How to read an ICO white paper?
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White papers and ICOs
The publication of a white paper have become something of a standard procedure in ICOs. When a startup is rolling out an initial coin offering, they outline the most important points about their business and technology in a document that is usually between 20 and 40 pages. White papers are usually a combination of a traditional business plan with some technical specifications. So you might read about things such as an executive summary, the team etc., but also about the token economy, or the type of blockchain being used.
However, there is no standard way of writing a white paper nor is there any kind of peer-review process. In contrast, for example, to academic papers, a white paper can be written and published by anyone. Therefore, it is up to the prospect investor to look into it in more depth and make an informed choice as to whether a white paper’s claims are sound or not.
Tips for reading white papers
I was recently reading an excellent post by CoinCentral outlining the things to look for, when reviewing a white paper. The main points to ask yourself are:
- What does this project do?
- How does it work?
- Why do we need this project?
- Why do this on the blockchain?
I think all these are valid points and I have talked about some of those in the past as well. However, I might want to add a fifth one: Whether the tokenomics make sense. Let’s take each point in turn:
What does this project do?
In the original article we read
“If you’re not sure what the project does, there are two likely conclusions. Either the project is so advanced that you’ll need more knowledge before you understand it, or the project doesn’t really do anything.”
I think that’s probably one of the best heuristics I’ve heard for white papers.
How does it work?
“By the end of the white paper if you can’t articulate what problem the project solves and how it does so, then the white paper did a poor job. In fact, a well-articulated white paper is a sign of a well-thought out project. On the other hand, the opposite is also true.”
This is another good point. There are many white papers which might be polished with nice graphics, and charts, etc., but when you actually try to understand what it is that they do, you can’t just figure it out. Obviously, not everyone has the technical knowledge to fully understand every blockchain project out there, but a white paper’s role is to actually tone the technical explanations down for the average person.
Be careful with startups that don’t do a good job here. There reason is that either their business model is broken, or they are not good in communicating their business. In the first case, just run with your money. In the latter, be careful, as this can be a sign of inexperience or lack of skill in business.
Why do we need this project?
This is a valid question irrespective of whether the project is based on blockchain or not. However, with white papers sometimes people get carried away with the technology and forget that the business needs to solve a genuine need, which is not addressed through other means.
Why do this on the blockchain?
Bennet Garret says “Not every project needs to be built on the blockchain. There, I said it.” and I couldn’t agree with him more! There are just so many projects that are trying to use blockchain when they shouldn’t. Sometimes, this is the result of a desire to run an ICO, with blockchain not really offering any real advantages. This is also something I have written about in a previous post.
Do the tokenomics make sense?
The final point for me, is to check whether the tokenomics make sense. This is one point where even good white papers get it wrong. Vague numbers, wrong estimations, dubious assumptions, all these things add up and work in synergy to create a completely wrong model. I am a big proponent of using agent based modelling in tokenomics for this very reason. Agent based modelling force your models to become more robust, by explicitly stating and modelling your assumptions.
In the end of the day, you, as an investor, care about whether you are going to see the return on your investment. If the tokenomics are off, then you just can’t be sure you are going to see your investment back.