Compiled & edited by 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
Air Date: July 11, 2024
Background Information
In this episode, Cosmo Jiang, portfolio manager at Pantera Capital, joins Token Terminal to discuss the details behind Pantera’s largest investment ever, in The Open Network (or TON), the L1 network originally designed by Telegram.
The podcast discusses Pantera’s long-term approach to fundamentals-based investing and covers their typical deal sourcing and due diligence process. It explores factors that helped Pantera build confidence in their largest investment to date, including the strategic partnership between Telegram and TON, how TON is uniquely positioned to attract the first billion users to cryptocurrency, the importance of a thriving developer ecosystem, the impressive traction mini-games are seeing on TON, and the growth of stablecoins on the network.
This issue also talks about Pantera’s bull case for TON, the risks and unanalyzable factors associated with the investment, and how Pantera can support TON’s post-investment growth.
Meet Cosmo Jiang
Cosmo Jiang is a portfolio manager at Pantera Capital, focusing on investments in the consumer internet sector, where he is responsible for the firm’s liquid token strategy and works closely with founder Dan Morehead.
He believes that tokens are a new way of capital formation and can coordinate the relationship between employees, management teams, token holders and users through incentive mechanisms. He firmly believes that digital assets and cryptocurrencies have the potential to subvert traditional Internet giants, so he devotes himself to this field.
Pantera Overview
Pantera was founded in 2003 by former Tiger Management macro director Dan Morehead as a macro-oriented fund. In 2013, Pantera turned to blockchain and became the first institutional investment company in the United States to focus on blockchain. Pantera's first Bitcoin fund achieved a return rate of 1,000 times, which made early investors very satisfied.
Jiang joined Pantera last year after founding his own digital asset hedge fund, Nova River, which aims to apply rigorous fundamental analysis from traditional finance to the crypto space.
Jiang emphasized that Pantera’s investment philosophy is to invest in the future of the digital asset industry for the long term and compound capital through years of industry growth. He also mentioned that educating investors on the importance of fundamental investing and applying this strategy on a larger scale is crucial to their success and the development of the industry as a whole.
How TON entered Pantera’s radar
Jiang mentioned that Telegram is the third largest messaging app in the world, second only to Facebook Messenger and WhatsApp. As an Internet investor, he has observed that messaging apps have extremely high user retention rates, but are relatively difficult to monetize. This is because the content of messages is usually more private and difficult to target ads, making monetization more difficult.
The TON network was originally developed by Telegram, but due to the SEC’s lawsuit, Telegram had to abandon the project and return it to users. Nevertheless, the TON network has undergone multiple iterations and developments over the past few years.
Jiang pointed out that in September last year, TON and Telegram reached a new strategic partnership, Telegram integrated the TON wallet into its application, and allowed users to use TON to pay for advertising and share in-app advertising revenue. This makes the relationship between TON and Telegram more concrete and realistic.
Jiang believes that this partnership, which combines TON’s ecosystem with Telegram’s 900 million monthly active users, has great potential to significantly expand the distribution and use of TON as a blockchain.
Telegram and TON strategic partnership
Oskari mentioned whether TON’s strategic partnership with Telegram was the main reason that prompted Pantera to delve deeper into TON, or because they observed some initial indicators and activities on the TON network.
Jiang responded that it was this strategic cooperation that made them start to pay serious attention to TON. They always knew that TON had a relationship with Telegram, but it was not until last year that this relationship became clear, making them realize that there might be significant progress.
Jiang explained that Pantera has been tracking the history of TON, and their biggest question is why these changes are happening now. Many Web 2.0 platforms have tried to enter the blockchain field, but they are not serious and therefore have not succeeded. Pantera's due diligence is mainly to understand the relationship between Telegram and TON and the motivations behind it.
Earlier this year, Telegram launched its built-in TON wallet, which gave Pantera real progress. TON's success is crucial to Telegram's sustainability as a private company. Due to Telegram's emphasis on data privacy and user sovereignty, it is not possible to monetize through advertising, and the subscription model is not successful enough.
Therefore, Jiang believes that Telegram’s only sustainable way to monetize may be through the distribution of cryptocurrency and TON.
Jiang also mentioned that Telegram may go public, which is good for TON, but if TON is successful, Telegram may not need to go public, which is more in line with its philosophy of user sovereignty and data privacy. After understanding this, Pantera realized that Telegram needs to ensure the success of TON not only economically but also strategically.
Pantera’s Due Diligence Process
Oskari asked about Pantera Capital’s typical discovery and due diligence process, with specific reference to the case of liquidity tokens.
Jiang pointed out that they focus on investing in blockchain businesses and protocols with product-market fit, strong growth prospects, excellent management teams, and the ability to create and capture economic value. In the early stages, they mainly focus on the strength of the management team, clear vision, and messaging capabilities, as these factors are critical to building initial products and finding product-market fit. As the company grows, they will pay more attention to the product itself, competitive advantages, and profitability plans.
Jiang explained that their process is similar to due diligence for traditional asset classes, which includes talking to clients and competitors, understanding the competitive landscape, analyzing the services provided by the business and its added value, and ultimately translating this information into financial models. They write detailed investment memoranda and actively engage in portfolio construction and management.
Specifically for TON, since it is relatively mature and has traceable fundamental data, they pay special attention to key performance indicators (KPIs) such as transaction volume, number of users, and usage. These data will eventually be incorporated into the financial model to ensure that investment decisions are based on a solid foundation.
Jiang stressed that due diligence is not just about number analysis, but also about understanding human interaction and teamwork, as these factors ultimately translate into financial data. They follow the data to ensure that the narrative and fundamental story are consistent, thus making wise investment decisions.
Oskari concluded that it’s a balance of qualitative and quantitative analysis , especially in a new industry where exact historical examples cannot be found .
Jiang added that fundamental investing is not just about numbers, but also about the understanding of human interaction and cooperation. This approach enabled them to conduct in-depth research on TON and conclude that TON is a very exciting investment opportunity.
Building Conviction for TON Investment
Oskari asked about the basis for Pantera Capital’s belief in investing in TON.
Jiang pointed out that the key question is whether TON can grow from the initial 1 million monthly active users (MAU) to the next billion users. This is a huge challenge, as the number of users in the cryptocurrency field is only in the tens of millions. Jiang believes that TON has the potential to achieve this goal, mainly based on the following aspects:
Telegram ’s user base : Pantera analyzed the growth history and distribution of Telegram users and compared them to potential blockchain users. TON currently has low penetration on Telegram, but has grown from 1 million MAU to 4 million MAU. They studied how TON can increase penetration among Telegram users, as well as possible growth drivers and strategies.
User Monetization : Pantera studied how to monetize users in cryptocurrency and non-cryptocurrency applications. They considered monetization models in multiple fields such as DeFi, transaction fees, payment substitution, as well as advertising and business models in social media and Web 2.0. They constructed reasonable assumptions to predict the monetization potential of TON.
Competitive Dynamics : Pantera uses conversations with development teams to understand the strengths and weaknesses of the TON ecosystem and how to increase developer adoption, which they believe 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 target of the TON network.
Oskari concluded that TON’s strength lies in its close ties with Telegram , which already has a large community that is integrating blockchain technology , rather than trying to create an entirely new community like most blockchain projects.
Telegram and other community platforms
Oskari asked Jiang why he thought Telegram had an advantage over other community platforms in being able to successfully integrate blockchain technology into the user experience.
First , Jiang highlighted Telegram ’s relationship with TON, which was the primary focus of their due diligence. He pointed out that Telegram is currently the only large social media platform with a blockchain strategy. Other platforms, such as Facebook (forced to withdraw), WeChat (unable to implement due to being located in China), and Google (failed in social experiments), do not have similar blockchain strategies. Telegram is located in Dubai and is not subject to regulatory restrictions in the United States and China, so it has more room to operate in the blockchain field.
Secondly, Jiang mentioned that Telegram does not have a traditional business model to break, nor does it face regulatory pressure like other platforms in the United States and China. This makes Telegram more flexible and free in trying and implementing blockchain strategies. In addition, Telegram already has a large user base, which provides a solid foundation for its blockchain strategy.
From a strategic perspective, Jiang believes that Telegram’s founding philosophy of user sovereignty and data privacy is highly consistent with the philosophy of blockchain. This philosophical consistency makes Telegram’s attempts in the blockchain field more natural and reasonable.
From a community perspective, Jiang noted that while TON currently has a small community of developers and crypto natives, the entire cryptocurrency space is still in a very early stage. Rather than starting from scratch, TON already has 2 million to 5 million daily active users, which is an important starting point in the process of reaching a billion users. Although TON's community is small and in its early stages, this is not a major disadvantage when the penetration rate of the entire cryptocurrency space is very low.
Play games on TON
Oskari mentioned that although Telegram is not currently promoting features such as wallet integration, these features are very easy to set up and the user experience is very smooth.
Jiang agrees, pointing out that the end user experience should be that users don't realize they are using blockchain technology. Many teams in the current cryptocurrency space are too focused on complex technical improvements and ignore what users really care about: whether the product is easy to use. TON's strategy is to prioritize the user interface rather than emphasizing blockchain technology first, which is very different from other blockchain projects.
Regarding games, Oskari mentioned that although there has been a lot of discussion in the past about how games can attract the first billion users, there has not been a particularly successful case so far. However, some small games recently launched on TON have shown some new trends and potential.
Jiang believes that blockchain games in the past have focused too much on the "play-to-earn" model, which is unsustainable because it relies on constant new value input (i.e. players investing money and time) rather than simply extracting value from the system. Future blockchain games need to focus more on the fun of the game itself to attract players willing to invest resources, rather than just to make money.
Games on TON have already had significant success. For example, Not Coin, the first game on Telegram, reached 10 million daily active users within a few months, far exceeding the number of users of the previous most successful blockchain game Axie Infinity. Another game, Hamster Combat, has also achieved great success, with 200 million unique users and 40 million daily active users.
Jiang pointed out that these successes are mainly due to TON's seamless user interface experience. Users can open these mini-games very conveniently in the Telegram app, and the messaging app is one of the most frequently opened apps by users every day. This convenience and high frequency of use allow TON to leverage Telegram's large user base and drive widespread adoption of games.
Notcoin and Hamster Combat: The popularity of dot games
Jiang pointed out that although these games seem very simple and even silly, such as Hamster Combat is just a click game, in fact, click games are one of the most popular game categories in the world. This category of games has the fastest growth rate and does not require high mental input. Players can enjoy the game without spending too much energy.
Jiang stressed that although the games on TON may seem simple and immature at present, these simple game formats are very meaningful on a global scale, especially in the non-cryptocurrency field. The popularity of dot-dot games illustrates the huge potential and market demand for these game formats.
Oskari added that a key advantage of dot-to-dot games is that they don’t interfere with users’ other activities. This form of game is very suitable for embedding in messaging apps because users can open the game while waiting for friends to reply to messages, perform some simple operations, and then return to the messaging interface to continue chatting.
Jiang further explained that this is where mini apps become powerful in messaging apps. Users can open games in between chatting with friends, constantly switching between messaging and games, and always staying active in the app. This seamless user experience greatly increases user stickiness, allowing games on the TON platform to quickly gain a large number of users.
Payments and Stablecoins on TON
Oskari mentioned that TON can not only attract developers through games, but also transform into a financial services company through payment and stablecoin functions. One of TON’s goals is to bring USDT (Tether) into every user’s pocket, and they have made some progress in this regard.
Jiang pointed out that TON has been very impressive in terms of the speed of stablecoin adoption. Currently, about $600 million USDT has been issued on TON, and this number is growing rapidly every month. In fact, TON is the blockchain with the fastest USDT adoption in Tether’s history. This shows TON’s strong ability in distribution, even though Tether was only launched on TON in April this year.
Jiang further explained that for 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 when trading and settling. TON has shown great potential in this regard.
In addition to stablecoins, Jiang also mentioned other important primitives such as exchanges and cross-chain bridges. Although TON is still in the early stages of cross-chain bridges, there may be some large bridge integration announcements in the future, which will further promote the development of TON.
Regarding the importance of payment, Jiang pointed out that payment is a very core part of our daily life. In the past 20 years, user acquisition strategies have been mainly implemented through social media networks, but in recent years, the most successful growth networks are fintech platforms such as Venmo and PayPal, because they provide peer-to-peer payment and daily payment functions, which are essential to users' daily lives.
The beauty of blockchain payments is that they are global, permissionless, and frictionless from day one. This is completely different from the traditional financial system, where, for example, sending money to grandma in China not only takes time and money, but the process is complex and prone to errors. Blockchain payments can complete these transactions instantly without these frictions.
Oskari concluded that once TON solves current growth bottlenecks, such as cross-chain bridging , the powerful power of its distribution channels will be fully utilized and future data will be very exciting.
TON’s value accumulation and investment potential
Oskari mentioned that TON has three main verticals: community, games, and payments and stablecoins. These areas build TON’s investment logic, and the importance of value accumulation in evaluating TON tokens cannot be ignored.
Jiang explained that the TON token is very similar to other L1 tokens in that it is a gas token used for all transactions on the TON blockchain. Currently, each transaction costs about 2 cents, with half of the transaction fees being burned.
This mechanism is similar to Ethereum, although the percentage of Ethereum destruction is larger. A portion of the transaction fees are destroyed, which helps reduce the supply of tokens, thereby increasing the value of the remaining token holders. Jiang emphasized that he usually thinks about things in terms of earnings per share or value per token. As the supply of tokens decreases due to destruction, the value of each token will rise if the total economic value of the system remains the same. This is the value accumulation mechanism of the TON token.
In order to achieve value growth, more transactions and economic activities need to be seen. These activities will translate into more token destruction and an increase in the value of each token. Therefore, TON's value accumulation depends on active transactions and economic activities within its ecosystem.
Risk and the “unanalyzable”
Jiang pointed 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 obtain TON tokens by achieving certain indicators in the next five years. This economic and philosophical consistency makes them more reassured about this relationship.
Another question is why TON will be more successful than other applications based on EVM or Solana.
Jiang explained that the TON wallet is a new tab in the Telegram app, which provides a huge advantage. User experience and UI design are very important, and every click will lead to user loss, so TON only requires one click to access, while other apps require multiple clicks.
TON is still in a very early stage, and when they first started researching TON, it didn’t even have a stablecoin. A lot of infrastructure has not been built yet, such as cross-chain bridges and developer tools. These all take time and effort to achieve, and investors need to have confidence in these future potentials.
TON is not EVM-compatible and is not written in Rust, but rather in FunC, a variant of C. While many developers use C, few cryptocurrency developers are comfortable using C. This could affect TON's ability to attract developers.
Growing from a few million users today to hundreds of millions in the future requires a lot of execution work and the coordination of multiple factors. This is a huge challenge with high execution risk.
Market Opportunity and Valuation Potential
Jiang believes that the core of L1 blockchain is to serve as a settlement layer for transactions, and its value depends on how much economic activity it can attract to the blockchain.
User growth: Telegram could reach 1.5 billion users in the next few years, from 900 million currently. If TON can penetrate one-third of them, then TON could have around 500 million users.
Revenue per User (ARPU): If TON can achieve an ARPU of $10 per user, 500 million users could generate $5 billion in annual revenue.
Payment settlement networks are high-margin businesses, with margins of almost 100%, so they can be given a higher P/E multiple.
Valuation calculation: Assuming $5 billion in annual revenue, multiplied by a 30x P/E multiple, you get a market cap of $150 billion.
Token Price: The current supply of TON tokens is approximately 5 billion, which means the potential price per token can reach $30.
Supporting TON’s Growth
Jiang detailed how they actively support the growth and development of TON (The Open Network) as a long-term investor. Here are some key points:
1. The role of long-term investors
a. Active participation
Jiang emphasized that as long-term investors, they are not just passive providers of funds, but actively participate in the management and development of the invested companies. Whether in the early or late stages, they will actively cooperate with the management team to provide advice and support.
b. Education and guidance
As large investors in the industry, they believe it is their responsibility to educate those outside the industry and guide developments within the industry. They use their perspectives and experience to help companies identify and respond to changes in the market and competition.
2. Provide multi-faceted support
a. Talent and resources
Pantera has a variety of professional talents and resources to provide support in multiple areas, including existing portfolio company networks, service provider relationships, token economics experts, internal legal counsel, capital markets and marketing, etc. Companies at different stages require different support, and they will provide corresponding help based on the specific needs of the company.
b. Investor perspective
Management teams are often focused on day-to-day execution and may not always be paying attention to larger industry dynamics or competitive changes. The role of investors is to help management teams see these changes and provide strategic advice. In addition, management teams, especially in the early stages of the cryptocurrency space, are often more focused on technology and products and may overlook capital market and commercialization considerations. Investors can provide this expertise and help companies achieve commercial and capital market feasibility.
3. Specific measures
a. Improve developer experience
They work closely with the TON team to improve developer documentation and ensure the usability of development tools. They also collect feedback from applications across the TON ecosystem to understand what works well and what needs improvement.
b. Collect and provide feedback
They act as the eyes and ears of developers, collect developer feedback, and communicate with the TON Foundation regularly to provide feedback and suggestions to help guide product development.
4. Support risk response
a. Improved developer experience
Attract more developers to join the TON ecosystem by improving developer documentation and tools.
b. Market and capital support
Help the TON team better understand the needs of investors and ensure that the product is not only technically feasible but also viable in business and capital markets.
Conclusion and Future Outlook
Jiang emphasized that Pantera Capital's investment strategy has always been centered around fundamental and rigorous investment principles. They focus on investing in high-potential startups and protocols that must have product-market fit, economic surplus creation capabilities, strong growth prospects, a trustworthy management team, and the ability to capture a certain percentage of economic surplus.
Jiang detailed how they actively support the development of TON, including improving developer experience, collecting and providing feedback, and providing expertise in capital markets and commercialization. They believe TON has great potential and are committed to helping it achieve long-term success.
Pantera Capital’s investments cover all aspects of the cryptocurrency space, from applications to infrastructure. They have specific views on different applications and infrastructure, although Jiang personally prefers investment at the application level.
Jiang pointed to several areas they believe have high potential:
Block Space: This is the largest market and includes blockchains such as TON, Ethereum, and Solana, which are centered around selling block space.
Decentralized Finance ( DeFi ): Specifically those businesses that use token incentives to incentivize real-world behaviors and businesses.
The intersection of AI and cryptocurrency: While it may not be profitable yet, it has huge potential for profitability in the future. Blockchain can uniquely support many AI use cases and accelerate AI adoption.
Jiang stressed that the fundamentals of investment are very important. When choosing investment targets, they always focus on projects that can create economic value and have strong growth prospects.
Pantera Capital is open to any high-potential projects in the cryptocurrency field, and they are constantly looking for new investment opportunities to promote the development of the entire industry.
