A cryptocurrency whitepaper enables projects to explain their products and goals to their audiences. Projects can freely choose what kind of information they want to provide, but whitepapers usually include an overview of the project’s goals, tokenomics, products, features, and information about the team. As such, whitepapers can be a good place to start when researching a specific project.
A whitepaper summarizes, in a single document, the important information related to a blockchain or cryptocurrency project. It’s a popular way of explaining how a certain project works and what problems it’s aiming to solve.
Why Are Whitepapers Important?:
Whitepapers are important for the crypto ecosystem. Even though there are no standards for creating them, whitepapers have become a framework for researching crypto projects.
It’s a general recommendation to start crypto research by reading the project’s whitepaper. Users can use whitepapers to identify potential red flags or promising projects. In addition, they enable users to monitor if a project is to its original plans and goals.
Whitepapers can provide transparency and equality by making the project’s key information public. Various parties can benefit from whitepapers. For example, while investors can make better investment decisions using them, developers can decide on their possible participation in the protocol. Similarly, a person interested in the idea can decide more confidently if he wants to join a particular community after reading it.
What Concepts Do You Need To Know To Understand A Crypto Whitepaper?:
Reading a whitepaper may be the best way to understand a crypto project you are interested in. But many people are confused about how to go about it, as whitepapers do not make for light reading, especially if you aren’t very tech-savvy. The good news is you do not need to have a background in computer science to understand a whitepaper. This guide will make it easier to read and understand a whitepaper.
How Do You Read A Crypto Whitepaper?:
1. Understand Why The Project Was Created:
Every project whitepaper will have a motivation behind its creation. It will usually be at the start of a white paper. It will give you an understanding of the problem the project is trying to solve and how its solution is different from the solutions that might already exist. The market analysis in the whitepaper will show you the exact need for the product and how it fits into the existing market.
2. Figure Out The Project’s Real-World Utility:
This is a vital aspect of a crypto token or a project. Many crypto coins will have a utility or a function other than just being a currency. Some can be for the governance of a project, and some can be non-fungible tokens that give ownership rights for a product. There are various utility tokens in the crypto space with vastly different purposes. Some utilities will be more practical than others.
3. How Does The Project Achieve Consensus In The Network?:
This criterion is the most critical part of the whitepaper. There are different consensus mechanisms to consider, such as proof of work, proof of stake, and variations of these two. Consensus is critical because it tells us how different nodes in the network can tell if a transaction is true or false without directly communicating with each other. This is the bedrock for decentralized technology.
4. How The Initial Coins Were Distributed
Many crypto projects will have initial token distributions using pre-mined coins, especially in proof-of-stake projects. You should check how these coins were distributed. Sometimes, a significant portion of the initial coins is offered to venture capitalists and project developers. This is often a sign of a pump-and-dump scheme and restricted project growth, respectively.
5. Technical Explanation Of The Project:
Typically, projects will try to simplify how the network functions using graphs and summaries. You should try to understand the big picture of the project and not worry about the minute technical details of the whitepaper.
6. Project Timeline:
The timeline of a project will tell you the working plan for the next few months. It will include details like when sales will start and when the token will be launched. The detailed timeline for a project can indicate the developer’s competence and foresight. This outlines a working plan for the next few months, including what will happen, when sales will start and when the token will be launched.
7. Team And Advisors:
This introduces the founders, employees and advisors behind the project. Much like the technical aspects, this is also a crucial factor as it provides important information on the team’s skills and experience and its relevance to the project.
You should consider these essential factors while reading a white paper, but they are not the only ones. It would help if you also considered factors that are not in the whitepaper, like the development team’s background and tokenomics. But this guide is a starting point for your journey.
8. The Problem And Solutions
This section is where the project is introduced, including the problem it intends to solve and how it will achieve this. The solution provides details of the full product description, as well as a market analysis to show the exact need for the product and how it fits into the existing market.
9. Token Information And Marketplace Consideration:
When starting an ICO, there’s certain information that is vital for investors to know. This includes details surrounding the new crypto tokens, such as their value, how many will be in circulation and what platform they will operate on. Whitepapers should also include how investors can redeem their tokens, as well as details on what will happen if the ICO doesn’t reach its funding targets.
10. Technical Description:
An important part of any crypto whitepaper, this section explains the technical aspects and the technology behind the project.
The whitepaper should provide you with a necessary understanding of what the cryptocurrency project plans to do and how. However, whitepapers are not regulated, and practically anyone can write one. So, if you are interested in a certain project, it’s important to analyze its whitepaper carefully, considering the potential red flags and risks.
When new crypto projects are launched, a whitepaper is released during its initial coin offering (ICO). In simple terms, a whitepaper is a document that details a project’s concept, roadmap and how it plans to grow in the future.
Whitepapers are a staple in crypto, but they’ve been around for much longer. The very first whitepaper originated from the British government around 100 years ago and was created to inform the public about key decisions made by government agencies.
Fast forward to today, and whitepapers are used by many to inform investors about how a crypto project works, the technology behind it and how it stands out from competitors. Crypto start-ups need to have a published whitepaper, as it is a key element that determines a project’s legitimacy.