Three Simple Things to Ask When Analyzing Token White Papers (Post from Dave Friedman)

Introducing: Dave Friedman
This week, we have a guest post from Dave Friedman. Dave is a professional ICO White Paper analyst, currently working with Venture Capital firms to analyze and construct better white papers. He also has the special distinction of not only being apart of the cryptocurrency boom, but also the dotcom market in the 90’s, helping companies put together IPO filings.

In this article, Dave is going to take you through the three simple things you can do quickly analyze white papers. These tips are meant to help new analysts and investors to quickly understand if an ICO is worth pursing further.

Now for Dave…

How to Read a Token Sale White Paper
One of the questions I am asked most frequently by people eager to jump on the cryptocurrencies bandwagon is “How do I know which token to buy?” Inevitably, my answer is that you need to research the various tokens and determine which fits best with your goals.

The first step in doing this research is the white paper. The white paper has become a de facto industry standard in the cryptocurrency space. The white paper is essentially a business plan that should explain the market the cryptocurrency is targeting, its underlying technology, its token’s cryptoeconomics, and hopefully some information about the team managing the project.

So what should you look for in a white paper? I have a pretty extensive checklist of filters that I apply to each white paper that I read. Here, I want to focus on the higher-level filters that I apply:

Is the white paper well-written?
If there are graphs or flow charts, do they make sense?
Is the white paper readable?
The answers to all of these things tells me whether the project team pays attention to details. Given the complexity of blockchain and cryptocurrency technology, evidence of attention to detail is critical. I will explain these filters by comparing two different teams’ white papers: Kyber Networks and Peercoin. Kyber Network’s white paper is available at here and Peercoin’s is available here.

Is the white paper well-written?
I want to see a white paper that has a coherent, logical, and narrative structure, starting with an identification of the problem, how the proposed cryptocurrency solves the problem, why the team will execute the project successfully, and how the token’s cryptoeconomy works.

Let’s break this down a bit more. While I am not looking for an essay that would be published in a literary magazine, I am looking for something that is well-written, largely free of grammatical and typographical errors, and generally easy to read. There are hundreds of token sales in existence today, with hundreds more planned in the next few months. Having a well-written white paper is critical to standing out from the crowd.

An objection that I often hear is “Writing doesn’t matter. Our technology is awesome!” Your technology may be great, but if you can’t effectively communicate your idea, someone who is a better communicator will come by and obliterate your market. Just ask Bill Gates what happened when a rejuvenated Steve Jobs returned to Apple.

Referring to the KyberNetwork white paper, consider the opening paragraph of the white paper:

Emerging cryptocurrencies such as Bitcoin, Ethereum and others have been gaining tractions of late because they allow users to transact, manage their digital assets in a decentralized and trustless model without relying on a third party. More interestingly, Ethereum network, with its turing complete scripting language and trustless smart contracts, makes its easier for people to issue and digitalize their own crypto tokens which either represents some real-world asset (e.g. Digix Gold token) or has values in some platform (GolemNetwork token, Gnosis token, Augur token, and so on). To date, the total market capitalization of the most popular cryptocurrency assets is 72 billion USD. This total market cap has tripled in 5 months and is still growing.

This is pretty good! There are a few very minor grammatical errors or typos, but the prose is not larded with technical jargon, the sentences are generally clear and declarative, and one can get a sense of where this team is headed with their communication. If reading that paragraph is the your first experience with a token sale white paper, some of the terms may be unfamiliar to you, but if you put the work in, you will quickly be able to understand all of it.

Let’s compare this to Peercoin’s introductory paragraph:

Since the creation of Bitcoin (Nakamoto 2008), proof-of-work has been the predominant design of peer-to-peer crypto currency. The concept of proof-of-work has been the backbone of minting and security model of Nakamoto’s design.

As historical artifact, I supposed that this introduction is interesting, but it tells me nothing about the coin, the project, the team, or why I should care. This is bad writing, because it doesn’t inform. Curiously, the entire white paper is only four pages, and there is no information about the tokens, the cryptoeconomics of the tokens, or the team itself.

Clarity of communication matters. If English is not the project team’s first language, or the team feels uncomfortable writing professional-quality English prose, I strongly recommend that they hire either an editor or proofreader before they release their white paper to the public.

Do The Graphs and Flow Charts Make Sense?
Very often computer programmers use flow charts and graphs as a kind of short-hand to explain what they’re doing. And this is a very valuable took. But project teams have to ensure that someone who is reading the white paper for the first time can look at the graphs and flow charts and understand them.

I recommend that project teams have people unfamiliar with the project review the graphs and flow charts. Doing this would go a long way to ensuring that a white paper is a high quality product.

Here is the first graph from KyberNetwork’s white paper, on page 7:

This seems pretty clear. If you are reading this white paper carefully, it is evident what ‘Reserve Manager’ and other terms refer to. This graphic gives a logical map in how I can think about their network, giving more clarity to their vision and utility.

As a counter example, here is how Peercoin used graphics in their White Paper:

The Peercoin white paper only contains one graphic. While it’s laid out well, and clearly labeled, it’s not entirely clear why I should care about it. It’s doesn’t give me anymore clarity in how the project should work or why their mechanism is better than a competitors. An effective use of graphics can not only help new users understand the project’s purpose, but also shows that the team understands how the platform should work.

Is the white paper readable?
Here I am referring more to the aesthetics of the white paper, than to the quality of its writing. This may seem surprising to people, but I have read close to one hundred white papers. Some of them are simply unreadable: bad font choice, garish color schemes, grainy screenshots, etc.

If you’re not comfortable laying out a document, consider hiring a graphic designer or other professional to make sure that your white paper appears crisp and presentable. Never underestimate the simplicity of black text on a white background.

Using KyberNetworks’ white paper again as our reference point, the white paper is readable: it’s mainly black text on white background, with a readable font. The graphs are clear and crisp. Granted, KyberNetworks is a liquidity and infrastructure project, and so doesn’t need the pizzazz that a project which attempts to tokenize musicians’ work would need. But if part of your project’s identity is pizzazz and buzz, ensure that you make it readable. A white paper doesn’t have to be black and white and boring. It can have color and personality. But you have to ensure that it is readable, and that its ‘personality’ doesn’t detract from it.

Where Peercoin fails in this regard is that the paper is thin on details about the project team and its development timeline. In addition, the paper looks like it could have benefited from additional formatting changes and structure. While both KyberNetworks and Peercoin are written in more of an academic style, Peercoin looks more like an average paper you might see submitted in College Seminar, while KyberNetworks put the effort into making the paper read well.

Conclusion
The overarching point that I am making here is that the white paper is the project team’s opportunity to market themselves to the public. Often, first impressions are the only impressions one gets to make. Project teams should ensure that their first impression is a favorable one.