Reading a cryptocurrency whitepaper with the appropriate technique of how to read a crypto whitepaper can help you find the most essential information about a project while also identifying potential risks. This post will walk you through the steps of reading a cryptocurrency whitepaper, including essential sections and how to find the most relevant information about a project.
What Is a Crypto Whitepaper?
A crypto whitepaper is a concise explanation of a new blockchain project, outlining the key technological and economic aspects of the new chain. It is an official document released by the authors of a cryptocurrency project. It describes the project’s objective, the problem it seeks to answer, the technology that powers it, tokenomics, the plan, and, in many cases, the team members.
Think of it as a project blueprint. A well-written cryptocurrency whitepaper should be transparent and detailed, allowing potential users and investors to assess the project’s validity and worth. The whitepaper approach is similar to Bitcoin in that it combines a technical document with philosophical aspects.
Purpose of a Whitepaper in the Crypto World?
A cryptocurrency whitepaper serves two purposes: it educates and promotes a token initiative. As a result, most modern whitepapers include a combination of technical features and promises about the project’s future. This guide will also discuss the downsides of this strategy, allowing users to avoid superfluous details or hype.
The whitepaper also aimed to distinguish the new cryptocurrency initiative by highlighting its unique promises and capabilities.
Why Reading a Whitepaper Matters
Getting familiar with a crypto whitepaper before investing in a project is one of the best acts in the space. With a structured approach, a reader can quickly locate the relevant information that will help them to:
- Avoid frauds and Rug Pulls: Reading a whitepaper does not ensure protection from frauds, but it can help you identify warning signals. An inconsistent, shoddily written whitepaper with typos may indicate that a project lacks the resources or will to generate a quality document.
- Make Informed investing Decisions: Reading a cryptocurrency whitepaper will highlight the key aspects of investing decisions. The most crucial aspect would be the tokenomics, or how the project will generate revenue. A whitepaper will include information about token supply, inflation, fees, and incentives. Some projects will go into greater detail regarding the team, as well as prospective budgets and revenue streams.
- Identify a Project’s Long-Term Potential: A cryptocurrency whitepaper can provide insight into a project’s long-term development. Token and other coin whitepapers, like Bitcoin’s whitepaper, include hints on future supply, mining rewards and operations, token burning, and other modifications.
Structure of a Typical Crypto Whitepaper
1. Executive Summary
Modern whitepapers, intended at investors or busy traders, sometimes begin with an executive summary, a few paragraphs outlining the project’s essential themes. The summary will include the project’s aim, a quick overview of the technology and network type, and a concise summary of the business strategy. Reading the executive summary of a crypto whitepaper can also help you compare the project to its competitors.
2. Problem Statement and Proposed Solution
Crypto ventures will identify an issue that has not been addressed by existing competitors and propose their own solution. Problem statements address difficulties such as network performance, decentralisation, and anonymous or veiled transactions. Some chains give solutions to specific challenges, such as image or media management.
Crypto whitepapers frequently highlight vulnerabilities inherent in blockchains or attack existing Internet infrastructure. The issue statement could relate to a decentralised solution for an existing app, social network, or another platform.
3. Technology and Architecture
This section will outline what the project’s team intends to launch. It will specify the type of chain that the team intends to establish. The section explains whether the project will use proof-of-work (PoW) or proof-of-stake (PoS). The project team will also clarify whether their chain is standalone and fresh, or a Layer 2 of an existing base chain.
When reading a crypto whitepaper’s technical section, keep an eye out for terms like nodes, staking, token issuance rate, and incentives. Typically, the technology of a cryptocurrency project is inextricably linked to the commercial side and investment requirements.
4. Tokenomics and Token Utility
The tokenomics section will go beyond the technical details to discuss how the project will create value. It is critical to understand the token quantity, how the asset is issued, and whether there are incentives such as rewards, token burns, or vesting schedules for locked tokens.
Some projects will have more complicated tokenomics, involving two or three assets. The tokenomics section often explains how various tokens interact and what functions they play.
5. Roadmap and Development Timeline
A project’s roadmap provides insight into its growth potential while also indicating potential delays. The project’s primary features and promises may take years to materialise, locking in holders’ investments. When reviewing a cryptocurrency whitepaper, make sure the roadmap appears plausible and compare it to other comparable projects.
6. Team and Advisors
A fully doxxed crew is generally a good sign for a project. A lack of a team section, or a pseudonymous team, could be a warning indicator, especially if the paper includes a high-stakes value proposition and a call to action. Satoshi Nakamoto‘s Bitcoin whitepaper was anonymous. However, newer ventures resemble traditional startups, and their teams contribute to the overall credibility.
A pseudonymous team is the second-best option, especially if it includes additional avenues of contact via social media. However, pseudonymous teams have been reported to vanish overnight. When evaluating the team portion of the whitepaper, ensure that the images and identities are verifiable. Check to see if the team or advisors are involved in any other initiatives, and if they are still feasible.
7. Legal and Regulatory Disclosures
Whitepapers are not limited by geography and can be created by a team from multiple regions. Make sure the whitepaper clearly indicates its primary jurisdiction and any prohibited regions.
Some whitepapers will include clear exclusion lists, which commonly harm potential investors from the United States, Canada, or other restricted areas. This ensures that the project will not be subject to any regulatory restrictions in those nations.
While many projects are outside the purview of regulators, this could be a red flag. Make sure you understand the regulatory ramifications of owning tokens. Regulatory conditions may potentially shift based on recent cases involving cryptocurrency initiatives.
8. Use of Funds and ICO/IDO Details
If a token sale is the desired mechanism of distribution, the parameters will most likely be included in the whitepaper. In this part, the project will discuss the percentage of supply that will be offered for sale. Other data may be provided, such as the stages of the ICO or IDO, the platform on which it will take place, and when the tokens will be issued and traded.
This part may also include the fundraising goals and planned use of the money. The sale page may include the assets for sale, such as BTC, ETH, stablecoins, and fiat currencies.
Step-by-Step Guide: How to Read a Crypto Whitepaper
Step 1. Start with the Executive Summary
Get conversant with the executive summary. Recall the basics of the project’s proposition, and proceed to check the details in other relevant sections. Watch out for excessive hype or over-promises in this part.
Step 2. Assess the Problem and Solution
Carefully read the project’s principal purpose and analyse its viability. For example, is the platform striving to increase the number of transactions per second? Is it geared towards scalability, or does it provide a superior decentralisation structure?
Is the project seeking to bring a market outside of crypto onto the blockchain? This section assesses project feasibility and the need for blockchain integration. Can the project deliver on its promise to compete with established projects by adding tokens?
This area will also allow you to compare the project and determine whether it was produced independently, following a trend, or competing with other projects.
Step 3 – Evaluate the Technology
As more cryptocurrency ventures are established, the more commonalities emerge. Some whitepapers will go into detail on their proprietary chains. Others will overlook this aspect because on-chain activity is already widespread. Make sure you understand how the technology integrates into the existing infrastructure and whether it is compatible with some of the major chains.
The technology used may provide insight into the project’s economic prospects. Is the platform aimed at miners, or is it designed specifically for traders?
Step 4. Dive Into Tokenomics
When reading the whitepaper, consider the token supply, issuance timeline, token burning, staking, and incentives. How is the token used? Is it merely an idle asset, or will it be useful? Tokenomics will also provide an indication of how the asset might trade in the future. Make sure you comprehend the asset’s potential for representation on exchanges. For example, anonymous coins and tokens are no longer readily available on major cryptocurrency exchanges.
Step 5. Examine the Roadmap
Check the project’s launch timetable to ensure that you won’t have to wait years for the platform to deliver on its promises. Compare similar projects and determine whether the team can accomplish them quickly enough. Market conditions may change, causing delays in the roadmap.
Step 6. Verify Team Credentials
Check the team’s social media pages, if any are available. Whitepapers rarely include completely anonymous teams, which may be a red flag. Check the founder’s LinkedIn page for previous cryptocurrency ventures and evaluate their success or failure.
Crypto teams have faced numerous threats, including infiltration by DPRK hackers. Pay attention to the developer team and monitor their code repositories as needed.
Step 7. Check for Legal Disclaimers
Check to see if the project is available in your jurisdiction and whether there is an exclusion risk. Examine the project’s legal disclaimers and look for potential security legislation violations. Despite their digital and permissionless nature, crypto tokens are frequently referred to as unregistered securities.
Step 8. Look for Red Flags
Examine the crypto whitepaper in its entirety to find red flags. Is the presentation, language, or spelling too unusual? It could be a warning indication, indicating machine translation and potential language difficulties among the team. Evaluate the project’s location and ensure that you have access to legal representation in the event of failure.
If the entire whitepaper focuses primarily on the marketing aspect or the project’s potential worth, this could be a warning sign. Also, be sceptical of whitepapers that expressly anticipate the token’s price growth over time. Ambitious promises, such as competing with established initiatives in a few years, raise red flags. Evaluate the team section for warning signs such as lack of information and incomplete profiles.
Red Flags to Watch Out For in a Whitepaper
1. Overpromising Without Substance
Some whitepapers emphasise possible earnings or the future growth of their tokens. While certain cryptocurrencies experience rapid growth, be aware of whitepapers that make unrealistic claims, especially those with a hazy roadmap.
2. Anonymous Team or Fake Advisors
Be aware of anonymous teams, mostly due to the danger of disappearance or insider trading. Hackers may also infiltrate teams. Look for a complete list of social media profiles, including their histories, and investigate each one.
3. Poor Tokenomics or Unlimited Supply
Tokens with infinite minting or a very big supply could be a dangerous omen. Tokenomics may potentially skew supply towards the team or investors, leaving retail customers with little influence. Poor tokenomics may potentially result in insider trading.
4. Copy-Paste or Plagiarized Sections
Some whitepapers are created in haste to capitalise on a trend or replicate another successful endeavour. Look for plagiarized sections, explicit copy-paste, or potential AI-generated content.
Tools and Tips for Analyzing Whitepapers
1. Community and Developer Feedback
High-profile cryptocurrency initiatives are frequently observed on social media, and some of the commentary may be sceptical or negative. Use social media as a source of community input. Seek out the project’s developers and observe how they engage with the community and resolve issues.
2. Use Tools like Messari and Whitepaper Databases
Check to see if the document is in a trusted cryptocurrency whitepaper database. Are other people reading and understanding the whitepaper? If the project has already been released, employ tracking tools to ensure that the tokenomics are accurate. Check the price performance and results of the token sale.
3. Cross-check Roadmap Milestones
Check to see if launched projects have completed their milestones. Use market tracking tools to monitor progress during bull or down markets.
Final Thought
An excellent whitepaper should leave you with a clear understanding of a project’s goals and how it expects to achieve them. However, because anyone can publish a whitepaper, see its substance as one piece of evidence among several. Read attentively, look for confirming evidence, and keep an eye out for red signals such as overpromising, ambiguous token schemes, or anonymous teams with no verified track record.
