Who Controls the Majority of Mined TONs? (De)Centralization in TON

The Decentralized Legacy of Pavel Durov — The Open Network — is actively evolving: The DeFi ecosystem is gradually increasing TVL, various services are emerging, and the Toncoin token remains in the top 30 in terms of market capitalization rankings.

However, researchers at Whiterabbit have concluded that not everything is smooth sailing for the project. One of the main risks is centralization due to the excessive concentration of utility tokens among a small number of ecosystem participants associated with the TON Foundation.

Nearly 86% of the total supply of Toncoin tokens is held by a small number of TON ecosystem participants.

Many “whale” addresses closely interact with each other and are also linked to the TON Foundation.

Whiterabbit researchers see signs of centralization in the TON project and risks of manipulation of the utility token price.

The Complex Story of The Open Network

To better understand the essence of the problem, it is advisable to delve into the context. Let’s recall a brief history of the project.

The Open Network — a Proof-of-Stake-based blockchain initially created by the Telegram team but now supported by third-party developers.

The first information about plans to create an ambitious blockchain project appeared on December 22, 2017. Former VKontakte employee Anton Rosenberg revealed that Pavel Durov planned to conduct an ICO for Telegram. He disclosed the project’s name — Telegram Open Network (TON) — and the token — Gram.

By that time, the messenger’s user base had reached 180 million people, and the crypto industry was experiencing a boom in initial coin offerings.

The Telegram team decided to conduct a private token sale involving professional investors, which more closely resembled a traditional fundraising round for tech companies. In exchange for money, investors were supposed to receive Gram tokens, but only after the launch of the TON network.

In January 2018, the ICO application process began. It was conducted in accordance with US law because US investors participated in the token sale.

The excitement surrounding the ICO was truly great: in the first round, the volume of applications reached $3.8 billion, exceeding the planned figure several times over. The goal of raising $850 million was quickly achieved.

In addition to American investors, TON attracted investments from Asian and Russian entrepreneurs, including Roman Abramovich and Mikhail Abyzov. Then another $850 million was raised in the second round.

TON was conceived as the next stage in blockchain development after Bitcoin and Ethereum. It was supposed to become a platform for decentralized applications with smart contracts and a virtual machine. But scalability was initially built into the architecture of TON, far exceeding the capabilities of Ethereum.

An important direction was related to integrating the system and Gram into Telegram, which would provide access to hundreds of millions of users. It was assumed that tokens could be used to pay for advertising in channels.

Although the creation of TON took place in secrecy, third-party developers were involved, and the Telegram team published the results openly. This allowed the project to be launched in 2020 without the participation of Telegram and Pavel Durov.

In the spring of 2019, the TON test network went live. Access was granted to several third-party teams, including TON Labs.

By the fall, it became clear that TON was in its final stages. The code for the full node appeared on the test.ton.org website, and a block explorer was launched for the test network.

According to the terms of the contract with Telegram, ICO participants could only receive Gram tokens after the main TON network was launched, but no later than October 31, 2019. This date served as the deadline for the project’s implementation.

However, on the eve of the launch, on October 11, the SEC suddenly announced the adoption of “emergency measures and restrictions” against two offshore companies associated with the TON token sale. The Commission stated that Gram had been illegally sold to investors. Officials also concluded that rights to 1 billion tokens had been sold to 39 US residents.

The SEC obtained a temporary restraining order against the distribution of Gram, making the launch of TON impossible. The agency also sued Telegram for selling unregistered securities.

As a result, Pavel Durov announced the closure of the project, and his company did not challenge the court’s injunction against the issuance of Gram.

The New Life of TON

By the spring of 2020, all the technical components of the Telegram Open Network were ready, and the community announced the possibility of launching the network without Telegram’s involvement, as the company had relinquished sole control over the project. The scenario of a “decentralized launch” was supported by the leading validators of the network.

After the closure of TON, several independent teams continued to work on blockchain based on the project’s code:

• Free TON, later renamed Everscale;
• The Chinese project from the TON Community (which is currently not being developed);

NewTON

In March 2021, representatives of Telegram transferred the ton.org domain and the GitHub repository to The Open Network community (formerly NewTON).

By that time, the issuance of the ecosystem’s native token — Toncoin — had reached 5 billion coins. The number of accounts in the network exceeded 70,000.

“We are disappointed that Telegram was forced to withdraw from the TON project in 2020. However, the community will continue to develop the underlying TON technology,” noted members of The Open Network.

In December 2021, Pavel Durov publicly supported the developers of Toncoin.

He stated that he was proud that “the technology is alive and evolving.” Durov also emphasized that Toncoin is not dependent on the Telegram team and wished the developers success:

“In combination with the right market entry strategy, they have everything they need to create something grand.”

The statement led to a significant increase in the token’s price.

In early November 2022, the Fragment platform initiated the sale of Telegram usernames for Toncoin. The first batch, @auto, was sold for 900,000 Toncoin (approximately $1.4 million at that time).

In February 2023, TON validators voted to suspend the operation of 194 wallets with a total balance of 1.08 billion Toncoin (>$2 billion), which had not conducted any transactions since the distribution of coins from 2020 to 2022.

“By potentially suspending the operation of these wallets […] clarity will be provided regarding the volume of available Toncoin,” the project’s blog stated.

The procedure does not cover addresses that did not participate in the initial distribution. The suspension will be effective for four years. The corresponding addresses will lose the ability to conduct transactions during this period.

The volume of frozen coins is equivalent to 21.3% of the total asset supply.

Also in February, TON developers presented the roadmap for 2023. It includes:

• Launching a unified protocol for interaction between ecosystem applications and wallets;
• Enhancing network security and stability;
• Support for EVM signature verification;
• Improving TON wallet address formats and transforming them into decentralized encrypted messengers;
• Implementing a mechanism for burning part of the fees;
• Cross-chain transfers between TON and Polygon, as well as creating a bridge for transferring bitcoins, ETH, and BNB;
• Splitting nodes into collators and validators to increase blockchain performance.

Additionally, the TON team launched the Ton.vote platform for conducting polls. Through it, TToncoin holders will be able to participate in decision-making on all projects in the network.

As of May 6, 2024, the total value locked (TVL) in the TON ecosystem’s applications barely exceeds $206 million. For comparison, BNB Chain and Tron have TVL metrics of $5.45 billion and $8.45 billion, respectively.

The lion’s share of the TVL (approximately 92%) is attributed to the decentralized exchange Ton Stakers.

A representative of TON emphasized that the project’s team is currently paying significant attention to DeFi products, hence the likelihood of the locked-in value within the ecosystem increasing.

“When comparing this [$15 million] figure to the zero TVL in the TON ecosystem just last year, the progress is quite significant. […] We are striving for Web3, of which DeFi is an essential part. We are confident that the TVL of the TON ecosystem will continue to grow and has every chance of becoming the largest in the world,” stated the press service.

An Unconventional Distribution Model

In the summer of 2020, the project initiated the distribution of digital assets through mining based on Initial Proof-of-Work (IPoW). According to developers, the latter combines the advantages of various consensus algorithms.

“The blockchain operates on Proof-of-Stake technology, making it fast and inexpensive. However, the initial token distribution was available through mining, which implies decentralization and equal opportunities for all participants,” as stated on the project’s website.

According to representatives of TON, all tokens were dispersed among “tens of thousands of miners”:

“The project chose not to conduct an ICO, IEO, or any other type of token sale. This growth was organic, much like with Bitcoin.”

According to information from Whiterabbit researchers, on July 6, the Telegram developers transferred tokens “from the system address to 20 contracts for coin distribution.”

The contract addresses were of two types: Small Givers and Large Givers.

“The latter distributed more coins (each time 100,000 instead of 100), but required more computational power,” explained Whiterabbit experts.

According to their observations, mining continued from July 6, 2020, to June 28, 2022. However, almost all issued coins were distributed within 51 days after the launch of mining capabilities:

• From July 6 to August 26, 2020, Large Givers distributed 4.8 billion (96%) tokens, while Small Givers distributed only 9.9 million coins (0.2%);

• From August 27 to June 28, 2022, Small Givers distributed 117.3 million tokens (2.35%).

“Interestingly, de facto, the Large Givers concluded mining on August 24, but two addresses received the last 100,000 tokens from participants in this group on August 26,” the researchers noted.

According to their observations, the remaining 1.45% of the coins were distributed in 2019-2020 from the system address, “for testing purposes.” Subsequently, the majority of these funds were transferred to one of the addresses of the TON Foundation.

The experts emphasized that after the mining concluded, “the test Grams were renamed to tokens of the main TON network,” and their market capitalization grew from zero to $11 billion over three years.

“Most major holders (miners in the Large Givers category, active since 2020) still hold their coins. A significant portion of them may have long-term plans for the ecosystem,” the researchers noted.

According to their observations, the depth of the TON market is quite shallow. Therefore, it is “almost impossible” to sell these coins without significant influence on the asset’s price.

In the TON press service, it was noted that mining took place “with a certain degree of natural concentration of power and interest among participants.” According to a project representative, this is why significant token holders emerged in the ecosystem.

A big big WHALES!

Whiterabbit researchers also concluded that 3,278 unique addresses participated in mining. However, only 248 interacted with Large Givers. As mentioned earlier, the latter distributed 96% of the coin supply. These findings somewhat contrast with TON developers’ statement about the participation of “tens of thousands of miners.”

“In addition, these 248 addresses are closely interconnected […]. We also detected some retail activity, but the majority of tokens were mined by a group of whales connected to each other,” noted Whiterabbit.

Based on on-chain analysis results, experts divided the major miners into several groups that interacted with Large Givers and were linked to TON Foundation:

1. First (July 6 — July 30) — mined 22% of the total coin supply;
2. Second (July 30 — August 24) — 20%;
3. Third (July 6 — August 24) — 18.8%;
4. Fourth (July 19 — August 24) — 17.2%;
5. Smaller groups that started mining on August 1 — 7.8%.

“According to our calculations, addresses associated with TON Foundation control at least 85.8% of the supply volume,” emphasized the researchers.

The Whiterabbit team also discovered that 170 validators (out of 272 active at the time of the study) were associated with the aforementioned mining groups. Additionally, 12 such ecosystem participants received funds from TON Foundation “either directly or through proxy addresses.”

“Thus, there are 182 (~66.9%) validators who received coins from certain mining groups. The latter may be under the control of the aforementioned group of early TON miners,” shared the researchers, providing a table with detailed results of on-chain analysis.

Whiterabbit experts concluded that the addresses “controlling at least 85.8% of the supply” are also closely interconnected.

“The group of individuals controlling these addresses slowly releases TON tokens into the market, limiting their supply and exerting a low liquidity effect. This positively impacts the price of TON,” the researchers added.

It is unknown who specifically controls these addresses. However, at least some of these mysterious market participants collaborate with TON Foundation, the experts speculated.

“This group sent tens of millions of TON tokens to centralized exchanges to provide liquidity. Integration with these trading platforms was announced and managed by TON Foundation,” they added.

Additionally, transfers from the aforementioned addresses were made to “key members of the TON community.” Test transactions were also conducted in interaction with TON Foundation, exchanges, and other services.

The researchers also expressed the opinion that the recent initiative to freeze addresses with 1.08 billion Toncoin is unlikely to solve the problem of supply concentration — the mentioned mining groups will continue to hold the lion’s share of the coins.

“Potential investors will see the risks of centralization in such a token distribution,” speculated Whiterabbit.

Prospects for TON: Addressing Centralization Risks and Future Challenges

According to researchers, the fate and future prospects of the TON project heavily depend on how its tokens are distributed. The active involvement of the community and key ecosystem projects in this process could contribute to the popularization of the blockchain. However, the concentration of token holders remains a significant challenge, as large holders may manipulate the token supply and its price.

TON representatives state that token distribution is already actively underway through grants, contests, hackathons, and airdrops. Nevertheless, recent initiatives to freeze tokens, while reducing associated risks, have not fully addressed the problem of centralization among token holders.

One of the main challenges facing the project is the centralization risk, as large holders can manipulate the token supply and price. Additionally, the high entry barrier for developers could slow down ecosystem development, as they would need to learn new technologies and programming languages.

However, with integration with Telegram, asynchronous blockchain architecture, and a strong developer base, the TON ecosystem could become a serious competitor to projects like BNB Chain, Polygon, or Avalanche in the future. The success of the project will depend on how effectively cooperation between key ecosystem participants is managed and how token distribution is handled.

The organization highlighted that the concentration of liquid assets among large holders is a common scenario in cryptocurrency projects. According to a spokesperson, similar situations can be observed in networks like Bitcoin and Ethereum.

The press service also added that the impact of token freezing on the project’s economy would be “limited.” This is because access to relevant addresses was lost even before the vote on the suspension took place.

Conclusion

When conducting thorough fundamental analysis of projects, investors should pay attention to the nature and pace of cryptocurrency issuance, as well as the plans and characteristics of its distribution in the future.

If a significant portion of coins is concentrated in a small number of addresses, this indicates centralization of the project. In such a scenario, one of the main risks is decision-making by a small group of ecosystem participants in their own favor. In the case of TON, for example, this includes the freezing of addresses based on validator voting results or the potential sale of a large volume of tokens “on the market”.

Nevertheless, a strong team of developers, innovative technology, as well as integrations can create a powerful network effect, capable of mitigating many drawbacks.

FAQ: 

1. What is the current state of decentralization in the TON project? Researchers at Whiterabbit have found signs of centralization in the TON project due to the excessive concentration of utility tokens among a small number of ecosystem participants, many of whom are associated with the TON Foundation.
2. How much of the Toncoin token supply is held by a small number of participants? Nearly 86% of the total supply of Toncoin tokens is held by a small number of TON ecosystem participants, raising concerns about centralization and potential manipulation of the token price.
3. What were the findings of Whiterabbit researchers regarding TON’s mining process? Whiterabbit researchers discovered that a significant portion of tokens were mined by a group of “whales” closely connected to each other, with almost all coins distributed within a short period after mining commenced.
4. How are TON validators and mining groups linked? A substantial number of validators (66.9%) are associated with mining groups that received coins from certain large miners, potentially under the control of early TON miners.
5. What are the implications of the recent initiative to freeze addresses with 1.08 billion Toncoin? While this initiative aims to address supply concentration, Whiterabbit researchers believe it may not fully solve the problem, as the mining groups will likely continue to hold a significant portion of the coins.
6. What are the future challenges and prospects for the TON project? The project’s success depends on effective token distribution, cooperation between ecosystem participants, and addressing centralization risks. Despite challenges, integration with Telegram, strong developer base, and innovative technology could position TON as a serious competitor in the blockchain space.
7. What distinguishes TON’s distribution model from traditional ICOs or token sales? Unlike traditional ICOs or token sales, TON opted for a distribution model based on mining through Initial Proof-of-Work (IPoW), aiming to achieve decentralization and equal opportunities for all participants.
8. What are the main challenges posed by the concentration of token holders in the TON ecosystem? The concentration of token holders raises concerns about decision-making by a small group of participants in their own favor, potentially affecting the project’s governance and market dynamics.
9. How does TON’s TVL compare to other blockchain ecosystems like BNB Chain and Tron? As of May 6, 2024, the total value locked (TVL) in the TON ecosystem’s applications is approximately $206 million, significantly lower than BNB Chain’s $5.45 billion and Tron’s $8.45 billion.
10. What measures has TON taken to address centralization risks and promote decentralization? TON has initiated token distribution through grants, contests, hackathons, and airdrops to involve the community and key ecosystem projects. However, recent initiatives to freeze tokens have only partially addressed the centralization problem.