How to Read a White Paper

Here, you will learn you a valuable skill – how to read a white paper, and why it is such an important source fo information.

It All Started with a White Paper

In 2008, a mysterious white paper began circulating in Academic communities; it was called “Bitcoin: A Peer-to-Peer Electronic Cash System”. It didn’t have any stand-out features and wasn’t even the first paper to discuss peer-to-peer payment solutions.

But it was the first solution to be successfully implemented – and 14 years later, that one innocuous-looking document is the foundation of absolutely EVERYTHING in the blockchain ecosystem. Wish you had read it at the time now, right?

Crypto is an ecosystem based on fast innovation – different iterations and developments that all osmosed out from existing ideas. And with each new development, a white paper is published to explain the concept and give its essential details.

You may not realize it, but the ubiquitous white paper is one of your most powerful tools in web3. It provides great insight when it comes to critically assessing the potential of a project. If you’re going to put your money behind something, you’re going to want to know as much about it as possible, right? 

Understanding the function of a white paper and how to read one gives you an upper hand. As you assess projects in the space and carve out a strategy for yourself. Let’s get into the nuts and bolts of white papers, and how to read them.

First Things First: What Is a White Paper?

Let’s start with the basics. A white paper is a summary of a project, giving specific detail in relation to the problem being solved, the solution being proposed, the technology used and the team behind the endeavor. 

White papers are not specific to crypto. In fact, they can be found throughout the science, technology and product design industries. They’re a means of giving readers and investors an overview of a project – and selling its proposition to would-be investors. 

Not surprisingly, in crypto – a world built on new projects and innovations seeking support from their community – white papers are a staple of the space.

But white papers can be pretty complex and it might feel overwhelming to start trying to read one. If that’s how you’ve been feeling, don’t worry. Here is an overview of what to look for, so you can get the hidden treasure out of this incredibly valuable document.

Here’s what to look for and why it’s important.

The Where: Location, Location, Location

Knowing where a project is based informs you about the regulatory environment it faces. Projects that are based in countries with strict crypto regulations ultimately have a harder time getting going than those in crypto-friendly regions. A project based in places where crypto is outlawed. Nigeria or Turkey, for example, might struggle by comparison to a project in El Salvador or Germany, both of whom are pretty crypto-liberal.

The type of token being offered by a project is also a defining feature in how it will be treated by law. If, for example, the tokens are classed as securities (check out the Howey Test for some idea of what that means), the project will face a different, and much more stringent, regulatory framework than if it were issuing coins. A great example of this can be seen in the ongoing case of Ripple v SEC. As the Securities and Exchange Commission taking aim at Ripple’s XRP on the basis that it’s a security, and should be regulated. There is not yet an outcome of this case. It will be a high watermark for the rest of the industry and has caused long-term uncertainty for Ripple.

The takeaway? Do some research into the regulatory space in the country where your project is based. The white paper might not go into that sort of detail (regional legislation) but it’s important for you to have the power to research this for yourself.

The Why: What is the Use Case?

Every project has an objective. Knowing the function and the specific purpose of a project gives you insight into a couple of things:

Utility

Firstly, the white paper provides the overall mission of the project. If you can’t find more substance than the offer of rewards, then the application is thin. The project might not go as far as it boasts. Real utility means there is a genuine function that the project can offer and it’s offering a solution to a problem.

Competition

Secondly, it shows you how it differs from competitor projects. If the team can define what it is aiming to do in the white paper without relying on using competition as a reference point, it’s a good sign. 

Uniswap is a good example of a project that offers both utility (an Automated Market Maker where people can exchange their crypto). A unique solution to a problem (they don’t need to wait for an order book match, meaning no slippage fees). As the first AMM, it offered a unique platform that the industry as a whole needed.

You’ll typically find the why behind the project at the beginning of the white paper. As it sets up the framework for the more technical components of “how” a project works. Speaking of…

The How: Mechanisms, Protocols and Processes

It’s important to understand the underlying systems powering a project. Taking a look at what sort of consensus mechanism it uses (if it has its own blockchain). How its internal smart contracts or protocols work (these are the internal mechanisms of exchanges, liquidity pools and other common services), will give you important insight into the project: how it will operate, its strengths, weaknesses, rewards for participants and even energy usage. 

This might seem a little nuanced. It’s important to know how scalable and future-focused the project will be for those directly involved (such as validators). In terms of its sustainability, as well as whether it will be interoperable with other projects down the line.

Does This Even Need To Be on a Blockchain?

Looking at how the project operates and what problem it solves also gives insight into whether it needs to be on a blockchain at all. Blockchain technology presents some big possibilities. It’s important to be able to spot an application where it’s really making things better from one where it has nothing to offer beyond existing solutions.

The Who – The Team Behind the Project

If you can find the people behind a project in the white paper, you’re looking at gaining some valuable alpha about its future. The team behind a project can instill confidence in the project’s potential success – or shake it. 

The background, qualifications and reputation of founders and developers of a project brings in an element of reliability. For example, if you saw Vitalik Buterin’s name on a new project, this might add some weight or interest to the project via his prior success.

Money Talks: Tokenomics

Tokenomics deals with token supply, which has everything to do with how YOU can interact with the project. The distribution of the tokens – and what rights and utilities they come with – discloses a lot about your options.

When reading a white paper, consider the following:

• The token distribution and allocation to investors

How much of the total supply is locked away for the team behind the project and private backers will give you some idea of how much stake the community (including you) will have and how much weight the tokens will actually have if you buy in.

• Token utility

Look at whether the tokens give any sort of governance right. If so, the community might govern the project later down the line. The token’s utility also speaks to the degree to which you buy into the project. By looking at the project’s total token supply, you’ll be able to see the proportion of “governance” influence you’d be buying with a given purchase of tokens.

• Inflationary vs deflationary tokens (and max supply)

Look at the total supply of the project and whether there’s a capped supply. The supply of tokens will also show you where the project came from, and how it is going. For example, Bitcoin has a cap on supply and once the mining of the coins is done, it is not possible to create more. This created inflationary value as the supply-demand relationship tends to lean towards increasing demand and limited supply. Dogecoin, on the other hand, has no cap on its supply. There is no limit to minting many DOGE coins. It has an impact on establishing value over time. More importantly – what your coins might mean over time.

The Future: The Roadmap and Projection

The roadmap of a project outlines the stepping stones of where it hopes to go and how long the team is hoping to take to get to each milestone. One pretty creative example of a roadmap is the one released by BAYC in 2021. Detailing via an actual map the intentions of the project in the coming years.

The roadmap is not only a direction guide. It also informs you whether the project has met previous targets. Or whether it struggles to stick to the schedule if you apply it retroactively.

It’s worth noting that some white papers don’t have a roadmap – for several reasons. It could be that the project hasn’t drawn up a roadmap yet. Or that it is possible to publish in the white paper for regulatory reasons. There are cases where the roadmap can be found elsewhere. Such as the website of a project – so do a little further reading into the project if you can’t find the roadmap in the white paper.

Beyond the hype: why white papers matter

Blockchain offers freedom. Setting up a decentralized financial space with no red tape and no gatekeepers, where you decide what to back. 

However, it’s important to recognize that the responsibility is in your hands. Therefore exercising good judgment is essential as you explore. For this, the white paper is your best friend, giving you all the crucial detail about new projects you’re considering. Now you’ve had a short crash course in how to read one – and what to look for. You’re free to unleash your x-ray vision on the crypto space, and explore wisely. You never know – maybe you’ll discover the next Bitcoin.

How to Stay Safe As You Explore Crypto

Congratulations! If you’re reading this article, you take security seriously – and you realize that only YOU can navigate the risks. Here is the lowdown on some of the threats you’ll face in crypto and how to avoid them.