How to read a Whitepaper?
Now researching a whitepaper gets easy!
This is going to be a long one,so bear with me !
In the Blockchain and crypto world, technical jargon often floods a whitepaper. It is riddled with so many terminologies that we often get lost in details or lose track of the purpose.
I know it can be difficult, as I have experienced over the years. But, last night, I could not sleep thinking it over and over again when I was reading a whitepaper of my next potential allocation(more on that later)
I realized how complex and challenging, at the same time very demotivating, it can be for newbies who are just trying to set their foot in this space. I could not help but remember my situation when I read “Polkadot” whitepaper, which frankly went above my head.
(Thanks to the brilliance of Dr. Gavin wood, No offense to him: I admire his vision and intelligence)
Enough with digression, so I ended up waking middle of the night and started jotting down on what I could accumulate the whole night about how to read a whitepaper.
What is Whitepaper? Or is it only called white paper?
Here is what Wikipedia says
It is a technical summary of the project, broadly including its purpose, philosophy, team, funding or backers, and roadmap. Generally, it is one of the first few developments that the team showcase while launching the project.
Why?
It is a channel that allows people to understand its impact and potential. It is also reported to be used primarily for marketing purposes because it is intended to attract investors, making it possible to funnel big money from retail to VCs.
Sometimes, a whitepaper may be called by different names. For example, Ethereum’s white paper is called Yellow paper. A yellow paper is a more technical but concise version of a white paper. Sometimes, a white paper is also called Beige paper, which is relatively less technical and less elaborate than a yellow paper.
So, what are things to look out for when we read a white paper?
1. Year of launch and the author’s profile
The first thing I look at is when it was written and who the author is. It is because these crypto projects develop or instead change over time. As a result, multiple versions of white paper may be issued for a single project since it was first launched. So it is essential as an investor to ensure that I am reading the most updated whitepaper.
The source of the whitepaper is usually its website, but sometimes it may also be documented in other documentation links. If I cannot find whitepaper, the most often used website for all whitepaper searches is whitepaper.io. The fun part of this website is that you can also glance at the project’s older version of the whitepaper(if it changed over time). It is where I analyze the quality of a whitepaper.
The reason is that I can see how the project has developed or changed over time since its genesis. Now, it can be essential. I cannot overemphasize that it’s not a good sign when a project seems to be associated with the same version of the script or significantly insignificant changes are observed.
Why?
It indicates that the project’s adaptability is not present, and thus with time, it may lose its presence to its competitors even if the project has very high potential at its early stage.
I specifically pay attention to discrepancies and ambiguity between former and current authors. A different tone of the paper and direction may indicate a disagreement among its authors, which is a concern for me in the future. This development could trigger internal team issues, which I may not be privy to.
Why does it matter?
Because, when privy to such issues, big investors may not be interested in those projects, which could pop up late after being invested, and hence a big downfall may occur for the same.
It also signifies how the team is behind the scenes because they are usually the author of the whitepaper. And this is also where I try to find a red flag in its paper. If a team’s members are not the authors, you should turn your face 180 degrees. The team’s history and earlier ventures and cooperation are essential for the project as it plays a long-term role in its potential.
2. Funding and project headquarter(registered location)
Funding is the project’s backbone because the team’s vision may be paralyzed and eventually go for a toss without capital. I usually look at the maximum amount of funding that the project envisages raising? Or even in some cases already raised. A VC may heavily influence a project, and thus, the issue of control comes into the picture. Arguably, giant funding by a VC is sometimes, reportedly, a good sign or a bad sign, according to the opinions in the market. I generally look at the profile of the VC backing the project. When you see some VCs which are subsidiaries of big names such as Coinbase, Binance, etc. it most likely indicates that those projects are going to be listed on those exchanges and are a good sign for the success of the project
If subsidiaries backing the project are already a big name in the same industry, it reflects the experts’ confidence in the project. It is worth mentioning that I find funding by a VC after the project’s launch a good sign because it indicates that VC is in for a long-term play but not for pump and dump.
The headquarters ‘ location (usually the project’s prime location) plays a vital role in its success. It is because the country’s regulations can be detrimental to that project’s growth and other milestones. For example, the United States generally has strict rules regarding ICO, exchange listing, etc., for projects based in the US. Hence the growth of projects gets hampered. You can find some examples if you google them.
3. Purpose of the project and the trade-offs
Ideally, a white paper should direct you straight to its purpose at the start of a whitepaper. It includes the details such as :
What the team or project is trying to solve?
How big is the problem?
How are they trying to accomplish it?
If the project’s intended purpose is not given at the start and instead replaced with some irrelevant history, then it’s a red flag for me.
It conveys that this whitepaper is meant for inexperienced people and thus a lousy quality parameter, in my opinion. I also try to see whether the authors can define the project’s purpose without articulating its competitor’s name. If it does, it indicates that the project is likely to be a good one. If the authors spend too much time talking about their competitors rather than portraying what they are trying to achieve, it’s a concern for me.
It can also be a game-changer for your research if you can see whether the project is built from scratch or a fork of something else with a few different features. Because a ground-up project has more upside than a forked one has.
4. Design and philosophy of the project
A project’s internal technical foundation is vital for its success. What I mean is the underlying architecture and core principles of the project.
If you are unaware of architecture technically, it is analogous to the internal organs of a human body, required for the smooth function of the system. A more realistic lookout will be whether the architecture’s base is a coin or a token.
It differs in the case that a coin is generally a blockchain’s native currency used in various ways, while a token is built on the top of its Blockchain or multiple Blockchain, for that matter.
So, when I look at the architecture of the project, I look at its Consensus protocol, Validation model, and other features.
The consensus protocol is how the Blockchain acquires its true value. This is a topic for some other day, but to set briefly, I see whether it is a Proof of Work or Proof of stake apart from others such as Proof of history which is a component of Proof of stake. I prefer the Proof of stake model to Proof of work because of its energy issue and useless competition.
I then look out for the barrier of entry to validators and the limitations to the number of validators that can be a part of Blockchain. If there are limitations, then it is likely a more centralized one than the decentralized one, which is a big red flag for me. Though there may be some trade-offs, such as the TPS may be super-fast, as, in the case of Binance, such trade-offs also have risks involved.
Other features also carry a crucial role in the research. Technology such as virtual machines is where smart contracts deployments and interoperability occur. I generally look at whether they are using an existing platform or building a new platform as there are again a few trade-offs. There may be concerns concerning the above. If the project uses an existing platform such as EVM, their scaling solutions may be the same as their competitors. They are just copying another smart contract that may have existing limitations. However, if they are using or building a new platform, a trade-off is the risk because it might not be as good as its established competitors.
5. Tokenomics and Use of funds,
Tokenomics, usually often overlooked by a newbie, is critical to a coin’s price and valuation. The total token supply, sources of allocation, and drivers of demand can impact a project’s potential significantly. Similarly, unsold tokens at the initial allocation also go unnoticed in the research as to whether they are burned or kept decides the integrity of the team involved.
Sources of coins/tokens supply include annual inflation, initial allocations, and vesting schedule. High inflation is undesirable for a project. The initial allocation is essential because its team members are allocated a considerable chunk through the sale. It can trigger a selling pressure after price escalation, especially if the vesting schedule is not smooth. A long, smooth vesting schedule is healthy for the project, while a stair-case graph-like schedule consisting of risers and treads is not healthy.
The demand drivers include:
Transaction fees of the network.
Staking rewards.
Other perks such as airdrop of tokens built on Blockchain.
Generally, crypto coins have the most substantial potential rather than tokens because they are required to pay all the fees on the Blockchain and are used for various purposes such as governance, etc. Further, if the marketing strategies are in good play, it can trigger the adoption and thus a good potential for price escalation.
The use of funds is also required in defining a project’s success. Good and well-balanced use of the funding ensures investors’ confidence in the project. There are various areas where funding is utilized. Some of them are product development, branding, promotions, Legal expenses and allocation for developers for a hackathon, etc.
6. Roadmap
Practical and realistic milestones set out for many years are a healthy sign of a good project. Landmarks such as Test net launch, Main net launch, Wallet addition, Exchange listing, Additional upgrades such as Privacy, scalability, etc., partnerships are initially well planned and expressed in a whitepaper. If it is not, then it may not be a good indicator. However, regulations and unfriendly jurisdiction of the country where the project is located also play an essential role in expressing the road map.
Typically, if a roadmap is not set out in a whitepaper, it may be included in its other documentation. As mentioned earlier, there may be no roadmaps from a team depending upon the jurisdiction of the country it is located in.
It is rather disturbing because unfriendly jurisdiction’s controller may assume that if there are attractive roadmaps, it can be termed as a tool to attract investors for profit speculation. Thus, unnecessary hassle and legal visits from regulators may be triggered.
7. Index and references
Index and references, which are often overlooked, are usually at the last section of a whitepaper. The references can give a strong indication of the technicality of the project. As such, whitepapers are cited in several subsequent journals and papers, which is a healthy sign of a project because the project’s technical structure is usually sound with more citations. You may track profiles through references and know about the authors, whether they are highly respected or veterans in the industry, or newbies.
For example, references indicated in the whitepaper of the Avalanche project are very impressive. The authors are highly respected, one of them being Emin G¨un Sirer, an acclaimed associate professor of Cornell University. References to a general page such as Wikipedia and other whitepapers are not good signs, while reference to quality sources such as scientific journals and papers are indicators of a good project.
Thus wrapping up, I hope that this well-detailed article will help you to do more detailed research of some projects.
Disclaimer: None of the content, in part or whole, articulated here is any financial advice. This article is about a part of my investment philosophy and a medium to generate awareness in the financial journey. Please consult your financial advisor before making any financial decision.
Apologies for the above disclaimer!
So, did you like the content? If you did not, please drop a comment to share your feedback. I hope you enjoyed the content and added another pill of knowledge to your list. If you like the content, please let me know through any means conveniently, as this would help me and motivate me to write more valuable content for you. For more articles and updates, please follow my page.