Introduction
Before making an investment in a business, particularly a crypto project, it is vital to read the project’s white paper. The information in the white paper helps you understand how plausible the project is. The white paper is like a scientific article based on an experiment or any other form of research. The difference is that the article is written after the completion of the study, but the white paper is written at the beginning of the work to introduce the project. Also, the article contains tested results, but the information in the white paper may not be conclusive if the project fails. In this paper, we help you distinguish between a well and a poorly-developed white paper, so you know what information to look for in a white paper.
What is a White Paper?
Before we delve into the matter, let us briefly describe what a white paper is. A white paper is basically a project’s plan to attract investors and earn capital. It represents a vacancy or deficiency and provides a solution to fill the gap. Therefore, based on the white paper, you can figure out whether the project is dealing with a problem that is already solved or addresses a major issue in blockchain technology. In other words, the white paper can represent the project’s novelty and necessity, a detailed approach to the stated problem, a viable solution and a comprehensive plan to guarantee the project’s future. Of course, as an investor, you should make time to look into other white papers of similar projects to make an informed decision. The remainder of the article elaborates on the elements of an excellent white paper.
1- Structured Format
As mentioned above, a white paper is similar to a scientific paper. Before anything, the white paper must be organized in the first look. It should start with an index, go to the abstract that gives an overview of the paper, proceeds to the introduction, and continue with the project’s step-by-step proposal to solve the issue.
If a white paper is not well-structured, you cannot easily navigate through the text or compare a particular of the paper with the respective part in another paper. Some crypto projects use the .pdf format to present their white paper, and others explain it under Documentation on their website. The web version is easier to explore but lacks the solidity of the .pdf format. That is, the administrators can easily modify the online version. In contrast, the .pdf format stored on your hard drive is not alterable. as a fundamental document, the white paper cannot easily change its parts.
2- The Size of a White Paper
The length of a white paper is dependent on how exhaustively the experts have elaborated on the problem and solution. The Bitcoin white paper is ten pages, while other projects’ white papers like Ethereum or Solana may amount to 30 to 40 pages. Overall, the white paper’s length should not exceed 50 pages, including the references. The longer the document gets, the less likely it is to maintain the readers’ attention. The conciseness of the document plays a vital role in this respect. The text must clearly represent the project and explain the issue comprehensively in as few words as possible.
3- Clear and Understandable
The white paper is meant to link the business with the interested audience. Therefore, the language should be understandable as most readers might not be familiar with the technical jargon. Basically, if you do not comprehend the white paper, you are blindly investing your money in the project. Of course, it does not mean that you should not expect any technical terminology, especially when the white paper is explaining the solution. But it should be clear enough for an average crypto trader to get the gist of the matter. Additionally, a good white paper benefits from shapes and figures that visualize the procedure.
4- Aim of the Project
The aim of the project must be specific. No beating around the bush is tolerable in a white paper. The abstract illustrates a general scheme of the purpose of the project the body of the document explains it logically. The project’s roadmap depends on its purpose, and if the white paper fails to clearly state its aim, the roadmap is just a route to nowhere land. For example, the Solana white paper vividly states that it aims to introduce the Proof of History (PoH) architecture. Then, throughout the text elaborates on the details of its proposal.
5- Consensus
The information on consensus tells us how the nodes on the blockchain reach an agreement on the current status of the network. Furthermore, the consensus determines the criteria according to which nodes can verify the transactions. Proof-of-Work (PoW) and Proof of Stake (PoS) are the most common consensuses around.
4-1 Proof of Work
PoW is the oldest consensus and requires nodes to spend computing power to solve complex mathematical problems. PoW is extraordinarily secure, and compromising a PoW-based network is too costly to occur. Bitcoin is the first and most famous blockchain to use PoW.
4-2 Proof of Stake
PoS is the second most popular blockchain consensus. Ethereum used to operate using PoW, but in September 2022, it transitioned to PoS. Based on the PoS scheme, network nodes need to lock a certain number of tokens in the blockchain to be able to verify transactions. Therefore, unlike PoW, PoS does not need to expend large amounts of computing power to validate transactions. As a result, PoS is extremely cost-effective but the network security is maintained by the project’s community and does not have the solidity of PoW.
Of course, there are many other types of consensuses, such as Proof of Importance (PoI), Proof of Capacity (PoC), Proof of Authority (PoA), etc. When you are reading a white paper, look for the consensus and research its pros and cons. Security, stability and affordability are the key factors when analyzing the consensus.
6- Solution Part of the White Paper
This is where things get tricky for average readers. The solution in a white paper includes mathematical explanations, formulas, and algorithms describing how the project will work. However, it should not concern you since there are many crypto analysts who can interpret the data and put it in simple terms. We do not mean to imply that the data in the solution is not understandable. It might be more intangible and theoretical compared to other parts of the white paper. A good white paper will bring real-life examples of the project’s use case to clarify the solution.
The project’s solution in the white paper goes a long way in attracting investors. You should refer to the problem and see whether the explanations in this part can address it. The solution should be unique and innovative. Other crypto projects may already have addressed the same problem, but as far as the new project unveils remarkable features, it is worth investing in. The art of the white paper is to justify the reason why investors should invest in this project rather than other similar projects. The solution must be compelling enough to persuade the investors that the project will survive the fierce competition in the market. You, as the investor, should make an effort to examine the project founders’ claim about the importance of their work.
7- Tokenization
Tokenization refers to the process of converting something of value to a token that users can trade or use on the blockchain for other purposes. The tokenization sheds light on how easily token holders can trade their assets, how much the transaction costs are, and how transparent are the token transfers on the blockchain. Tokens come in several categories. First, security tokens represent a voting right or a share in a company. The second type is the utility token that gives users access to the features of a blockchain. The third type is a currency token designed for trading. Currency tokens can derive their value from an underlying asset (e.g., USDT) or blockchain mechanisms. Knowledge of tokenization can give you an understanding of the asset’s liquidity and how easily you can monetize your investment. You can read this article for further information on tokenization. https://www.gemini.com/cryptopedia/what-is-tokenization-definition-crypto-token
8- Token Economics
Token Economies, or tokenomics, is another section you should find in a white paper. This element can paint you a picture of the project’s future and how many tokens you receive in exchange for your investment. Tokenomics can also show how the funds will be used for the project’s advancement according to the roadmap. Some critical points in analyzing tokenomics include token supply, distribution, and incentives.
8-1 Token Supply
The token supply indicates whether the project will mint a limited or unlimited number of tokens. Tokens with a maximum supply are deflationary in nature, and uncapped tokens devise mechanisms to control inflation as the number of tokens increases. For example, based on tokenomics, smart contracts burn a predetermined number of tokens at an orderly interval to control the asset’s circulating supply.
8-2 Toke Distribution
The distribution of the tokens can tell you how many of the tokens are in possession of the project’s developers and investors and how many are dedicated to the public. The token distribution should maintain a balance between private and public investors. Projects that allocate more than 50% of the tokens to private investors are riskier for public investors.
8-3 Token Use Case
As we explained under Tokenization, the project’s token can have any of the several functions. Interestingly, some projects with broader ecosystems may have more than one token type used in different sections of the company’s platform. If you have some basic fundamental analysis skills, this part can tell you whether the utility is worth investing in.
8-4 Token Incentives
Token incentives refer to the rewards that the nodes contributing to the network receive. The nodes can receive incentives for validating transactions (as in PoS-based blockchain), staking assets or lending them. The incentive plan should be designed to maintain the balance between supply and demand for the asset in the market.
8-5 Token Listing
You should look for information regarding the token listing in different exchanges. Does the white paper provide any details on how many crypto exchanges will list the token? If so, how much is the trading volume of the exchange? The answers to these questions can assure you how conveniently you can withdraw your capital once you have invested in the project.
9- The Project’s Team
For most investors, the team behind the project is the most critical factor in the project’s success. Some white papers introduce the CEO and the project’s management team for transparency. For example, the BNB white paper is very transparent in this regard (and it must be since BNB is the utility token of the centralized exchange, Binance). However, other projects may evade introducing the founding team. Since we are dealing with blockchain technology, anonymity is not a negative feature. For example, there is no information about the developers’ team in a project like Zcash, where the focus is on the privacy and security of the transactions. For cases like this, you can search other reliable sources to get information about the project’s developers.
10- Conclusion
After stating the problem and providing an in-depth solution to address it, the white paper should end with a brief conclusion. The conclusion contains a summary of the information you need to look for in a white paper.
Final Words
If you want to make a safe short-term or long-term investment in the crypto business, you should take several aspects into consideration. One of the essential aspects is reading the project’s white paper. The document should briefly and clearly state the problem at the very beginning and go through the details in the body of the text. In this article, we tried to mention all the crucial information a white paper must include. By analyzing the abovementioned factors, you can make an informed decision on investing in the right business.
Disclaimer
The guidelines we mentioned in this article are only for educational purposes. Please do not regard them as financial advice. Note that investing in financial markets requires a comprehensive trading plan. Any rash decision can easily spoil your capital.
