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A step-by-step guide to understanding a crypto whitepaper

A step-by-step guide to understanding a crypto whitepaper
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By CNBCTV18.com Feb 7, 2022 2:23:24 PM IST (Updated)

A whitepaper is a document released by developers that explains the technology and purpose of the project they are working on. It tells prospective investors how the cryptocurrency was conceived and highlights its purpose. A crypto whitepaper contains various forms of data like statistics, diagrams, and formulas. The goal of this data is to convince prospective investors to invest in that cryptocurrency.

The growth and development of blockchain technology and decentralised finance have seen a massive boom in the last two or three years. Today, there seems to be a new blockchain project emerging every day. And every time there is a new blockchain or cryptocurrency in the market, you hear the term ‘whitepaper’ thrown around a lot. But what is a whitepaper? And what can it tell us about the upcoming project?

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Here we will learn what a crypto whitepaper is and how to make sense of one.
What is a whitepaper?
A whitepaper is a document released by developers that explains the technology and purpose of the project they are working on. It tells prospective investors how the cryptocurrency was conceived and highlights its purpose.
A crypto whitepaper contains various forms of data like statistics, diagrams, and formulas. The goal of this data is to convince prospective investors to invest in that cryptocurrency. For any crypto start-up, releasing a whitepaper is a way to be considered professional and legitimate. It helps investors understand how the project is different from other projects in the crypto space.
One of the most famous whitepapers, considered the gold standard for crypto whitepapers, was ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, published by Satoshi Nakamoto in 2008.
What concepts do you need to know to understand a crypto whitepaper?
Reading a whitepaper may be the best way to understand a crypto project you are interested in. But many people are confused about how to go about it, as whitepapers do not make for light reading, especially if you aren't very tech-savvy. The good news is you do not need to have a background in computer science to understand a whitepaper. This guide will make it easier to read and understand a whitepaper.
First, you need to be aware of a few crypto concepts. You can quickly learn about them using Wikipedia or any other source on the internet. These concepts include:
  • Blockchain
  • Consensus mechanism- (Proof of work and proof of stake)Nodes
  • Mempool
  • Soft-forks and hard-forks
  • Governance
  • Smart contracts
  • Byzantine general problem
  • While you do not need a detailed understanding of these concepts, it is essential to know them. Once you are aware of these concepts, you will better understand the different aspects and data contained within a whitepaper.
    How do you read a crypto whitepaper?
    Here is a step-by-step guide to analysing a whitepaper.
    1. Understand why the project was created
    Every project whitepaper will have a motivation behind its creation. It will usually be at the start of a white paper. It will give you an understanding of the problem the project is trying to solve and how its solution is different from the solutions that might already exist. The market analysis in the whitepaper will show you the exact need for the product and how it fits into the existing market.
    2. Figure out the project’s real-world utility
    This is a vital aspect of a crypto token or a project. Many crypto coins will have a utility or a function other than just being a currency. Some can be for the governance of a project, and some can be non-fungible tokens that give ownership rights for a product. There are various utility tokens in the crypto space with vastly different purposes. Some utilities will be more practical than others.
    3. How does the project achieve consensus in the network?
    This criterion is the most critical part of the whitepaper. There are different consensus mechanisms to consider, such as proof of work, proof of stake, and variations of these two. Consensus is critical because it tells us how different nodes in the network can tell if a transaction is true or false without directly communicating with each other. This is the bedrock for decentralised technology.
    4. How the initial coins were distributed
    Many crypto projects will have initial token distributions using pre-mined coins, especially in proof of stake projects. You should check how these coins were distributed. Sometimes, a significant portion of the initial coins is offered to venture capitalists and project developers. This is often a sign of a pump and dump scheme and restricted project growth, respectively.
    5. Technical explanation of the project
    Typically, projects will try to simplify how the network functions using graphs and summaries. You should try to understand the big picture of the project and not worry about the minute technical details of the whitepaper.
    6. Project timeline
    The timeline of a project will tell you the working plan for the next few months. It will include details like when sales will start and when the token will be launched. The detailed timeline for a project can indicate the developer’s competence and foresight.
    You should consider these essential factors while reading a whitepaper, but they are not the only ones. It would help if you also considered factors that are not in the whitepaper, like the development team’s background and tokenomics. But this guide is a starting point for your journey. You will get more proficient in understanding the pros and cons of a project as you read more whitepapers.
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