According to the Wall Street Journal, in 2017 more than $4 billion was raised through means of ICO. This number is growing daily, with reports of upwards of $2.3 billion being raised over the last 3 months alone.
These numbers to any traditional investors are staggering: VC’s, Fund Managers, and Angel Investors everywhere are scrambling to understand exactly how to define and find the winners in this new, tokenized economy.
As this scramble has progressed the ICO market has began to face heightening levels of uncertainty and doubt, with notable cases of scams, frauds, and ponzi-schemes plaguing the news and crowding the ICO space for genuine, well thought out projects.
This article aims to address some of the first steps that any average techie or crypto enthusiast can take when evaluating new ICO projects — starting from the most basic document of any tokenized service: the whitepaper.
The article provides a high level insight into the basic, ground level due diligence that must be performed on any token project, as well as some of the questions that must be asked by any ICO enthusiast before taking the next step towards an opinion regarding a project.
The Problem
After a preliminary glance through any whitepaper we must first start by asking and answering the most important question facing any new business: does this project solve a real world problem?
Due to an overall lack of investor knowledge in the blockchain space many projects are able to secure support and funding without a clear, concise explanation of what the problem is that they are trying to solve. Projects often instead present their product in a solution-first fashion; solely focusing on the innovative, game-changing properties of the project’s token.
Before being able to make any judgement towards the success of a project one must be able to understand and answer whether the project is fundamentally a good blockchain use case, as well as exactly how a project’s blockchain solution will solve a problem that a centralized service cannot resolve (which is the real key here).
Oftentimes in whitepapers you see the words “trustless”, “disintermediated”, and “efficient” all over the place — it is critical to understand that these are not necessarily properties of many blockchain projects (especially in their early stages), and that these words can just be considered buzzwords/nonsense if there is no justification as to how these features will be attained or provided.
For those who are looking for a more detailed introduction to blockchain use cases I would highly recommend reading my prior article on the matter.
Concisely put, if a product or project does not enable the ability for multiple mutually untrusting parties to coordinate on complex issues, there is a high likelihood that a blockchain is not needed and the project will face long term adoptability issues, or, post ICO boom, will be replaced by a more efficient centralized service.
The Team
After evaluating an ICO’s use case, it is vitally important to analyze the strength of the team executing on the project’s vision. Ask yourself: is the team working on the product qualified? Do they have prior industry experience? And do they have at least one member with experience in the blockchain space?
You would be shocked as to how many projects feature team members with no blockchain experience who have yet to even update their Linkedin’s with their involvement in the venture: an immediate red flag to any investor. When digging through whitepapers it is important to almost act as your own private investigator, sleuthing for information on both the team and the company — as the founders past body of work is almost as important as the idea being proposed.
The Product
The product: the meat of any blockchain project. This is where ICO’s often differentiate themselves, with some ICO’s nearly launched and ready for adoption, and others months away from any sort of solution.
Investment/due diligence theses differ greatly on this matter, but I am personally of the opinion that the further that a product is along in its development, the better likelihood is that the product will be brought to market/will have success in the industry.
Oftentimes whitepapers display and highlight the long term potential of a project with little information as to the current state of the solution, leveraging a “fear of missing out”, or FOMO, while providing very little insight into timeline, roadmap, and development. It is often important to thoroughly analyze any whitepaper’s “roadmap” and “product development” sections before making any decisions on a project, understanding just how close or far away a product may be from a being rolled out to market.
If you are more technical it is also highly valuable to analyze and audit flow charts describing the solution proposed, as the charts and images within the paper provide insight into the approach a company is taking to develop their product.
Ask yourself: does this project have a blockchain layer built already? Or does it still rely on centralized services? How much of this project’s vision is attainable with current blockchain technology? And how much development of blockchain technology must take place in order for their simplest vision to be attained? If an approach looks wrong or inefficient it is worth re-considering one’s opinion on a project.
Note: Securities vs Utilities
In this turbulent day and age of legality regarding ICO’s it is critically important to understand what kind of investment vehicle any token sale is offering. If a whitepaper is offering a “security token” centred around offering shares of equity in an ICO’s company one’s evaluation is completely different than if a whitepaper is offering a “utility token”, where the value of the token is associated with the inherent unique functionality of a platform, app, or service.
With the SEC cracking down on some projects for mislabeling themselves as utilities it is critically important to understand this difference, as this mislabeling can lead to serious charges that can instantly cripple an ICO’s business. For more information into classifying securities vs utilities I would highly recommend checking out this article from Crypto Law Group.
The Code
Has this project’s code been audited? And who was the code written by? This is an extremely important aspect of the evaluation of the process, as if a product hasn’t been audited or developed thoughtfully it can be extremely vulnerable to a number of crippling attack vectors (see: the DAO hack).
The autonomous nature of smart contracts makes them vulnerable to a number of different exploitations; potentially resulting in the theft of funds, data, or any other form of value. Typically whitepapers feature a technical portion where they mention these audits — it is worth seeking this section out to understand just how rigorously the project’s code has been tested.
The Community
The last and one of the most important portions of a whitepaper to evaluate is the project’s community. As much as it is important to focus on an ICO’s product it is also critical to evaluate who the project’s adopters are.
What generation is being targeted? Who are their stakeholders? Who are they partnered with? What will those partners offer? Is there a proven demand for blockchain solutions amongst the target demographic?
These questions can start to give you an idea of what incentivization people will have to use the product, and can be extrapolated to gain insight into who the product SHOULD be tailored to.
The ideals, design, and priorities of a project’s target user base should always be aligned with the functionality of a product, as, no matter whether a company is looking for immediate funds or a broad investor base, they will always need long-term users and adopters to provide their platform with any substantial value.
Summary
Congratulations, we are now well on our way to understanding what goes into a good ICO whitepaper! Despite the contrarian tone of this article, there are actually still a number of quality projects and whitepapers out there that are leading well thought-out token sales that greatly improve the quality of the blockchain community. Before jumping the gun and deciding that a project is one of these cases, however, it is important to ask ourselves some of the questions listed in this article.
More whitepaper principles (business plans, community engagement, token economics, incentivization schemes) to evaluate are still to come, however, if we are able to progress our way through all of the headers listed in the article above we are well on our way to discovering a sound ICO project — increasing our likelihood of developing and fostering the exponentially expanding ICO market.
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About the Author: Wesley works in business Development at Block 16, a full service token sale accelerator. Block 16 offers services in token design, network syndication, marketing, advisory, and blockchain development. If you would like a consultation on your ICO/token project please email wesley@block16.io!