Perusing dozens of white papers in the past months (researching and consulting as a Managing Partner), I wanted to point out that having a nominal chapter on project description, technical details, token economics, or team is simply not enough.
In fact, superficial chapters and vague content abound in a lot of these white papers such that the reader is often forced to be left hanging, e.g. as to why a project needs tokens, why it needs to be blockchain in the first place, how exactly the blockchain technology is to be leveraged, why decentralization is the relevant issue at stake, etc. Some white papers are so low-quality that it is to everyone’s surprise that those who wrote them are able to raise any amount of capital for anything. Admittedly, it is almost amusing but of course clearly dangerous at the same time.
Moving forward, I believe legitimacy (in terms of technological understanding of blockchain, driven motivation, etc.) will triumph in the long run, and that is why I wanted to add to the following article —
— and propose 4 key details that every ICO white paper should include in a clear, concise manner:
Detail #1: Reason why the native token would have any value
This directly strikes at the heart of token economics. A lot of projects discuss extensively about some form of token economics, dynamics, and incentive alignment but tend to focus too much on the “sell-side” of their native tokens rather than the “buy-side.”
In other words, projects often structure their white papers with the assumption that owning more tokens is always better, period. Nonetheless, the demand side of the token often lacks explanation, as it is not clear from the outset as to why a token would have any demand, hence value.
Why exactly would a normal user purchase tokens to use the platform? What would the nature of each transaction be like? Is the receiver of tokens (as a result of a transaction) incentivized to hold the token in any way, or incentivized to sell it off immediately? Why not just ETH as opposed to a native token in the first place?
The gist I often come across is that “users need to purchase the native tokens to partake in the platform’s token ecosystem.” What does that even mean?
Detail #2: The content of the blockchain itself
Of course, it is helpful for the reader if there exists substantial discussion regarding the benefits of leveraging blockchain in a relevant context, e.g. supply chain, identity, health data industry, etc. However, the discussion can go further and help the reader understand what is being recorded on the blockchain itself, as it corresponds to relevant parameters of blockchain such as transparency, decentralization, and privacy.
For most simple dApps (say on Ethereum), this will be transaction records as users interact with a dApp. For more involved projects, there have been more options as to what can be registered on the blockchain itself:
- Take Steemit, for example. As its block explorer reveals, each block contains multiple types of data, such as upvotes, comments, and Steemit posts themselves. Of course, there could be arguments back and forth regarding this sheer fact alone, but it is definitely worth noting that data on the blockchain are not necessarily restricted to payment data.
- For identity-related blockchain projects (e.g. Civic, THEKEY, etc.), it should be clear that one’s personal data are not to be logged onto the blockchain, as it would be a serious intrusion of privacy; instead, the hashes are. Then a detailed question would be, hashes of what exactly, and how?
- Similar mechanism (i.e. putting hashes on the blockchain, as opposed to the raw data themselves) should hold for all AI-related blockchain projects at this point, as blockchains are not the best for hosting large amounts of data yet. Whenever a project claims buzz words such as AI, big data, data marketplace, and data science, the details of what exactly becomes recorded on the blockchain have been ambiguous for the most part.
The reason the above matters is that whatever is on the blockchain is in fact whatever becomes publicly available in a decentralized manner. This is where transparency and privacy become the topic of discussion, depending on which pieces of data are chosen to be on the blockchain, either to promote transparency or otherwise.
At the same time, a more fundamental point that should be noted is that those pieces of data chosen to be on the blockchain should be “significant enough” to deserve a trustless system (i.e. blockchain) in the first place. In other words, the use of blockchain for Bitcoin makes sense (because financial data can benefit from a trustless system) whereas the use of blockchain for insignificant data (e.g. how many salmon shorts men own) does not.
Detail #3: Relevant technical details
Note that there is a nontrivial difference between “technical” details and “relevant technical” details, especially in the blockchain space. Of course, a white paper should always include technical details to some extent (e.g. which platform the project aims to utilize). The issue, however, has been that a lot of details that appear technical in many white papers are often not relevant in the scheme of corresponding blockchain projects.
For instance, stating the definition of Nash equilibrium (as well as Pareto optimality or Metcalfe’s law for that matter) in the most formal way possible is not going to contribute to one’s token economics model in any practical sense. Similarly, defining what a Weierstrass form for elliptic curves means as well as how the group law works in the context of Elliptic Curve Cryptography is not the most relevant when applying cryptography to make data secure. Even if relevant, too much superfluous formalism has not helped anyone and will only confuse the reader.
On the other hand, a clear demonstration of one’s understanding of IPFS does matter, for instance, especially if a project’s success depends on the IPFS protocol. In addition to one’s understanding, the paper (in that case) must show how the project aims to leverage IPFS to achieve something meaningful in a problem-solving way.
If one decides to interject a technical-looking math formula (e.g. logit function) in the middle of a white paper, the reason and the context should be pretty clear as well.
Detail #4: The reason for & the degree of decentralization
Clearly, the concept of decentralization has been hyped up in the past year, almost in an abusive way. It is rather questionable as to whether or not most blockchain projects have even thought about the implications of decentralization in depth before launching their ICO. This is because a lot of white papers simply lack any analysis on decentralization and how it is to benefit certain industries at the “cost” of losing centralized efficiency.
For instance, a white paper should be able to answer (or at least address):
- how a decentralized model compares to a centralized one in a given industry context,
- whether or not decentralization is the only way to go about solving certain problems,
- the degree to which decentralization is to take place,
- and the cost-benefit analysis of that degree of decentralization.
The latter two points are particularly interesting, as the degree of decentralization has always been the heated issue at stake, an ongoing debate among projects and communities. See Ethereum vs EOS (for smart contract platforms), Eximchain vs Ambrosus (for supply chain platforms), Civic vs uPort (for identity platforms), Thunderella (a protocol that attempts to achieve two degrees of decentralization at the same time by having two chains side-by-side), and (of course) Bitcoin vs Ripple.
In essence, the argument that decentralization is the absolute best way to go regardless of context is not the most sound one. As a result, a white paper should indeed give some thought to the issue rather than blindly praising the buzz word, which would help the reader understand the relevance of decentralization better in the first place.
All in all, it is irrefutable that the blockchain/ICO space is still fairly new and hence highly experimental in a lot of ways. While the current gap between the hype and the market glaringly exists, no one knows how long the liveliness of the market is going to last, or how the whole space is going to evolve in the coming months and years.
That said, the number of immature projects in the space is surely diminishing (knock on wood) while more legitimate players are and will be entering the scene over time. As this is the case, it is to my hope that every upcoming ICO white paper should be able to expound on the four aforementioned points in a detailed way moving forward, bettering the presentation of innovative blockchain-related ideas for the reader — and hence bettering the blockchain space overall.