Organized & Compiled by: Deep Tide TechFlow

Guest: Cosmo Jiang, Pantera Fund Manager

Host: Oskari Tempakka, Host of the Fundamentals podcast

Podcast Source: Token Terminal

Original Title: TON: Pantera's Largest Investment Ever | Interview With Cosmo Jiang

Release Date: July 11, 2024

Background Information

In this episode, Cosmo Jiang, Portfolio Manager at Pantera Capital, discusses the details behind Pantera's largest investment ever, which is in The Open Network (or TON), an L1 network originally designed by Telegram, with Token Terminal.

The podcast covers Pantera's long-term approach to fundamental-based investing and introduces their typical deal sourcing and due diligence processes. It explores the factors that helped Pantera build confidence in their largest investment to date, including the strategic partnership between Telegram and TON, how TON has a unique advantage in attracting the first billion users to use cryptocurrency, the importance of a thriving developer ecosystem, the impressive appeal of mini-games on TON, and the growth of stablecoins on the network.

This episode also discusses Pantera's bullish case for TON, the risks and unquantifiable factors associated with the investment, and how Pantera supports the post-investment growth of TON.

Meet Cosmo Jiang

• Cosmo Jiang is a Portfolio Manager at Pantera Capital, focusing on investments in the consumer internet space, responsible for the firm's liquid token strategy, and working closely with founder Dan Morehead.

• He believes that tokens represent a new way of capital formation and can coordinate relationships among employees, management teams, token holders, and users through incentive mechanisms. He is convinced that digital assets and cryptocurrencies have the potential to disrupt traditional internet giants, which is why he is fully committed to this field.

Pantera Overview

• Pantera was founded in 2003 by former Tiger Management macro chief Dan Morehead, initially as a macro-oriented fund. In 2013, Pantera fully transitioned to blockchain, becoming the first institutional investment firm in the U.S. focused on blockchain. Pantera's first Bitcoin fund achieved a 1000x return, greatly satisfying early investors.

• Jiang joined Pantera last year after founding his own digital asset hedge fund, Nova River, aimed at applying rigorous fundamental analysis from traditional finance to the crypto space.

• Jiang emphasizes that Pantera's investment philosophy is to invest long-term in the future of the digital asset industry, compounding capital through years of industry growth. He also mentions that educating investors about the importance of fundamental investing and applying this strategy on a larger scale is crucial for their success and the development of the entire industry.

How TON Came on Pantera's Radar

• Jiang mentions that Telegram is the third-largest messaging app in the world, behind Facebook Messenger and WhatsApp. As an internet investor, he observed that messaging apps have very high user retention rates but monetization is relatively difficult. This is because messaging content is often private, making it hard to target ads, which leads to challenges in monetization.

• The TON network was initially developed by Telegram, but due to a lawsuit from the SEC, Telegram had to abandon the project and hand it back to the users. Nevertheless, the TON network has undergone multiple iterations and developments over the past few years.

• Jiang points out that last September, TON established a new strategic partnership with Telegram, integrating the TON wallet into its app and allowing users to pay for ads and share in-app ad revenue using TON. This made the relationship between TON and Telegram more concrete and tangible.

• Jiang believes that this partnership combines TON's ecosystem with Telegram's 900 million monthly active users, presenting a huge potential to significantly expand the distribution and usage of TON as a blockchain.

Strategic Partnership Between Telegram and TON

Oskari asks whether the strategic partnership between TON and Telegram was the main reason for Pantera's deep dive into TON, or if they observed some initial indicators and activities on the TON network.

• Jiang responds that indeed, it was this strategic partnership that prompted them to start taking TON seriously. They had always known about the relationship between TON and Telegram, but it only became clear last year, making them realize that significant progress might be underway.

• Jiang explains that Pantera has been tracking the history of TON, and their biggest question was why these changes were happening now. Many Web 2.0 platforms have attempted to enter the blockchain space but have not done so seriously, resulting in failure. Pantera's due diligence was primarily aimed at understanding the relationship and motivations between Telegram and TON.

• Earlier this year, Telegram launched an integrated TON wallet, which allowed Pantera to see tangible progress. The success of TON is crucial for Telegram as a private company. Since Telegram emphasizes data privacy and user sovereignty, it cannot monetize through ads, and its subscription model has not been very successful.

• Therefore, Jiang believes that the only sustainable monetization method for Telegram may be through cryptocurrency and the distribution of TON.

• Jiang also mentions that Telegram has the potential to go public, which would benefit TON, but if TON succeeds, Telegram may not need to go public, aligning more with its philosophy of user sovereignty and data privacy. Realizing this, Pantera recognized that Telegram needs to ensure the success of TON both economically and strategically.

Pantera's Due Diligence Process

Oskari inquires about Pantera Capital's typical findings and due diligence process, specifically mentioning the case of liquid tokens.

• Jiang notes that they focus on investing in blockchain businesses and protocols that have product-market fit, strong growth prospects, excellent management teams, and the ability to create and capture economic value. In the early stages, they primarily look at the strength of the management team, clarity of vision, and communication skills, as these factors are crucial for building initial products and finding product-market fit. As companies grow, they pay more attention to the product itself, competitive advantages, and profitability plans.

• Jiang explains that their process is similar to due diligence in traditional asset classes, including talking to customers and competitors, understanding the competitive landscape, analyzing the services offered by the business and their added value, and ultimately translating this information into financial models. They write detailed investment memos and actively engage in portfolio construction and management.

• Specifically regarding TON, due to its maturity and traceable fundamental data, they pay particular attention to key performance indicators (KPIs) such as transaction volume, user numbers, and usage metrics. This data will ultimately be incorporated into financial models to ensure investment decisions are based on solid foundations.

• Jiang emphasizes that due diligence is not just about numerical analysis but also includes understanding human interactions and teamwork, as these factors will ultimately translate into financial data. They ensure that the narrative and fundamental story align by tracking data, allowing them to make informed investment decisions.

Oskari summarizes that this is a balance of qualitative and quantitative analysis, especially in an emerging industry where it is difficult to find fully comparable historical cases.

• Jiang adds that fundamental investing is not just about numbers but also about understanding human interactions and collaboration. This approach allows them to conduct in-depth research on TON and conclude that TON represents a very exciting investment opportunity.

Building Confidence in TON Investment

Oskari inquires about the basis of Pantera Capital's confidence in investing in TON.

• Jiang points out that the key question is whether TON can grow from an initial 1 million monthly active users (MAU) to the next billion users. This is a huge challenge, as the current number of users in the cryptocurrency space is only in the tens of millions. Jiang believes that TON has the potential to achieve this goal, based mainly on the following aspects:

1. Telegram's User Base: Pantera analyzed the growth history and distribution of Telegram users and compared it with potential blockchain users. TON currently has a low penetration rate on Telegram but has grown from 1 million MAU to 4 million MAU. They studied how TON can increase its penetration among Telegram users and the possible growth drivers and strategies.

2. User Monetization: Pantera researched how to monetize users in both cryptocurrency and non-cryptocurrency applications. They considered monetization models across various areas, including DeFi, transaction fees, and payment alternatives, as well as advertising and business models in social media and Web 2.0. They constructed reasonable hypotheses to predict TON's monetization potential.

3. Competitive Dynamics: Pantera engaged in conversations with the development team to understand the strengths and weaknesses of the TON ecosystem and how to increase developer adoption. They believe that developer adoption will ultimately translate into user adoption.

• By combining user growth, monetization potential, and competitive dynamics, Pantera built a model to predict the valuation and price targets for the TON network.

Oskari summarizes that TON's advantage lies in its close connection with Telegram, which already has a large community integrating** blockchain technology rather than trying to create a brand new community like most blockchain projects.

Telegram vs. Other Community Platforms

Oskari asks Jiang why he believes Telegram has an advantage over other community platforms in successfully integrating blockchain technology into the user experience.

• First, Jiang emphasizes the relationship between** Telegram and TON, which is their primary focus for due diligence. He points out that Telegram is currently the only large social media platform with a blockchain strategy. Other platforms, such as Facebook (which was forced to exit), WeChat (which cannot implement it due to being based in China), and Google (which failed in social experiments), do not have a similar blockchain strategy. Telegram, located in Dubai, is not subject to regulatory restrictions from the U.S. and China, allowing for more operational flexibility in the blockchain space.

• Secondly, Jiang mentions that Telegram does not have a traditional business model to disrupt and does not face the regulatory pressures that other platforms do in the U.S. and China. This gives Telegram more flexibility and freedom in trying and implementing a blockchain strategy. Additionally, Telegram already has a large user base, providing a solid foundation for its blockchain strategy.

• From a strategic perspective, Jiang believes that the founding philosophy of Telegram—user sovereignty and data privacy—is highly aligned with the philosophy of blockchain. This philosophical alignment makes Telegram's attempts in the blockchain space more natural and reasonable.

• From a community perspective, Jiang points out that although the current developer and crypto-native community for TON is small, the entire cryptocurrency space is still in a very early stage. Rather than starting from scratch, TON already has 2 to 5 million daily active users, which is an important starting point in the quest to reach a billion users. Despite TON's community being small and in its early stages, this is not a significant disadvantage given the low penetration across the entire cryptocurrency space.

Playing Games on TON

Oskari mentions that although Telegram is not currently heavily promoting features like wallet integration, these features are very easy to set up, and the user experience is very smooth.

• Jiang agrees, noting that the ultimate user experience should be such that users do not realize they are using blockchain technology. Many teams in the current cryptocurrency space focus too much on complex technological improvements and overlook what users truly care about: whether the product is user-friendly. TON's strategy prioritizes the user interface rather than emphasizing blockchain technology first, which is a significant difference from other blockchain projects.

Regarding games, Oskari mentions that although there has been much discussion in the past about how games can attract the first billion users, there have yet to be particularly successful cases. However, some mini-games recently launched on TON show new trends and potential.

• Jiang believes that past blockchain games focused too much on the "play-to-earn" model, which is unsustainable as it relies on a constant influx of new value (i.e., players investing money and time) rather than simply extracting value from the system. Future blockchain games need to focus more on the enjoyment of the game itself to attract players willing to invest resources, rather than just to make money.

• Games on TON have already seen significant success. For example, Not Coin is the first game on Telegram, reaching 10 million daily active users within a few months, far surpassing the user numbers of the previously most successful blockchain game, Axie Infinity. Another game, Hamster Combat, has also achieved great success, boasting 200 million unique users and 40 million daily active users.

• Jiang points out that these successes are primarily due to TON's seamless user interface. Users can easily open these mini-games within the Telegram app, which is one of the most frequently opened apps by users daily. This convenience and high-frequency usage allow TON to leverage Telegram's vast user base to drive widespread adoption of games.

Notcoin and Hamster Combat: Popularity of Mini-Games

• Jiang notes that although these games may seem very simple, even somewhat silly, such as Hamster Combat being just a click game, clicker games are one of the most popular game categories worldwide. This category of games is growing the fastest and does not require high cognitive investment, allowing players to enjoy the game without expending too much effort.

• Jiang emphasizes that while the games on TON may currently appear simple and immature, these simple game forms are very significant globally, especially outside the cryptocurrency space. The popularity of clicker games indicates the immense potential and market demand for these game forms.

Oskari adds that a key advantage of clicker games is that they do not interfere with users' other activities. This game format is very suitable for embedding in messaging apps, as users can open the game while waiting for friends to reply, perform some simple actions, and then return to the messaging interface to continue chatting.

• Jiang further explains that this is where mini-apps excel within messaging applications. Users can open games during conversations with friends, constantly switching between messages and games, remaining active within the app. This seamless user experience greatly increases user stickiness, allowing games on the TON platform to rapidly gain a large user base.

Payments and Stablecoins on TON

Oskari mentions that TON can attract developers not only through games but also by transforming into financial services companies through payment and stablecoin functionalities. One of TON's goals is to bring USDT (Tether) into every user's pocket, and they have made some progress in this area.

• Jiang points out that the speed of stablecoin adoption on TON is remarkable. Currently, about $600 million of USDT has been issued on TON, and this number is growing rapidly each month. In fact, TON is the fastest blockchain in Tether's history for USDT adoption. This demonstrates TON's strong capabilities in distribution, even though Tether only launched on TON this past April.

• Jiang further explains that for a blockchain to succeed, it needs some basic primitives, the most important of which is stablecoins. The emergence of stablecoins has helped the development of Ethereum DeFi (decentralized finance) because users want to use non-volatile assets for trading and settlement. TON has already shown tremendous potential in this regard.

• In addition to stablecoins, Jiang also mentions other important primitives, such as exchanges and cross-chain bridges. Although TON is still in the early stages of cross-chain bridging, there may be some major bridging integration announcements in the future, which will further drive the development of TON.

• Regarding the importance of payments, Jiang notes that payments are a core part of our daily lives. For the past 20 years, user acquisition strategies have primarily been achieved through social media networks, but in recent years, the most successful growth networks have been fintech platforms like Venmo and PayPal, as they provide peer-to-peer payment and everyday payment functionalities that are crucial for users' daily lives.

• The beauty of blockchain payments is that they are global, permissionless, and frictionless from day one. This is completely different from traditional financial systems; for example, sending money to a grandmother living in China not only takes time and money but is also a complex process prone to errors. In contrast, blockchain payments can complete these transactions instantly without such friction.

Oskari summarizes that once TON addresses its current growth bottlenecks, such as cross-chain bridging, its powerful distribution channels will be fully realized, and future data will be very promising.

Value Accumulation and Investment Potential of TON

Oskari mentions that TON has three main verticals: community, gaming, and payments and stablecoins. These areas build the investment logic for TON, and value accumulation is crucial for assessing the importance of the TON token.

• Jiang explains that the TON token is very similar to other layer 1 blockchain tokens; it is a gas token used for all transactions on the TON blockchain. Currently, the cost of each transaction is about 2 cents, half of which is burned.

• This mechanism is similar to Ethereum, although Ethereum has a higher burn rate. A portion of the transaction fees is burned, helping to reduce the supply of tokens, thereby increasing the value for remaining token holders. Jiang emphasizes that he typically considers issues from the perspective of earnings per share or value per token. As the token supply decreases due to burning, if the total economic value of the system remains unchanged, the value of each token will rise. This is the value accumulation mechanism of the TON token.

• To achieve value growth, more transactions and economic activities need to be seen. These activities will translate into more token burns and an increase in the value of each token. Therefore, the value accumulation of TON relies on active trading and economic activities within its ecosystem.

Risks and "Unquantifiable"

• Jiang points out that many people are confused about the relationship between Telegram and TON. Through in-depth research, they found that Telegram's strategic significance on TON is very clear. Telegram can earn TON tokens by achieving certain metrics over the next five years, and this economic and philosophical alignment makes them more confident in this relationship.

Another question is, why will TON be more successful than other applications based on EVM or Solana.

• Jiang explains that the TON wallet is a new tab within the Telegram app, providing a significant advantage. User experience and UI design are crucial; every click can lead to user drop-off, so TON only requires one click to access, while other applications require multiple clicks.

• TON is still in a very early stage; when they initially researched TON, it did not even have stablecoins. Many infrastructures, such as cross-chain bridges and developer tools, have yet to be established. These will take time and effort to realize, and investors need to have confidence in these future potentials.

• TON is not EVM-compatible and is not written in Rust; it is written in FunC (a variant of C). While many developers use C, very few cryptocurrency developers are accustomed to using C. This may affect TON's ability to attract developers.

• Growing from a few million users to hundreds of millions in the future requires a lot of execution work and coordination of multiple factors. This is a huge challenge with high execution risks.

Market Opportunities and Valuation Potential

• Jiang believes that the core of L1 blockchains is as a settlement layer for transactions, and their value depends on how much economic activity they can attract to the blockchain.

• User Growth: Telegram could reach 1.5 billion users in the coming years, currently at 900 million. If TON can penetrate one-third of that, it could have around 500 million users.

• Average Revenue Per User (ARPU): If TON can achieve an ARPU of $10 per user, then 500 million users could generate $5 billion in annual revenue.

• Payment settlement networks are high-margin businesses, with nearly 100% profit margins. Therefore, a higher price-to-earnings ratio can be applied.

• Valuation Calculation: Assuming $5 billion in annual revenue, multiplied by a 30x price-to-earnings ratio, could reach a market cap of $150 billion.

• Token Price: Currently, the supply of TON tokens is about 5 billion, meaning the potential price per token could reach $30.

Supporting the Growth of TON

Jiang elaborates on how they actively support the growth and development of TON (The Open Network) as long-term investors. Here are some key points:

1. Role of Long-Term Investors

a. Active Participation

Jiang emphasizes that they, as long-term investors, are not just passive providers of capital but actively engage in the management and development of the companies they invest in. Whether in the early or later stages, they work closely with management teams to provide advice and support.

b. Education and Guidance

As a large investor in the industry, they feel responsible for educating those outside the industry and guiding developments within it. They leverage their perspectives and experiences to help companies identify and respond to market and competitive changes.

2. Providing Multifaceted Support

a. Talent and Resources

Pantera has various professionals and resources to provide support across multiple areas, including existing portfolio company networks, service provider relationships, token economics experts, in-house legal advisors, capital markets, and marketing. Companies at different stages require different support, and they tailor their assistance based on the specific needs of the company.

b. Investor Perspective

Management teams often focus on daily execution and may not always pay attention to broader industry dynamics or competitive changes. The role of investors is to help management teams see these changes and provide strategic advice. Additionally, management teams, especially in the early stages of the cryptocurrency space, often focus more on technology and products, potentially overlooking considerations related to capital markets and commercialization. Investors can provide expertise in these areas to help companies achieve commercial and capital market viability.

3. Specific Measures

a. Improving Developer Experience

They work closely with the TON team to improve developer documentation and ensure the availability of development tools. They also collect feedback from applications across the TON ecosystem to understand what works well and what needs improvement.

b. Collecting and Providing Feedback

They act as the eyes and ears of developers, gathering feedback and regularly communicating with the TON Foundation to provide insights and suggestions to help guide product development.

4. Supporting Risk Mitigation

a. Improving Developer Experience

By enhancing developer documentation and tools, they aim to attract more developers to the TON ecosystem.

b. Market and Capital Support

They help the TON team better understand investor needs, ensuring that products are not only technically feasible but also commercially and capital market viable.

Conclusion and Future Outlook

• Jiang emphasizes that Pantera Capital's investment strategy is always centered around fundamental and rigorous investment principles. They focus on investing in high-potential startups and protocols that must have product-market fit, the ability to create economic surplus, strong growth prospects, and trustworthy management teams, and be able to capture a portion of the economic surplus.

• Jiang elaborates on how they actively support the development of TON, including improving developer experience, collecting and providing feedback, and offering expertise in capital markets and commercialization. They believe that TON has tremendous potential and are committed to helping it achieve long-term success.

• Pantera Capital's investments cover various aspects of the cryptocurrency space, from applications to infrastructure. They have specific views on different applications and infrastructures, although Jiang personally leans more towards investments at the application layer.

• Jiang points out several areas they believe have high potential:

• Block Space: This is the largest market, including blockchains like TON, Ethereum, and Solana, which are centered around selling block space.

• Decentralized Finance (DeFi): Especially those businesses that use token incentive mechanisms to motivate real-world behaviors and businesses.

• Intersection of AI and Cryptocurrency: Although it may not be profitable currently, it has enormous profit potential in the future. Blockchain can uniquely support many AI use cases, accelerating AI adoption.

• Jiang emphasizes that the fundamentals of investing are very important. They always focus on projects that can create economic value and have strong growth prospects when selecting investment targets.

• Pantera Capital remains open to any high-potential projects in the cryptocurrency space, continuously seeking new investment opportunities to drive the development of the entire industry.