How to Unpack a Crypto White Paper?

25 August 2022, 07:18

What Is a White Paper?

Think of it as a manual explaining the rationale for a crypto project’s (whether it’s a new coin, blockchain, or NFT) existence. A white paper usually covers the proposed functionality and real-world application of a coin, explains its underlying technology, and draws a roadmap for where the project plans to go. 

Note that there is no legal or standardised definition of what information should be present in a white paper. 

For example, the Bitcoin white paper written by Satoshi Nakamoto in 2009 is a relatively austere, 9-page document outlining the proposed methodology of creating a system for electronic transactions without the need for a trusted third party.

In contrast, the Ethereum whitepaper released in 2013 is a document several times longer than Bitcoin’s, and comprehensively details the “next-generation smart contract and decentralised application platform”, covering everything from the foundation laid by Bitcoin, to its own technologies. Also, how Ethereum addressed several of Bitcoin’s limitations while listing the vast number of applications that its own built-in programming language had. 

What to Look Out for in a White Paper?

1. Do You Understand the Basic Concepts?

Most white papers will be filled with technical terms and extremely dense with information that will only make sense to those with a background in computer science. However, its basic idea should be relatively simple. Read the opening paragraph and the conclusion to see if the goals of the project are clear. Ethereum, for example, is built with its own programming language so that it is “open-ended by design”, and can be used for an array of “financial and non-financial” applications.  

If a crypto project is easily understood by and sounds like a good idea to even a layperson, it increases the chances that it is a project that will be widely adopted. 

2. What are The Current and Future Uses for the Project?

Part of a crypto project’s fundamentals lies in its functionality, and a white paper should be able to clearly outline its uses – whether it is as a currency (and what makes it stand out from other crypto coins), or NFTs, or even just as a platform like Cardano. 

Going one step further, ask yourself whether the proposed use solves any current or foreseeable real-world problems. For example, if the project is currency – is it meant to replace, complement, or represent fiat currency? Part of Tether’s (USDT) initial success, for example, comes from the fact that it was originally designed to be a stablecoin by tying its value to the US dollar, with every USDT issued backed by US$1 in reserve – combining the stability of fiat currency with the decentralisation of a cryptocurrency.  

Not Investment Advice

This is not investment advice. Having a comprehensive, well-written white paper does not guarantee a coin’s investment potential. However, having a well-articulated white paper or significant resources backing it does increase the chances that a blockchain or coin’s creators are at least serious about its development and not just running a “pump and dump” scam. However, in the highly volatile, often sentiment-led wild west of crypto, even an incomplete or poorly-conceived coin can shoot “to the moon“ on the back of memes or marketing. But be careful! This also means that said coin can also come crashing down just as quickly. When it comes to cryptocurrencies, the old adage rings especially true: never invest more than you can afford to lose.