It’s been over a decade since Satoshi Nakamoto released the Bitcoin whitepaper, a document with commendable technical depth and filled with groundbreaking new ideas. Coining the word “blockchain,” this whitepaper laid the foundation for an entire new industry that today includes applications ranging from fintech to supply chain management. With new blockchain projects springing up like mushrooms, enthusiasts and investors alike rely on whitepapers to judge the merit of these projects.
In their evolution from technical documents to business plans, however, many whitepapers have lost track of their original purpose as trusted sources of detailed technical information. Today, many blockchain companies are wholly identified by their whitepapers, which replace business plans as the primary sources of information for investors and the curious public. Being able to identify the warning signs of a nonsense “technology” whitepaper has become a critical skill.
Whereas a traditional business plan would contain a schedule for product development, financial statements, and a clear plan for the company’s growth, the new wave of whitepapers usually offers readers none of this critical information. In the worst case, whitepapers even provide false information.
Recently, companies have started to admit on the record that they only use blockchain as a fundraising technique. And Decrypt’s exposure of dishonest practices earlier this year confirmed a lot of spoken and unspoken suspicions—whitepaper writing has evolved into an industry rife with fraudsters. Aside from lacking any real technical expertise, many writers are regularly being asked to make up key elements of business models and lie about companies’ expenses to help their clients secure capital investment.
This deceitful documentation is spread on a company’s website as well. Whitepapers and websites, often the only places for potential investors to find information on a blockchain company, are being used to mislead investors, both gullible and educated, by disguising fraud as promising technology.
Since this trend shows no signs of fading, here are some things to consider as you read through blockchain project websites and whitepapers.
- It may sound obvious, but ask yourself: “What is the role of blockchain technology in this project?” or “What does blockchain add to the product?” Many times, blockchain is only used for the hype, to spiff up a project that could easily be executed with traditional techniques. If, after reading the company’s whitepaper, you can identify suitable technology alternatives that already exist in the marketplace, consider that a red flag.
- The content is full of vague descriptions and buzzwords? Stay away. Superfluous mathematical proofs and trivial lines of computer code are often used along with these marketing tricks to inflate the significance of any technology. In a legitimate whitepaper, you can expect the text to give a thorough explanation of what the company is developing, without requiring you to get a PhD in cryptography or computer science.
- If it sounds too good to be true it probably is. Business plans that sound unrealistic for the company’s bottom line should give you pause. Like this gem: “We will give back 100% of our profits as dividends for all tokenholders.” Stop and ask how that is a feasible business model. If profit or market penetration predictions expand exponentially over just a few years, be especially suspicious.
- There’s no free lunch—you’ll have to do some research on the company’s leadership team. Embellishing the list of team members with names and images copied off the internet has become a shockingly common occurrence. Make sure folks listed as team or advisers are affiliated with the project in multiple places online—for example, in articles as well as on their LinkedIn profiles. Also, be on the lookout for leadership that has the expertise necessary to execute the technology described in the whitepaper. A quick Google search now can save you a big headache later.
- Lastly, don’t play with fire. Steer clear of projects touting their ability to avoid regulatory oversight or circumvent any country’s laws. Although looking for such loopholes may seem appealing, there’s a good chance you’ll get burned.
Returning to tech roots
The practice of marketing companies directly to the investing public through lazy and misleading whitepapers is hurting the many legitimate companies with exciting blockchain applications, forcing them to constantly fight an uphill battle against the bad reputation fraudsters are creating. The first line of defense is raising our standards for acceptable whitepapers—not blindly trusting buzzwords and hype, instead demanding technical expertise and a feasible project plan.
No matter your level of expertise, don’t let a few ill-advised projects scare you away from blockchain. There are a growing number of fantastic applications of this technology. Keeping an eye out for a few red flags will be worth your time in the end.
David Williams, PhD, is Chief Technologist at BlockRules, a fintech company developing blockchain technology for the regulations-compliant sale, launch, and trading of securities. BlockRules’ goal is to bring the certainty afforded by regulated securities to a global investor base through security token offerings on a public blockchain ledger. David is also Senior Director of Platform Technology at Verseon, a clinical-stage, computer-driven drug discovery company. He has over 35 years of experience in software development, numeric programming, and data science.