Why TON will ‘become’ another SOL: The Tokenomics Behind TON

July 16, 2024 DetectiveTON

Toncoin (TON) has become a standout player in the blockchain space, garnering significant attention and investment despite not being listed on Binance and having a relatively nascent ecosystem. How does this Layer 1 smart contract network, originally developed by Telegram co-founder Nikolai Durov, command such a high market valuation, just like SOL in 2020 and 2021? Let’s delve into the tokenomics of TON.

1. An Introduction to Tokenomics

Tokenomics, a blend of “token” and “economics,” drives the dynamics of blockchain-based systems. In the world of Web3, tokens go beyond mere speculative assets, offering deeper functionality and interactivity. Understanding tokenomics is crucial for grasping a project’s profitability and growth potential.

Tokenomics involves the economic design and mechanisms of a token, aiming to align participants’ interests, promote network growth, and incentivize desired behaviors. In simple terms, moving from zero to one relies on the product itself, while scaling from one to one hundred depends on robust tokenomics. Although there’s no precise definition, tokenomics can be summarized as the science of what makes crypto assets valuable. It encompasses supply and demand, inflation rates, distribution, incentives, utility, governance, and monetary policy.

Tokens possess two primary attributes:

Monetary Attribute: Tokens held for using a specific product or service. Most stablecoins are purely monetary tokens, acting as mediums of exchange. Discussing monetary demand and supply, projects can capture seigniorage (the difference between the value of money and its production cost), which explains the strength of stablecoins.
Asset Attribute: Tokens held for profit distribution and value appreciation. As speculative assets and stores of value, discussions focus on token distribution, asset pricing, and fully diluted valuation (FDV) value capture.

2. Use cases for Toncoin

As the native utility coin of the TON blockchain, Toncoin plays a crucial role in interacting with the TON ecosystem and its various decentralized applications (DApps). These include TON Proxy (a VPN service safeguarding users’ IP addresses), TON Storage (a decentralized file storage service), and TON Space (a self-custody blockchain wallet accessible via Telegram). Toncoin’s use cases encompass:

Paying gas fees for transactions and transfers
Staking Toncoin for network security and rewards
Interacting with TON DApps
Participating in on-chain governance and voting

2.1 Subdivisions and Terminology

According to the TON white paper, Toncoin is divided into one billion (10^9) smaller units called nanotons (ntons or simply nanos). All transfers and account balances are represented as non-negative integers of nanotons. The initial supply of Toncoin is capped at 5 billion (5 x 10^9) Toncoin, or 5 gigatons. The supply is mainly controlled by the staking mechanism as $TON is distributed to reward validators. If a validator is caught misbehaving, a part or all of its stake will be slashed as a punishment. Currently, the staking APY is around 3%.

2.2 Initial Supply and Token Distribution

Toncoin’s initial supply was 5 billion tokens, with the team holding 1.45% and the remaining 98.55% mined early through Proof-of-Work (PoW). With the network transitioning to Proof-of-Stake (PoS), Toncoin’s supply inflates at about 0.6% annually to reward PoS validators. As of 2024, the total supply of Toncoin is approximately 5.1 billion tokens, with around 3.53 billion in circulation.

2.3 Inflation and Burn Mechanisms

Toncoin is an inflationary token with no upper limit, inflating at an annual rate of 0.6%. Misbehaving validators face partial or complete stake slashing as punishment, with most slashed tokens being burned, reducing the total supply. The community has also voted to burn half of transaction fees to reduce circulating supply. Although currently only 350-400 TON are burned daily, data shows the community’s efforts to dilute early whale holdings have been effective.

3. Toncoin’s Market Performance and Future Potential

Understanding Toncoin’s (TON) market performance and potential is crucial for evaluating its investment value through the lens of tokenomics. Here’s a concise breakdown of key data points that highlight why TON is a compelling asset:

3.1 Market Capitalization and Trading Volume

As of July 2, 2024, Toncoin is ranked 8th on CoinMarketCap with a market cap of $19.85 billion USD and a fully diluted market cap of $41.66 billion USD. Over the past year, Toncoin’s price surged by about 430%. Over the past 30 days, the trading volume reached $12.21 billion, hitting an all-time high of $8.22 last month.

Tokenomics Insight: High market cap and trading volume reflect strong investor interest and high liquidity, crucial for a token’s stability and market presence. This also indicates a healthy demand-supply dynamic, essential for sustainable growth. Significant price increase at the same time signals strong market confidence and the perceived value of TON.

3.2 Token Distribution and Holding Periods

Data shows that 85.45% of Toncoin holders have $0-$1k worth of TON, 15.15% hold $1k-$100k, and 0.4% hold over $100k. Whales hold 65% of the supply, while retail investors hold 35%. Additionally, 27% of holders have held TON for over six months, and about 19% for more than a month.

Tokenomics Insight: Distribution and holding data highlight the balance between large holders and retail investors. A diversified holder base reduces the risk of market manipulation and enhances network stability. Long-term holding indicates confidence in the token’s future, a positive sign for potential investors.

3.3 Validator Participation

TON is supported by 365 validators across 30 countries, with nearly 500 million TON staked, accounting for about 10% of the total supply and 20% of the circulating supply.

Tokenomics Insight: High validator participation indicates robust network security and decentralization, key factors for a healthy blockchain ecosystem. Staking mechanisms also help manage token supply, supporting price stability and rewarding network participation.

3.4 Revenue and Expenses

In the last 30 days, TON generated $1.67 million in revenue but incurred $11.88 million in expenses.

Tokenomics Insight: While revenue growth is positive, managing high expenses is crucial for economic sustainability. Effective tokenomics should address cost-efficiency to ensure long-term viability and profitability.

3.6 Valuation Ratios

P/F Ratio (Fully Diluted): 888.2x (down 4.7%)
P/S Ratio (Fully Diluted): 1,776.4x (down 4.7%)
P/F Ratio (Circulating): 476.1x (up 15.7%)
P/S Ratio (Circulating): 952.3x (up 15.7%)

Tokenomics Insight: High valuation ratios suggest TON might be overvalued relative to its current revenue and fees. However, decreasing ratios indicate improvements. These metrics are critical for understanding the token’s market positioning and growth potential.

3.7 Development Activity

TON had 98 code commits and 13 core developers in the last 30 days.

Tokenomics Insight: Active development signals ongoing improvements and innovation, vital for a dynamic and evolving blockchain ecosystem. Strong development activity supports long-term value creation and enhances the token’s utility.

4. Future Value Capture of TON

Understanding the mechanisms behind TON’s future value capture is crucial for assessing its long-term investment potential. Here’s a detailed exploration of the key aspects that drive TON’s future value.

4.1 Core Value from Telegram Platform

TON’s core value capture largely stems from the robust support of the Telegram social platform. With over 1 billion users, Telegram provides a vast user base for TON to drive the adoption and expansion of its ecosystem. Specifically:

User Base:

Vast User Pool: Telegram’s 1 billion users offer TON a significant potential market. TON can leverage Telegram’s promotional capabilities and user engagement to rapidly expand its ecosystem.
Active Engagement: Telegram users are highly active, which provides strong user participation and interaction for TON’s ecosystem applications.

TON’s user growth has demonstrated stability, with a reported count of over 3.8 million accounts on the chain, which accounts for a growth rate of 868% compared to 6 months ago. The on-chain activated wallet has reached around 9,571,000. Based on this momentum, the goal is for TON to encompass about 30% of Telegram users by January 2022 and target 500 million users by 2028 is achievable.

Advertising Revenue:

Ad Payments: In February 2024, Telegram announced an ad revenue sharing plan that splits profits 50/50 with channel owners. Crucially, the revenue is paid out in TON’s native token, toncoin, and facilitated through the TON network. This not only increases TON’s use cases but also boosts its liquidity demand.
Revenue Sharing: The ad revenue sharing mechanism significantly increases the usage of TON tokens, further driving the development of the TON ecosystem.

4.2 Continuous Expansion of the Ecosystem

Although the current number of projects within the TON ecosystem is limited, there is significant potential for future expansion. The future value capture will primarily manifest in the following areas:

Emergence of New Projects:

Infrastructure Projects: The expansion of infrastructure projects like TON Storage (decentralized storage service) and TON Proxy (VPN service) will support more DApps, fostering the prosperity of the TON ecosystem. These infrastructure projects not only enhance the network’s utility but also provide more functionalities and services to users.
Financial Applications: Financial applications based on TON will become an essential part of the future ecosystem. Decentralized exchanges (DEX) like STON and DeDust, as well as other DeFi projects, will bring substantial trading and staking demand to TON. This not only increases TON’s liquidity but also attracts more users and developers to the ecosystem.

Ecosystem Incentive Plans:

Developer Incentives: TON Foundation has established a series of developer incentive programs to attract more developers to build applications on TON. These programs include financial support, technical guidance, and market promotion, aiming to create a thriving ecosystem. Through these incentive plans, TON can quickly attract more innovative projects, further enhancing its ecosystem’s competitiveness.

Transaction Fees:

Users need to pay a small amount of Toncoin as transaction fees when transacting on the TON network. These fees are used to reward validators, ensuring the network’s efficient operation. Compared to other blockchains, TON’s transaction fees are relatively low, averaging between $0.1 to $0.5 per transaction, significantly lower than Tron’s $1-$2 and Ethereum’s $7.

Ecosystem Support:

The TON Foundation has established a series of funding support plans to help new projects grow on TON. These plans include developer incentives and DApp support, aimed at creating a thriving ecosystem. For example:
- USDT Incentive Plan: On April 19, 2024, TON announced an 11 million Toncoin user incentive for early USDT adopters on the blockchain. The distribution is as follows:
  - 5 million Toncoin: For USDT mining in the Telegram wallet, users earn rewards by purchasing or depositing USDT.
  - 5 million Toncoin: To incentivize USDT liquidity in TON’s two major DEXs—STON.fi and DeDust, users can participate in liquidity mining by providing equal amounts of Toncoin and USDT.
  - 1.2 million Toncoin: Provided by various centralized exchange partners to offset users’ withdrawal fees of USDT or any TON assets to TON on-chain wallets.
- TON/USDT Liquidity Pool Incentive: On April 22, 2024, TON announced a $30 million incentive program for TON/USDT liquidity pools. 5 million TON will be used to incentivize users to add liquidity to TON DEX’s TON/USDT liquidity pools, aiming to provide an annual yield of 50-60% for three months.

These incentive plans and ecosystem support measures not only attract more developers and users to join the TON ecosystem but also promote the network’s stability and sustainable development, further enhancing TON’s market value and influence.

4.3 Decentralized Governance and Value Capture

TON community uses decentralized governance mechanisms to continuously optimize and adjust TON’s economic model, ensuring long-term stability and sustainable development. This includes:

Governance Proposals and Community Participation:

Temporary Freezing of Inactive Wallets: In February 2023, the TON community passed a proposal to temporarily freeze inactive mining wallets for 48 months. These wallets have never been activated and have no outgoing transactions in their history. Currently, 171 inactive mining wallets hold over 1.08 billion TON, accounting for about 21% of the total supply at the time. This measure effectively reduces the circulating supply, easing the selling pressure from whales.
Transaction Fee Burn: By burning half of the transaction fees to reduce the circulating supply, burning 350-400 TON per day, further stabilizing TON’s market price.

Validator Network Stability:

High Participation: As of July 2024, there are 365 validators supporting TON, with nearly 500 million TON staked, accounting for about 10% of the total supply. This demonstrates the high security and stability of the TON network.
Validator Incentives: By rewarding PoS miners, TON ensures continuous participation of validators and the secure operation of the network.

4.4 Future Market Expectations

Regarding market expectations, the upcoming listing of TON on Binance has garnered significant attention. As one of the largest cryptocurrency exchanges globally, Binance’s support will greatly enhance TON’s market exposure and trading volume. Additionally, Telegram’s plan for an IPO will bring more commercial support and market confidence to TON.

Release of Trading Potential:

Listing on Binance: Binance has already listed TON’s perpetual contracts, and the upcoming listing of TON spot trading will further release TON’s trading potential, driving market prices higher.
Market Enthusiasm: With more investors and traders participating, TON’s market enthusiasm and trading activity will continue to rise.

Long-term Value Capture:

Ecosystem Expansion: TON’s ecosystem will continuously expand, with new projects and applications emerging, bringing sustained user growth and value capture to TON.
Market Integration: The deep integration of TON with Telegram will enable TON to better capture the commercial value brought by Telegram’s vast user base. Recently, the TON community launched Adsgram, a new third-party platform on Telegram, allowing developers to connect their mini-programs or bots to the ad system and earn Toncoin through displaying ads. Adsgram offers various ad formats, including 15-second video ads, static banners, and upcoming channel subscription features.

Just like SOL, TON’s future value capture relies on its strong platform value, extensive ecosystem expansion, effective decentralized governance, and market expectations. With these factors continuously driving its growth, TON is poised to maintain strong market performance and become the lead member in L1 battle.