Looking for the center of the action in cryptocurrency today? Bitcoin is so passé – the big money is now in Initial Coin Offerings (ICOs).
Part investment security (although they’re not), part ‘altcoin’ token with true utility (although there isn’t), ICOs are nevertheless attracting billions of dollars in speculative investment from hundreds of thousands of people with more money than sense.
At the center of this frenzy is one upcoming ICO, whose purported $2 billion valuation dwarfs all others – Telegram.
Founded by Russian entrepreneurs Pavel and Nikolai Durov who cashed out of their social media company VKontakte to the tune of $300 million, Telegram is a secure messaging app that competes with the like of WhatsApp.
‘Compete,’ however, is misleading, because Telegram has no viable business model, as it makes no money – on purpose.
In fact, Pavel Durov covers all its expenses out of his own pocket. “Pavel Durov, who shares our vision, supplied Telegram with a generous donation, so we have quite enough money for the time being,” claims the FAQ on the Telegram web site. “If Telegram runs out, we will introduce non-essential paid options to support the infrastructure and finance developer salaries. But making profits will never be an end-goal for Telegram.”
The ICO, therefore, appears to be a mechanism for Telegram to cover its bills. “With growing user base, he would’ve eventually run out of money,” explains Gregory Klumov, CEO and Founder of STASIS. “Therefore he opted for an ICO as a mechanism to raise funds without getting outside investors into Telegram’s shareholder capital.”
Travis Scher, Vice President of Investments at Digital Currency Group echoes this sentiment. “It really felt like it was one of these start-ups that’s burning through cash and needs a way to bring money in to keep funding their operations,” Scher says. “This is how they decided they’re going to do it.”
Why All the Excitement?
Given the plethora of secure messaging apps on the market coupled with Telegram’s lack of a business model, one might wonder what all the excitement is about.
Perhaps its extra layers of security and privacy account for the excitement, as it’s become a favored messaging app among the ‘crypto elite.’ “Telegram is my crypto world,” says Woody Levin, Founder and CEO at 3.0 Capital. “It’s one of the first things I check in the morning and one of the last things I do at night.”
For better or worse, “Telegram users are really at the epicenter of the whole crypto boom,” says Ryan Gilbert, Partner at Propel Venture Partners.
Telegram’s combination of rigorous privacy and zero cost is, in fact, its raison d'être. “Secure messaging should be free for everyone. Displaying ads alongside your private communication seems out of place, even immoral,” according to Pavel Durov. “We’re aiming to set a higher standard for messaging technologies, to raise the bar of communication in terms of speed, security and versatility.”
Yet, while privacy appeals to the crypto elite as well as the dissidents and activists that the Durovs intended to support, it is also enabled Telegraph to become a communication tool of choice for terrorists, child pornographers, and other criminals. In fact, the presence of child pornography on the Telecom app caused Apple AAPL -0.33% to pull it from its App Store last week.
Of particular interest to this criminal underbelly are a Telegram feature it calls ‘secret chats.’ “Secret chats are meant for people who want more secrecy than the average fella,” explains the Telegram web site. “All messages in secret chats use end-to-end encryption.” The site continues: “On top of this, messages cannot be forwarded from secret chats.”
Telegram’s Controversial White Paper
As with all ICOs, Telegram published a white paper delineating its plans for the ICO. While touting world-changing benefits of its tokens (as so many ICOs do), the paper also reveals a lack of depth. “The teams that will win are teams with deep historical context who have been tinkering with consensus mechanisms and scalability for several years. It’s more like science than entrepreneurship,” says Nick Tomaino, Founder of 1confirmation. “In my mind, [Telegram doesn’t] have the talent to do that.”
Even assuming the Telegram team is up the task the company says it is ready to tackle, there is simply too much money in the deal. “You could see how people would say this one checks all the boxes — amazing team, a market set up for them and a good product,” says DCG’s Scher. “[But] the numbers are totally out of whack.”
The size of the ICO, in fact, is separating the more seasoned crypto investors from the newbies. “Venture investors with deep domain expertise in the blockchain technology sector and crypto ecosystem are passing,” says Bart Stephens, Cofounder and Managing Partner at Blockchain Capital. “Generalist VC firms who feel that they have so far missed the boat on crypto appear to be interested.”
While such generalist firms and other newbies are happy to jump on board, the more technically savvy investors are uncomfortable with the technical depth in the white paper.
“The entire thing should have a disclaimer attached: ‘all of the technical things we said this will do are completely unproven and have not been subjected to outside scrutiny,’” says Charles Noyes, Quant Researcher/Protocol Analyst at Pantera Capital. “They’re promising something that will somehow be radically better than everything else out there, with no real explanation of how that will happen or outside scrutiny of those claims,” Noyes continues.
Questions about Telegram’s Homegrown Security
While Telegram touts rigorous security, both within its existing messaging app as well as for the plans it lays out in its white paper, some people have doubts.
At issue: Telegram created its own MTProto security protocol, which hasn’t had the same kind of trial by fire that other protocols have had to face. “They use the MTProto protocol which is effectively homegrown and I’ve seen no proper proofs of its security,” warns Alan Woodward, Member of the Advisory Board at the Kent Interdisciplinary Research Centre in Cybersecurity at the University of Kent and Professor at the University of Surrey. “At present we don’t know enough to know if it’s secure or insecure. That’s the trouble with security by obscurity.” Woodward continues: “Unless you have considerable experience, you shouldn’t write your own crypto. No one really understands why they did that.”
The Telegram FAQ admits the protocol is home-grown. “We are based on the MTProto protocol,” the FAQ explains, “built upon time-tested algorithms to make security compatible with high-speed delivery and reliability on weak connections. We are continuously working with the community to improve the security of our protocol and clients.”
In fact, it didn’t take long for a student to poke holes in Telegram’s security approach. “I’ve discovered Telegram obfuscates its traffic by re-encrypting everything with a prepended key. When I’ve prompted the Telegram Security team for comments, they responded that this measure is used to ‘counter some of the less sophisticated attempts at banning our service in certain countries,’” explains Tomáš Sušánka, Student and Developer at SatoshiLabs.
Sušánka continues: “The obfuscation method is not officially documented, which makes sense if Telegram uses it to circumvent censorship. However, the reality of its functionality is doubtful at best. A more conventional approach would be much appreciated, such as the usage of SSL/TLS [a common, hardened protocol].”