What should I be looking for when reading ICO white papers?
This question originally appeared on Quora, the knowledge sharing network where compelling questions are answered by people with unique insights.
Answers below are by Terrence Yang, Tyler Turner,Edvard Boguslavskij, David Friedman and Kayee Tong.
Answered June 14, 2017
When reading ICO white papers, it’s best to first understand relevant reality: The vast majority of ICO-related tokens – past and current/pending – are going to zero in 5 years if not 5 weeks. Just as Bitcoin’s killer app a couple years ago was enabling money laundering, stealing and drug dealing (Silk Road[1] , Mt. Gox[2] , etc.), Ethereum’s killer app is enabling Ponzi schemes[3]and near-Ponzi schemes to launch as ICOs.
With that in mind, when evaluating ICOs, the overarching question is: Fundamentally, is buying the tokens a compelling value proposition or not?
I ask for plain English explanations. The culture of white papers is to use jargon. But before investing you should ask the coin creators for a plain English translation, preferably one that is legally binding. Even if you are technical. I make founders of derivative projects explain what they are in plain English even though I have expertise in that space. I want to know how well they understand it. Many technical people and bullshitters use a lot of jargon.
That severely limits the number of quality people who will:
buy the token for non-speculative, non-Ponzi reasons and work on and support the token and blockchain connected with the ICO.
In terms of how to read an ICO white paper, David Friedman’s answer nails it.
In terms of specifics on what to look for, focus on:
Product. What are they making? Is there an operational version of their software?[4]How quickly are they fixing bugs, patching up security holes and improving the code? Value. What good or service can the token be exchanged for? Is it valuable? How is the good or service differentiated from others? If the token cannot be exchanged for a good or service, how do you know the token is not a security or scam? Have you exchanged the security for a good or service? Was it a great experience?
Token Differentiation. How is this token different from all the others out there?
Moat. How do you build a wide moat around your product or service that the token can be exchanged for?
Problem. What problem is being solved?
Solution. What is the solution?
Market. What is the market for the tokens? How does one buy, sell, hold, transfer the tokens?
Terms. What percent is allocated to the core team? In presale? At ICO?
Token Printing. What’s to prevent token printing?
Launch. Has the underlying product or service launched? If not, why not?
User Feedback. What is the response from users to the product or service?
Team including Development. Who is working solely on this? Full-time? Part-time? Contract? Volunteering?
Who are the core committers? Meaning who has commit access? How strong are they at development?
Are there experienced engineers? Endorsements from known experts?[5]
Ecosystem and Underlying Ecosystem. How strong is the ecosystem? The underlying ecosystem the token is related to (e.g., Bitcoin, Ethereum, C++, Golang, Node.js, JavaScript)?
Who are the developers, promoters, advisers, (potential) miners, pre-sale investors and (potential) users, merchants.
If the above looks a lot like what some investors use to evaluate startups, that is because it is. You can make money speculating. Many have paper profits from speculating on cryptocurrencies and ICOs right now. I’m old school. If you are a US person speculating in this stuff, does the IRS think you have income or not? Because otherwise, it’s just on paper. Sell your coins and go into cash, like in a normal sale of IPO equity, etc. Until you do that, your so-called profits could easily vanish.
Answered June 22nd, 2017
Here are the basics of what to look for in ICO whitepapers: Is there a real use case?
Many ICOs are overhyped and may lack practical applications and a clear roadmap on how the product or service will provide unique value. So the first thing to look for in blockchain white papers is the industry the project focuses on an what problem they’re trying to solve. Ask yourself: Is this a large problem or issue that a lot of people have? Is the project solving it with a unique solution? What competitors exist, inside and outside of digital assets.
What is the ask? If you decide to move ahead with an ICO, consider how many total coins will be outstanding. If there are billions or more, your share in the total distribution may be minuscule, diluting the per-coin value and also your potential gains. In other words, check that your investment yields enough “skin in the game.”
What’s the team behind the ICO?
ICOs are a hotbed for questionable claims and inflated expectations. Successful project usually have one important thing in common: An excellent team. Startup projects already face a number of obstacles, so a strong team with a solid track record and experience in the field is not just a plus, but a must. Take a look at the ICO’s website for the team, then dig deeper to check their public LinkedIn for past projects. A Google search also helps.
Technology
If you have a technical understanding of the tech, dig deeper to validate claims the team makes. Do their roadmap, funding goals, tech stack, and more make sense? Is the project overly ambitious? Are their technology views misguided? What could be pitfalls and potential issues that may arrise?
Common Sense Check
One of the most typical things easily overlooked by ICO investors is the “Common Sense” test. It’s split into two parts, which we at CoinClerkALWAYS use internally to gut-check our potential holdings. Part one: Does the world really need this project and is it a 10x improvement on existing solutions (bad) or a 100x improvement (this is where bigger potential lies). Part two: Could this solution work without blockchain/crypto technology and may it even work better without it? In other words, is this ICO using blockchain technology to ride a trend or is their technology choice adding real value?
I hope this introduction helps you. Please let me know if you have any questions, always happy to help 🙂
Robert Digital Currency Expert: www.CoinClerk.com
The easiest digital currency portfolio. Launching 2017 by invitation only.
Disclaimer: The statements presented here are opinions only and should not be considered investment, financial, tax, or legal advice. They do not necessarily reflect the views of CoinClerk or its employees and officers. The risk of loss in trading or holding digital currency can be substantial. You should therefore carefully consider whether trading or holding digital currency is suitable for you in light of your financial condition. This opinion shall not constitute an offer to sell or the solicitation of an offer to buy securities nor shall there be any sale of these securities in any state in which such solicitation or sale would be unlawful prior to registration or qualification of these securities under the laws of any such state. One should not assume that any of the identified digital currencies and assets will be profitable.
Answered May 25, 2017
Pay attention to the Product When reading the white paper pay attention to the state of the product. What is the status on the product development? Is it in the infancy of it’s development, are there signs of functioning product already in the market? Do not expect to discover a fully, well developed product at once. Pay attention to what type of token will be ICO’d: usage – it’s a token that gives you the right to use the specific service/product. No special rights are issued to you, but you are granted access to the service. Think Bitcoin or Ether. work – such tokens give you the right to contribute to work to decentralised autonomous organisation (DAO) or help it function properly. Think Augur. These tokens are not mutually exclusive and some of them serve both characteristics.
If you are to participate in the ICO, ask yourself a question: “why I’d own any of these tokens?”
See what are the use cases of their service/product in the real world – what does the team and product try to accomplish.What is their vision positioning among others? Pay attention to their roadmap, is it realistic, how lengthy/complex is it, which stakeholder will exhibit pushback, which will be extremely valuable to have on your side. Even though it is difficult to estimate the potential of such highly technically complex products, try to also snoop around forums, blogs, etc., to uncover what is the hype about. If it’s only a hype, well, be cautious. “is it actually useful?” Developer pool in early-stage VC investing, you have to pay attention to the team – people who are behind building the service/product. It’s critical to identify the developers behind the product. What have they developed prior the service they are about to launch, what is their domain experience, how are they recognised in the developer community? How does their LinkedIn profile look like, what do they Tweet, what does their gitHub profile look like, how many lines of code are written there, what is the quality of that code (code sophistication), are other quality developers contributing to it. Even though that risk might seem distributed in the crowd sale, it will not protect you from losing money if developers are not developing the product. If the developers are not interested in the token dev. it harms the value of token. “who are these people?” A network ownership effect describes when the utility of the service and the value of ownership of the service increases for existing users when new users join. With time, best practices will emerge and they hype levels will decrease, the noise will filter itself out. What is being built now is still only at it’s infancy, there will be a certain level of risk involved. Familiarising with the newly issued white papers, reading them, getting an understanding what is out in the market and spotting the service/product development over time will be hugely beneficial to identify future use cases and quality products. Note: do not take this as an investment advice or an information piece to guide your decision making. Think for yourself, consult with developers, industry leaders, read. Hope this is useful. Thank you for an a2a, David Friedman!
Answered May 31, 2017
The first question I try to answer: Can I, as a relatively non-technical reader, understand the purpose and use case of this blockchain/ICO/whatever? I’ve read the original bitcoin white paper, as well as Ethereum’s, and don’t entirely understand them, yet both have, so far, proven their value, if not their utility. So not being able to answer this question isn’t proof of anything.
However, if I can answer this question, it’s a good sign that, at the very least, the people who wrote the white paper can communicate clearly and cogently, and have moved from abstract theorization to practical application. Mysterium is an example of a project whose white paper is well-written. I don’t understand all of it, but I understand enough of it to create a cogent narrative in my mind: This project is interesting because [reasons.] The market is [description], and I can apply my real-world knowledge of the market to this product and see how this product could deliver value if the developers’ promises are realized.
This is unusual, in the white papers that I have read. Then I go on to the diligence questions:
Who are the developers? What is their role and history in blockchain, cryptocurrency, etc.? What do I get out of buying one of their coins, tokens, etc.? Can I estimate the size of the market they’re pursuing? Is there any real world knowledge that I have about their area of inquiry that I can map onto this project? Is the paper well-written? Note here I am not asking about whether, especially for the more theoretical papers, whether the math checks out, or whether the algorithm makes sense (I’m neither a mathematician nor a computer scientist), but, rather, I am asking simply whether the prose makes sense. Are the sentences written coherently? Does the paper have a lot of spelling and grammar mistakes? Are they paying attention to details? Reasonable rebuttals to this particular inquiry include the argument that not all white paper authors are native English speakers. That’s fine, and I make an allowance for it when I am looking at the paper for prose stylings. But for developers for whom their native language is probably English, I do consider it a negative if they can’t write well. If you can’t write well, you can’t communicate well, and if you can’t communicate well, you’re going to have a hard time introducing a new and innovative product to the market.
Answered May 24, 2017
You should look for anything spotty.
A lot of times spotty documentation screams to me this is a scam, even if the people and devs check out somewhat.
I won’t defame any coins out there, but there are a lot of scamcoins out there. Do your research very carefully.Also, I have found that expected returns for new coins are pretty low relative to the risk involved. Tread very carefully. With so many coins, I have only invested in very very few coins (ETH and LTC) from the start and held them for a long time. Some coins, such as TRST and SJCX, I have just bought in early and sold as soon as it hits the exchange because the goals are lofty, people are decent, and the documentation is sound, but frankly they aren’t likely going to achieve their original targets relative to the amount of risk I am taking. If they happen to actually hit it or go up in value, I might take a second look then, but I usually end up investing in their ecosystem rather than actually buying the coin itself. However, they are likely going to get me a quick profit with the early backer discount. This is not investment advice.
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