In the flourishing world of ICOs, the white paper is the most important document available to a blockchain investor. It holds all the relevant information on what a startup’s plans are, why the market needs it, and how it will get there. A thorough analysis of this document should provide the necessary insight before making any decision.
Blockchain investment expert Nick Evdokimov has been reading white papers for a long time. His company ICO Box helps blockchain startups develop good ICO strategies and has helped raise more than $1 billion in capital. Recently, he sat down for an interview and shared a few of observations on what to look out for when evaluating these documents.
Coinspeaker: “Nick, you’ve probably reviewed hundreds of white papers by now. What are the first things you look out for?”
Nick Evdokimov: “Well, any white paper worth reading must address three important components at some point within the document. The first of these is the token itself, which is the main object of interest for investors. The next component is the business model. That is, the relationship between the business and the market, its place within it, and the innovation it introduces. Third, a white paper should always provide the professional profiles of the startup’s core team members. This gives investors a chance to analyze the team. To check if they’re ready and able to conduct an ICO and run the business itself. You see, the ICO is just the first step a startup takes before it faces the real market and you want to have people with experience in what follows.
So, we need to pay attention to the description of the token, the description of the business model, as well as the professional profiles of the core team.”
Coinspeaker: “Would you mind breaking down the first one? What tells you a token is worth investing in?”
Nick Evdokimov: “Great question. I take a look at the proposed token economy. Here, the white paper should explain how token demand will be created and how the startup plans to deal with the supply on the market. That is, how it will decrease the number of tokens in circulation. This should be pretty self-explanatory, but the reason a startup should reduce its supply of tokens over time is because it incentivizes demand and drives up the price. A basic economic principle.”
Coinspeaker: “I assume that controlling that supply becomes very important then. You want that to be outlined in the white paper.”
Nick Evdokimov: “Absolutely. We should always inquire about the startup’s token distribution program. Meaning, what will the uncontrolled volume of tokens in circulation be after the ICO? If more than 20% of tokens are set aside to be distributed outside the investor circle, this is already an indication that the startup is set to fail.
More so, this is where a startup’s business model comes into play. It should always count on strategies that reward holding or freeze tokens. This also helps decrease the number of tokens in the market.
So, to your point. Yes, pay close attention to the distribution program in the white paper.”
Coinspeaker: “Let’s move on to technology. Without getting too technical, what do you look for here?”
Nick Evdokimov: “Obviously, this is essential. We need to understand how the token is built and implemented. I actually covered this in one of my recent videos. Hopefully, the token is built on the Ethereum platform, which works very well. If the startup uses the ERC20 utility token standard, that should give investors some peace-of-mind on the technical side.”
Coinspeaker: “Perfect. There’s a pressing topic we haven’t touched on yet. The legal aspect. With all this talk about ICO regulations, it’s definitely something to evaluate.”
Nick Evdokimov: “Of course. We certainly need to consider the legal opinion. This basically boils down to whether or not a startup’s token is classified as a security. So, we need to make sure that what we’re purchasing is actually a utility token and not the shares in a company. There are three tests we can use to determine this: the Howey test, the family resemblance test, and the risk capital test. Every investor should take the time to learn about them.”
Coinspeaker: “Indeed. Thanks, Nick. This has been very informative. Any last comments?”
Nick Evdokimov: “Thank you for having me. To wrap up, I’d like to say that the diligence applied to the white paper correlates directly to the ability of the startup to run its business after launch. This is always a tell-tale sign for investors.”