In this post I will explain what it is I look for when I am reading a project's white paper. Things that hopefully will let me know whether I want to invest in it or not. Let us jump in, shall we?
This post should not be viewed as financial advice, and any advice in it is merely my opinion and how I chose to view things. You are free to do with your money how you see fit.
What is a Whitepaper?
In short, the Whitepaper is the blueprint or manual for a project. In it, you will, hopefully, find information such as why the project was created. And how it is planned to work. You should also be able to find information about the mechanisms that are connected to the coin or token. As well as a section about the project's tokenomics. We will go into details about this later. You should also be able to find information about who has created the project.
I will now go through the parts I look for when I am reading a Whitepaper, detail what their purpose is and why I find those parts to be important. And I might miss or skip some things that you find to ve crucial. If I do so please tell me about it in the comment section down below. And if I agree with your assessment I will make sure to update the post and include the missing part.
Why does the project exist?
The first thing I look for in a white paper is a section that will tell me why the project was created. This is because if the project wants to be a viable long-term project, in almost all cases they need to address a problem and offer a solution to this. If we take Bitcoin as an example. The problem there was that people had no real means to transfer money or wealth between them without having to involve a third party.
The solution then was to have Bitcoin work as a ledger and allow peer-to-peer transactions. This means I can send Bitcoin to anyone I want, without having to involve a third party like a bank.
This part is especially important for long-term projects. Because without a problem and a solution. There is no real value offered by the project. It then only serves as a tool for speculation. A lot of people use the term "shit coin" to describe projects like these. And I would be inclined to agree with that assessment. Usually, these projects are created so the ones creating it can get rich fast. And these projects rarely live any longer extent of time.
I would highly recommend staying away from projects like these as the risk involved usually are very high. But if you are looking for big gains in a short amount of time, this is exactly the type of project you are looking for. But that also means they're probably an even higher chance that you will lose all your money. Access caution while investing in these types of projects.
When you have managed to figure out what the problem is they plan to solve it, and how they propose ding it. You then have to take this information and do some research to find out if this problem is a real problem, and a problem people want to be fixed. But that is the details for a future post.
Is it a Coin or a token?
What I mean by this is what type of project is it. A coin project means that it is creating its own blockchain. While a token merely uses an already existing Blockchain.
This matters because coin projects tend to be much more complicated, and there is also a risk that there is a flaw that let an outsider take advantage. More or less take all the money while killing the projects. If we just look at the two most recent stops cased to the SOLANA Blockchain we can see the most recent one was caused by a bug. But the one before that was caused by outside interference, where a bunch of NFT boots was flooding the systems with transactions trying to mint new NFTs. And this massive influx of around 6M transactions per second caused the system to shut down.
SOLANA logo
While SOLANA is still going strong and looks to be a perfectly fine project, I have not looked into it I have to admit. It can serve as an example of how unforeseen things can impact a coin project. While non of these killed the project they caused some harm to the project itself and its ecosystem.
A token project on the other hand usually is more straightforward. This is because it is controlled by smart contracts instead of a complete Blockchain infrastructure. As this infrastructure already exists in the form of the Blockchain on which the project is based.
Token projects also tend to more frequently fall into the "shit coin" category.
What is the tokenomics of the project?
Tokenomics is a general term used to describe how the coin or token is supposed to work, how many of it there is supposed to exist, and who has them at the start of the project. Let us look at these one at a time.
How the coin works
By this I mean are there any fees associated with transactions, are there any inflationary- or deflationary mechanisms. Examples of these can be a buy or sales tax. This means if you buy 100 coins or tokens, you will get a few less depending on the tax. If it is a 5% buy or sell tax it means you will either get 95 coins or tokens when you buy. And you will only get money, coin, or tokens that equal the value of 95 instead of the 100 coins or tokens you sold or swapped.
If you like to watch the news you are probably already familiar with inflation and how it works. In short, it is a number that tells you how much value your money will lose over time. And an example of an inflationary mechanism allows for new coins and tokens to be minted. In general, this means that if more new tokens are created this lowers the value of all existing tokens.
An example of the opposite, a deflationary mechanism can be burning. Burning is the permanent removal of coins or tokens. There are removed never to be seen again. This will then in a perfect world cause the remaining coins and tokens to increase in scale by the value of the burned coins and tokens.
Personally, when I look at a project I would like to see it having a fixed number of tokens or coins. An example of this again is Bitcoin, it has a fixed number of coins and there can only ever be 21 million of them after all are mined. Having a fixed number of coins or tokens I view as a good way to be able to control the inflation and more importantly the deflation of the project.
If it does not have a fixed number I want to be able to understand how the deflation of the tokens works. Is this done by buybacks and burning alone or is there another mechanism at work? A good example of this is the AMPL we get as a tip here on Publish0x. This token is flexible, it means that once every day it will try and adjust its price so that it is close to $1. If the price is above $1 then the holders get more tokens. If it is lower then you get fewer. Al while keeping the total value of your tokens the same.
How are the coins allocated?
This is also an important part of the tokenomics of a project. It can tell you a lot about what type of project it is by simply looking at how the coins or tokens are allocated at the start of the project.
As an example, if there are a fixed number of coins or tokens, are all of them in circulation from the start, or will they get added over time at certain intervals? If they are not all available at once this means that each new influx of coins or tokens should cause a dip in the price whenever this occurs. And you probably will see the dip starting before they show up, as the market tends to react with anticipation to these things. Something to take into consideration at least.
Another thing you can see is also how the initial tokens are allocated. How big a percentage was sold to initial investors? How much was held off for the launch of the project? How big part do the project creators have?
If early investors have been able to buy a big portion of the coins or tokens this means the project has a higher degree of decentralization, as now many people own and control a part of it. This stands in opposition to the project creators' share. In general, I consider projects where the creators are allocated a high share of the numbers of tokens to be riskier than projects where the creators have a smaller share.
KuCoins' initial token distribution as shown in the Whitepaper
When one person or a few control a big share of the coins or tokens they can easily influence the entire project with their decisions to either invest more into the project or liquidate their holding, selling all of it. This can be just as beneficial as it can be detrimental. But it means that ultimately the success or failure is out of the hands of the people. The project is centralized.
If a small portion of the coins or tokens has been sold. This also means that the majority have not been used to create value or liquidity for the project. Thes coins or tokens only have a speculative value to them. And those greatly vary from project to project. But it also means that initially, the project can see some big fluctuation in its value. Especially if people are looking to take out a profit early.
DAO or not a DAO
Another thing that can play a major role in a project is whether it is a DAO or not. DAO stands for decentralized autonomous organization, this means that the holder of the coins or token gets a vote on decisions for the project. They get to vote on the changes and this can be a very good thing or a very bad thing. Depending on who the people involved in it are.
An example of a DAO that was used to do some less smart thing is the one that recently purchased the Jadorovsky Dune book. Made as part of the Dune movie project spearheaded by Jodorowsky back in the early 70ies. The project ultimately fell apart. But these books have been cult symbols to a large part of the Dune community.
The DAO then decided they would purchase this book as it was put up for action. And so they did. They did so thinking they then get to make a movie or tv series based on this book. Only they failed to realize that only because you bought a book, it does not give you any right or claim to the intellectual property in it. You have simply only bought a book.
The project shifted to becoming one where the new goal was to make this rare book available to everyone. The problem was that it already was. Anyone who did a quick google search would have found this out.
While this is a perfect example of a DAO gone bad, countless others are examples of a DAO done well. IT however means that it is a special type of project where its holders have and will influence its future of it. And this is something you should take into account on whether you would want to invest in such a project or not. You also need to look closely at the token distribution, so you do not invest thinking it is a community project only to find out it is a dictatorship.
Who are the creators behind the project?
The last thing I like to look at in the whitepaper for is information about the people involved in the project. The less information available the more of a red flag I see it as. This is not to say I expect to find names, photos, and addresses. But usernames for online profiles are a good start. Of course, if you're doing your due diligence you then use this information to dig further online. An address to a discord server is also a good start, there you usually can find more information on a project.
I hope that you have found this post educational and interesting. And I would love to hear from you about what you look for while reading a project's Whitepaper. Please share this in the comment section down below. Also if I have made any glaring errors please let me know.
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See you on the interwebs!
Picture provided by: https://pixabay.com/, https://solana.com/branding, https://www.kcs.foundation/kcs-whitepaper.pdf