White Papers: A Quick Rundown
An attempt at simplifying blockchain concepts, companies, and coins.
[Quick note: Julian is taking a short sabbatical in Thailand for the next two weeks. We'll have some amazing guest writers filling in between now and then. Stay tuned. - B]
A white paper in the world of cryptocurrency is a document that outlines the utility, economics, marketing and technology of a currency in the planning stages of an Initial Coin Offering. It is the primary marketing component of an ICO as it outlines the core use-case for the tokens and the organization(s) behind them. Satoshi Nakamoto, the shadowy founder of Bitcoin, launched the crypto craze with his own powerful white paper in 2008.
Since then, white paper creation has become something of a cottage industry in the world of ICOs. University professors, business writers, 'token advisors', and others will take your idea and 'white paper' it for the relatively low fee of $25-$50K. If you end up raising millions on an ICO, this seems like a worthwhile investment.
For the founders, perhaps, but not for the micro-investors who fund the crowdsale. I believe that the nonchalant publishing of white papers without proper research into the technology and utility of the token itself will draw the ire of the SEC and other government organizations in ways that are completely predictable and avoidable. In fact, an SEC investigation claiming unregulated security sales might be the best case scenario for some ICO investors (read: the Munchee debacle) as some ICOs may be intentional frauds (read: the Confido debacle).
Backing up a moment: The speculative mania that is driving the tokenization of everything is a good thing. A unique point in history, much like the tech boom in the 90s, that provides the investor capital necessary to push blockchain innovation to the bleeding edge. Like with all surges of capital, there are assholes who wish to loot and pillage, and there are visionaries who do it for the love of the game.
I have mentioned in the past that there are three buckets of ICOs on the market today. The malicious, the well-intentioned and the game-changers (more info in my last email). The problem isn't with deciding which game-changing ICO to invest in (build a bucket with many of them), but figuring out if the ICO you're reading about is truly in that category. The biggest clue in the analysis is often the white paper itself.
And so, the quick and dirty guide for avoiding the crappy ICOs:
Utility vs. Security vs. Is This Something That Matters:
Ask yourself one question: does this thing really need to exist on the blockchain? Does the blockchain offer some sort of exclusive, important benefit? If the only reason for launching an ICO is to raise capital for a company, you might walking into a mine field.
Look and Feel:
- Does the white paper look amazing, with fancy charts and graphics created by a professional? Great, Satoshi's white paper didn't have a single visual in it besides schematics. The design elements, beyond clarity and readability, need to be disregarded.
- Is it 50 pages long? Does it need to be? Remember, Bitcoin and Ethereum got their point across in 10 or so pages. Is an ICO for Liger Preservation really that much more complicated?
(Exception: some things are more complicated, obviously, so use your own judgement)
- Are words misspelled, misused or confusing? Red flag. Look, I know I'll catch some flak for saying this because many ICOs are from non English-speaking countries. I get it. But finding a US-based editor is not that difficult and details do matter.
(Exception: some white papers are primarily targeting other countries, and are just translated by fans or advisors. I tend to make an exception for offerings targeting countries that don't primarily rely on English-speaking investors)
- Most people reading this email will not be able to understand the more technical aspects of blockchain innovation. I can't either. Find someone who can. If you don't have someone like that in your life, find verified blockchain engineers on Twitter and follow them. They typically do an analysis of most interesting blockchain projects, including currencies.
- Examine the founding team. Do they have a strong technical background? If the two founders don't have a technical bone in their body, guess who didn't write the white paper?
- Examine the advisors and make sure they are actually advisors. That means they've been tweeting or writing about it. Believe it or not, some ICOs are faking advisory boards.
This is a tricky one, as there are token economics built for quick gains if you get in early, and there are token economics built for the long-haul. It's important to figure out what kind of investment you're looking to make: a quick flip or the long haul. This is an enormous topic, and I'll ask Julian to do a more in-depth analysis down the road.
Some things to look for:
- ICO price and why the team came to that conclusion
- Circulating supply, and what percentage will be sold at the ICO. What will happen with the remaining tokens? How will they be burnt (used)?
- Discounts and bonuses (and the associated time frames)
- Lock-up periods (if you can't sell it for 3 months, do you still want it?)
Remember, this is by no means an exhaustive list of things that we look for in ICO white papers. Do your research and read the research others create. Win with information, not pure luck, and don't get left holding the bag!
P.S: For some comic relief, check out this hilarious ICO idea generator.
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