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Key Takeaways
- Crypto whitepapers act like a blueprint, outlining its goals, technology, and the overall plan of the development of the project.
- The whitepaper should clearly explain the problem the project addresses and how its proposed technology solves it.
- They are just one piece of the puzzle. A well-written whitepaper doesn’t guarantee a project’s success.
Finding the right cryptocurrency to invest in can be challenging. There are thousands of coins out there, and many of them are likely to fail.
But if you understand what a project is all about, it will help you make better financial decisions.
One of the easiest ways to separate a good project from a bad one is by researching its whitepaper.
In this article, we will walk you through some of the most important steps for reading and analyzing a whitepaper so that you will not lose your hard-earned capital.
What Is A Whitepaper?
A whitepaper summarizes a crypto project, explaining the developers’ reasoning for creating it and providing essential details such as the roadmap, funding, and team.
Unfortunately, most people do not bother to read whitepapers because they think they are too complex or maybe it is just out of negligence.
So let us make it very simple for you. Here are the things you need to know if you want to read and analyze a whitepaper:
Most Whitepapers Follow A Common Pattern
The Reasoning Behind The Project
Every whitepaper must clearly state the reason for starting the project. Usually, a whitepaper introduces a problem the project wants to solve and describes how it will solve it.
For example, Bitcoin introduces the problem of centralization in online payments and presents the solution of a peer-to-peer (P2P) payment system that does not need to go through a middleman.
Utility And Use Case
The second section is the utility and use case, in which the whitepaper discusses the solution in detail.
This is where the whitepaper explains how the new project differs from its competitors. But take note that if a whitepaper dedicates this entire section to describing how they are better than their competitors and not how they plan to solve the problem, then it is probably not the right project for you.
Blockchain Architecture
This is also one of the most important sections where you can tell whether a project is worth investing in. It outlines the consensus mechanism for why the project should be on the blockchain and why the team chose that particular chain.
The consensus mechanism is the algorithm ensuring a blockchain works appropriately. The two most prevalent types used in blockchain are Proof-of-Work (PoW) and Proof-of-Stake (PoS) consensus algorithms.
If, at this point, you still cannot find any helpful information about the project’s purpose, utility, or use case, then it is more likely a red flag.
Token Distribution And Utility Of The Token
Token distribution is integral to tokenomics and the key to a project’s future success.
Every project has initial token distributions, during which they decide how many tokens will be distributed and how they will be distributed.
Note that if a small group of people controlled a large portion of the token, it would go against the key principle of blockchain, which is decentralization.
Another thing to look out for in this section is whether there are mechanics that cap its growth or even burn issued tokens. For example, there will only ever be 21 million Bitcoins, while Ethereum has an unlimited supply, but excess coins can be removed from circulation through burning.
The Team Behind It
Scan the team’s credentials and verify whether they have worked on any successful projects in the past.
Of course, Bitcoin is an exception to this rule, but if there is little or no information about the team, this is probably a huge red flag.
Whitepaper Red Flags
- Difficult To Get – If a team does not have a link to its whitepaper or any other relevant documentation on its website, they probably do not want you to see it.
- Length – A shady crypto project will probably create a whitepaper as an afterthought to entice investors; hence, such whitepapers usually lack useful information that correlates with the project. In addition, they often contain several typographical and spelling errors.
- Vagueness And False Promises – If a project sounds too good to be true, it probably is. A poor whitepaper will often use vague statements to conceal its incompetence since it cannot really explain what it does. For example, you might see statements like “revolutionize payments,” “the next Bitcoin,” or ”Ethereum killer.”
- No References – The reference section gives you a clue as to where the authors got their information from. If the authors did not cite specific journals or other reputable sources, then the paper is probably a sales letter disguised as a whitepaper.
Final Thoughts
In conclusion, a good whitepaper should contain enough information to address your questions. If the tone has become more salesy and less academic, then the only goal is to attract investors, not really solve any problem.