Bitcoin is in its 14th year! Bitcoin’s legendary whitepaper was posted to a mailing list for the first time on 31st October 2008 while the first block on the blockchain was mined on 3rd January 2009. Irrespective of which date you follow as the anniversary, crypto followers in general keep them close to their heart. The recipients in the mailing list probably would not have imagined in their wildest dreams about the potential of Bitcoin, the network and bitcoin, the cryptocurrency. Because we are not just seeing decentralization in cryptography but we are now looking at blockchain and other Web 3 networks aiming to introduce decentralization to the masses living across the world.
Historically, Bitcoin whitepaper is cited as the first-ever whitepaper released about a peer-to-peer public network. Since then experienced investors and crypto enthusiasts have followed a good practice to check the whitepaper of any new Web 3 project launched. Similar to an IPO prospectus, albeit much shorter stuffed with relevant technical details, whitepapers are essential to conduct due diligence about a new project by both institutional and retail investors like you and me. Yes it is understandably wordy but that doesn’t mean that retail investors especially can take it for granted or worse, ignore it. Let’s explore why investing your time in reviewing the whitepaper should precede your investment with money.
Screening Web 3 & Crypto Projects
White Paper helps an investor assess the utility and use cases of the projects that appear promising to them at first. Although analyzing a white paper is a vital process in crypto investment, it should always be done in concurrence with raising your queries about a new blockchain project on the official social media channels, enquiring about the project management plans, validating with your risk profiles and favorite themes etc. Having said that, a well written white paper should give the investor answers to key questions given below.
1. What is the Project About?
The title gives an idea regarding the nature of the project, whether it is a NFT, DeFi, meme, or any other utility project. A structured white paper answers what the project intends to solve.
2. How Will the Project Function?
The sustainability of the project backed ideally by facts such as proof of concept, governance structure, whether it is open source or not, what role the community will play, what does the reward structure for all parties involved look like among others gain investor attention.
3. What is the Need for the Project?
When there is an established player already, the need for a similar like-minded project is definitely not a bad idea speaking purely from a competition perspective. But it is key for the whitepaper to tell you how the new project will add value in the communities we live in and the society at large especially when we are talking about borderless resources. And considering the infancy of the industry, a project often challenges itself to overcome and improve the deficiencies of the existing networks in Web 3. Whitepaper again should be able to demonstrate how it will add value and what is that it will primarily look to solve?
4. Who are the Core Team Members?
Projects may reveal or conceal the details of team members based on certain situations. For instance, whenever the details of core team members behind the project are protected, it’s a good idea to check whether they have been audited by a reputed third-party audit firm like Certik who has a security score feature for the projects audited by them.
5. Project Roadmap
Roadmaps are steps taken by the core team to achieve their (technical) goals with the help of community, partnerships, research, product testing among others. This sequence of events may not be an absolute surety as they are dependent on multiple factors. That said, screening the road map gives you an idea regarding the future marketability and sustainability of the project.
6. Opportunities and Threats
The business scenario consists of opportunities and threats. A good project will be prepared, agile, and adapt to various internal/external threats and opportunities. For instance, when a project has a direct established competitor, it can envision in its whitepaper on how it will mitigate this risk by design.
This section in the whitepaper gives the investor an idea regarding the native token or coin (cryptocurrency) released after the project is launched. Tokenomics will include (but not limited to) total supply of native coins, reward structure for core team members, network validators, community and whether the coin will be inflationary or deflationary by design. Many projects also would opt for a prolonged lock-in period for the team tokens when they themselves are convinced about their long term prospects.
In short, reading and analyzing the whitepaper is one of the crucial steps before investing in a project. A good whitepaper helps an investor make informed decisions. The art of reading whitepaper needs to be inculcated as part of a sound crypto investment regimen. Investors should be aware that there are other key factors they need to look within and outside the white paper like consensus mechanism, energy efficiency, transaction costs, method of fundraising, efforts to make the community central to the project etc. A fundamentally sound project further will always look to have control over information delta between the core team and its community before the community can take over after project launch.
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Opinions expressed in this publication are those of the author(s). They do not necessarily purport to reflect the opinions or views of Shardeum Foundation.
About the Author : Bibin Prasannan is a passionate musculoskeletal physiotherapist interested in exploring future value gems in crypto. He is keen to explore the benefits of blockchain technology for the health care sector. You can follow him on LinkedIn