emphasizes trustless systems so much, the Durovs are asking investors to place a lot of trust in them and the Telegram team.

"Overall, I would be more worried about the governance over the arbitrary parameters that can be changed ex-post by the foundation and team," Catalini told CoinDesk. "Investors should evaluate the capacity of any team to execute on their plan and vision, as well as the protections they have if things go wrong."

And with that, Catalini said, more details need to be revealed about how the proceeds will be used beyond the everyday expenses.

He concluded:

"They need to provide a lot more detail on the monetary policy, how the parameters will be decided, what governance they see for the foundation, etc."

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