If you are on social media, it is hard to miss the crypto buzz. Everyone is talking about it and wants to buy some. But most of these investors are purchasing it for the hype without knowing what that specific cryptocurrency actually does and its founders’ vision. This is where the whitepaper comes in. Any sincere founder will launch a whitepaper before it plans to go ICO (Initial Coin Offering). It is analogous to a prospectus and an IPO (Initial Public Offering). Both serve the same purpose of informing their audience about their vision and specifically in the crypto space, the technology involved.
There are numerous whitepapers on the web, but are all of them worthy of your attention? No. Because of the recent crypto buzz, there has been a lot of whitepapers landing on the web, some genuine and some potentially looking to scam innocent retail investors. We are here to help guide you through the very technical whitepaper and spot the stuff that matters.
- Roadmap – one of the most important sections of a whitepaper would be the roadmap. It is the vision of the developers for the next few years. It details what they are on track to achieve and how they envision the crypto will be used. This will give you a sense of whether their project is realistic or not.
- Passion – on reading the entire whitepaper, you will know the inspiration behind the crypto. Those looking to scam may not have a specific inspiration and may seem generic. Genuine developers will be very passionate about a specific topic or a problem they are looking to solve. This passion drives their entire project and gives it a purpose.
- Research and technology – a whitepaper should provide its audience with details about the technology they are using backed by thorough research. The Bitcoin Whitepaper is considered to be an industry standard when it comes to whitepaper. It is clear and crisp, detailing the technology involved. Not being too lengthy, it is a good baseline to know what a whitepaper should look like.
- USP – every project should be different and be able to stand out from the crowd. If the paper does not describe how their crypto is different from the thousands available on the market, it is probably too generic and not a good investment. It should either satisfy an existing need or be able to create one.
- Team – lastly but most importantly, the team, developers included, should be vetted. Enough background information about each member should be provided helping the audience understand their roles and the skills they bring to the table.
The above points are a good way to gauge whether the project is a viable investment. But there are some clear red flags one should look out for.
- Lack of detail – if the paper is not long enough to provide the audience with the essential details, like how the technology works, it is a big red flag. Developers hoping to scam their investors will usually fill the paper with buzzwords. The paper would beat around the bush not providing the vital information needed to make an informed decision.
- Premine – premine refers to when a part of the tokens is reserved for among a small group before making them available to the public. This small group could consist of the developers and early investors. If a majority of the tokens are reserved for the founders or developers, it will most likely be for their self-gain, so they can profit when the token goes ICO. This information would be a part of the token supply in the whitepaper.
- Escrow – if they mention that the funds from the ICO will be kept in an escrow account, but the majority of the key owners would be part of the founder’s team, that would be a big red flag. Ideally, the ratio of key owners should be one team member and two or more community members. In this way, it is ensured that the funds are secured and will not be abruptly taken away. A real-life example of such a scam is the DeClouds scam where one of the founders was disguised as a neutral third party.
- ICO Cap – if the founders are asking for an unrealistic amount of money as a seed investment it is mostly out of greed or just due to the complete lack of financial knowledge. Either of the two reasons would be a big red flag.
- Token supply – the manner in which the tokens are distributed is an important factor in determining who has control. If the top holder is part of the owners, then they have immense control and could be a signal of a potential rug pull. Secondly, a portion of the liquidity pool should be locked. If the burn address starts with 0x000.. the LP is burned, if 100% of the supply is in a wallet address it is not burned and if it is a contract address it has been locked. Usually, the owners will provide a link to access the lock timer. To be on the safer side, the timer should be longer than two months.
