A whitepaper is a document which identifies a problem, emphasizes it and proposes a solution. In the context of an initial coin offering, an ICO whitepaper also specifies the ecosystem and the developed token (technical part). It’s more than a description of a project, a white paper is an opportunity to present your project to VCs and potential first token holders. In this article, I will analyze the most common mistakes and flaws I come across in ICO whitepapers. I’ll also propose how to fix them.

1. Using blockchain the wrong way

ICO whitepaper writers and founders sometimes forget that blockchain technology is all about new paradigms. Ranging from token economics to the way of thinking, blockchain technology removes the borders of progress.

However, it’s important to use blockchain the right way. The disruption of an existing industry goes way beyond an existing business idea even without adding the word “blockchain.” If an ICO whitepaper makes more sense by changing the word “blockchain” into “database,” then it seems nothing justifies the use of this technology. Moreover, the analysis of the token economics is vital: a poorly designed ecosystem is a sign of weak projects.

Finally, whitepapers must frame blockchain technology as something that can empower business processes, and not just as a way to make money.

2. Failing to identify market needs and to propose feasible solutions

A complete market analysis is important in order to determine its pain points and to propose innovative solutions. Identification of the key problem areas isn’t perfect because of minimalism which has found its way into market analysis. Take time to describe the market precisely! The project needs not only to innovate, but also work. Indeed, many projects propose interesting concepts, but are out of touch with reality.

3. Lack of a business strategy

Be able to identify your customers. Regardless of what your product is, whether it’s a platform, a DApp, a wallet, an exchange or a service, it’s essential to be able to identify your target customers. The first error of many businesses and blockchain startups is focusing on too broad a target group.

Correctly assess the necessary time to develop your product. Having a clear idea about the time necessary to develop your project is crucial. Developing a good product takes time and so building an over-optimistic roadmap may be a time bomb.

Sooner or later, you will have to explain yourself to the token holders. Some projects claim to disrupt the energy market in the span of twelve months. This kind of statement is suspicious, isn’t it?

How are you going to penetrate the market? Becoming the next LinkedIn or YouTube is not an easy task. Many actors pop up on the market every day, but just some of them plan their strategy carefully to attract users to their platform. Although, having the token holders’ trust is important but having a predefined market penetration is even more so.

4. No competitor analysis

There are numerous ICO whitepapers without a competitor analysis. Competition and competitors, either direct or indirect ones, are inalienable elements of running a business, so do be careful to take it into account. The absence of a competitor analysis can lead to a lack of cohesion, precision and business knowledge.

As a consequence, it’s important to analyse the competitors around the key comparison criteria, and identify their strengths and weaknesses. A research into different market actors can be conducted on several reference crypto websites (ICObench, ICODrops,  CoinGecko, etc.) but also similar businesses that aren’t based on blockchain technology.

5. Wrong choice of words

Many white papers are a compilation of buzzwords and false expectations for the future token holders. Don’t fall into this trap!

An ICO whitepaper must explain the project clearly and simply. A good project will still be good, even if it’s explained with simple words and terms. And a bad project hidden behind marketing terminology/gibberish will still be a poor one. So, keep it simple!

The choice of words is also extremely important legally-wise. The words can change the qualification from a utility token to a security token. It’s never recommended to talk about token price growth and promises of returns (high returns, outstanding returns, etc).

6. Lack of precision and structure in the ICO whitepaper

You have to structure the flow of your ICO whitepaper well because a structureless document is always difficult to read. We recommend using a classical structure, where the problems of the industry are emphasized (market overview, pain points) before presenting the solution proposed by the startup (touch points). Afterwards, an in-depth analysis of the competitors must be presented, before explaining why your project is different and more valuable than the already existing ones on the market.

An ICO whitepaper is the first representative of your project. This document must be precise and accurate, and the sources of every statement have to be referenced: the size and the potential growth of a market, the main pain points, etc. The sources must be trustworthy and verifiable (don’t use Wikipedia as a source, instead, go for scientific publications).

7. Problems in aligning interests

Many actors in the crypto industry have different interests:

1. The first token holders (also known as early-birds) present at the first stage of the ICO (private sale) want to benefit from an important bonus. It’s 60% on average but can go up to 80%.
2. The bounty-hunters want to have as many tokens, as fast as possible.
3. The token holders (simple holders) want to observe an organic growth of the token price.
4. The users of the DApp or the services want to have a stable price.

This divergence of interests can lead projects characterized by a poor token sale and tokens distribution strategy into an uncomfortable situation in which the token holders and final users pay the price for these mistakes.

Indeed, imagine a pre-ICO where you’re offering a bonus of 80% to the first token holders. The first reaction of these holders could be to drop the coin on the market the moment they learn about the the first exchange listing. Let’s say you also have a bad strategy of token distribution (designed to increase the liquidity of the token) in the form of an airdrop. Now combine it with this situation and you’ve got a major value loss of the token. This price drop is a very bad sign for token holders and the final users, who will suffer a significant loss.

8. Absence of legal structure

An ICO whitepaper must contain a disclaimer. As I said before, we recommend to pay attention to a  precise terminology while preparing and editing a white paper. On top of everything, a disclaimer at the end of the document written by a lawyer is a must. Don’t forget: a lawyer is somebody who you need to consult before starting a project in order to avoid problems afterwards.

Indeed, it’s important for both parties (the startup and the token holders) to know which risk is linked to the possession of this type of assets. If you’re thinking about organizing an ICO, you will also need to provide your potential token holders with a token sale agreement. It will include several details regarding the token holders (restricted areas, KYC process, etc) and the token itself (the price of the token, issuance date, etc).

Conclusion

Writing an ICO whitepaper isn’t an easy task. It requires time and expertise. If you want to talk about your white paper and how to improve it, don’t hesitate to contact me here at Espeo (box down below).

Innovations come to existence through different means and circumstances. Some of them start as meticulously planned inventions. Others – due to pure luck and uncontrollable external conditions. It’s never just one source that transforms promising innovation into a successful product or services. It’s usually mix of different factors. What about Fintech innovation, and blockchain Fintech challenges? Was it luck or the Invisible Hand of the Free Market? I’ll have to give you a bit of history first.

Let’s go back a decade…

We can’t talk about blockchain Fintech without mentioning Bitcoin. Bitcoin was the first successful decentralized cryptocurrency. It launched, at least as far as we can tell, before the financial crisis of 2008. In Bitcoin’s genesis block (the very first block created by Satoshi) there’s even a reference to a Times article mentioning a banks bailout program. There were several pre-crisis signs that could ignite Satoshi’s vision and spark Fintech innovation.

• fractional-reserve banking
• lack of transparency in government monetary decisions (inflation, printing new money)
• greedy financial institutions creating financial products to benefit mainly themselves (subprime mortgage derivatives)

Satoshi worked towards creating a truly stateless currency that would be used directly between parties. The parties interested would trade (person to person or between businesses) without any third party who could stop, corrupt, ban or censor transactions.

Financial crisis

This ‘shock to the system’ amplified the focus on cryptocurrencies and its values in later years. We could see this during the Greek government debt crisis and later during the Cypriot financial crisis. Statistics gathered by Google Trends show how often people searched for the term “bitcoin” in Google. During these times of hardship, you could see a correlation between the economic climate and the Bitcoin price on major crypto exchanges. It shows that people were trying to partially escape from certain ‘difficult’ currencies. For instance, EUR deposits of some Cypriots were confiscated in 50% at that time. People considered moving to something that they saw as less susceptible to government oppression.

Blockchain FinTech technology stack

The above mentioned source of innovation helped cryptocurrencies to form their basic manifesto and define their initial properties. But to exist and work as advertised, cryptocurrencies needed a sophisticated technology stack. In its core, Bitcoin and other cryptocurrencies created later derive a lot from other technologies, created much earlier. This can be regarded as part of a ‘Watching others’ source of Fintech innovation. Starting with the Bitcoin White Paper that refers to such inventions as: hash functions (SHA256) for anonymizing data and summarizing digital signatures, Elliptic Curve Cryptography for signing transactions and Hashcash for its proof of work algorithm. All of these technologies have existed much earlier than Bitcoin (some even 50 years earlier). However, they created the product we now know only in combination.

Cryptocurrencies created after the publication of the Bitcoin protocol  derive a lot from Bitcoin itself, but also from other inventions and technologies. These include: quantum computing, Schnorr signatures, Scrypt algorithm, Ring signatures, zero-knowledge proofs, Turing-complete programming languages for smart contract development or many more. All of these inventions were and are mixed and matched together, forming remarkable combination of various cryptocurrencies with distinct features.

Suddenly, entrepreneurs had many options to choose from to build products on top of existing cryptocurrencies. This spurred the ‘Recombination’ source of Fintech innovation. Companies and individuals from various industries started to look how they could utilize blockchains and cryptocurrencies in their fields of expertise. Also, they considered how they can disrupt other industries with trustless principles.

The cloud

From cloud computing providers (experienced with delivering easy-to-use development experience) to software developers interested in particular technologies: various people started to offer blockchain-based technologies in the cloud. These were pre-configured and ready to use, for everybody who wanted to experiment. All without spending days or weeks on proper configuration of the servers and setting up nodes.

Things became easier then for blockchain Fintech innovators. Insurance companies started to work on top of blockchain technologies like R3 Corda. Small insurance startups now experiment with blockchain technologies to offer products that aren’t feasible for other technologies (Tontine Trust). Financial startups try to reposition funds and assets settlement markets. Internet of Things (IoT) firms are looking at blockchains to safeguard access to devices and to make sure data gathered by the IoT monitoring devices are not tampered with.

Risks and regulations

As the technological, social, financial and business revolution progresses, there are new risks emerging. We couldn’t anticipate them: lost of access to investors’ fund, complex fraud schemes, Ponzi schemes using cryptocurrencies, money laundering, breaches to capital controls or financing terrorism. No government would turn a blind eye on these problems. Hence, we are seeing various forms of regulations popping up in different parts of the world, trying to curb some of the risks observed. Some of these regulations try to ban a particular form of cryptocurrency activities. Others are trying to stop some of the business participants from using crypto. These blockchain regulations, constraints and additional external factors drive further innovations in cryptocurrencies. How? Creators try to make them regulatory compliant and still useful for the consumers.

The ICO as FinTech innovation

Cryptocurrencies show up more and more often in mass media. There’s a heightened awareness that there are more investments coming into  crypto projects, especially from non-professional investors in form of the ICO. These investments are driven mainly by sophisticated and innovative marketing campaigns. They target private investors with relatively small capitals, but open to invest in high-risk ventures. There are advertising agencies solely created to support the needs of this type of activity. This Fintech innovation is curbed to some extent. Regulatory requirements change towards investments in risky startups, spurring even more innovations on the verge of these two competing forces. These include blockchain-based KYC or blockchain identities project.

Academia!

I’ve been calling it Fintech innovation but to be honest, blockchain penetrates various disciplines. Finance, technology, governance or social needs. No wonder it receives academic attention. It’s pushing curious scientific communities to look into blockchain deeper and to conduct research projects on it and its potentials. Institutions like MIT Media Lab, Cornell University or University of Nicosia are investing substantial money and involving top researchers and lecturers to deepen our understanding of this innovation. What’s more, they spin-off further developments on top of their research outcomes. In addition to research institutions, there are also commercially-led research projects. A good example is Blockstream with their impressive list of Bitcoin Core developers involved. There’s also individual lead research (for example MimbleWimble).

Design-driven innovation

Some blockchain Fintech innovators try to create completely new values in this space. They start from a different angle. Rather than innovating on top of the existing technologies and amending them, they try more of a design-driven approach. They learn from other projects’ mistakes and build better initial concepts. Then, basing on those concepts, they build new technologies better suited to fulfill different users’ needs. An example might be EOS. It was designed from scratch for massive scale, built from earlier experiments with BitShares technology.

The frustrated user as a source of innovation

Yet another Fintech innovation comes from the needs of the end users. It’s designed and developed by the frustrated (but technically capable) users. Examples could be cryptocurrency mixers. These try to hide the source and destination of the funds transfers in public ledgers by mixing many transactions into one. Another example is Monero, which tries to hide transfer details by cryptographic techniques.

As technology matures, and less technical users can begin to use it, ‘User innovation’ begins. Smart contract platforms were initially very complex to use. Now, they’re becoming more and more approachable. As an example, I’ll mention the Ethereum Solidity programming language (btw, do check out our Solidity tutorial). It’s very similar to JavaScript, and it opened smart contract development – and blockchain Fintech opportunities – to Web Developers.

This is further simplified by WYSIWYG-type of innovative platforms that will allow users to create sophisticated contracts by only interacting with intuitive wizards. ICOs are also an example of user-inspired innovations. Capital or years of development expertise might no longer be needed to set up innovative companies. If the project has enough convincing factors, an enthusiastic team behind it, it might get the funding needed to start off the ground.

So what do you need to be an innovator?

Each innovation is different and each can come into life differently.  I hope that I’ve managed to explain how blockchain Fintech came to be . What I can tell you is that at the beginning, innovation definitely needs sufficient resources. These can be financial resources or a dedicated team focused on delivery (yes, one like ours). Those resources promote it to the stage where you can observe its value. Over time, as the snowball effect takes place, a different type of  participant enters. And by mixing and matching one type of innovation with other innovations these varied participants create products that nobody even thought of at the beginning. This is the way industry disruption works. This same cycle happens until a new and significantly superior invention appears and takes its place. Then, the cycle starts from the beginning….

It’s not enough to throw in blockchain as a buzzword to get ahead. To be competitive, crypto-based organizations constantly have to innovate. An ‘edge’ or competitive advantage leading from just an innovative product is usually short-lived. Why? In a reasonable amount of time, it’s easy for other market participants to imitate the product or even improve on it. To be sustainable, innovation should be coupled with some sort of protection, done in a form that’s not easily visible to the consumers and competitors. I’ll demonstrate on how existing cryptocurrency market participants utilize innovation. Hopefully, this will serve as inspiration to stay ahead of blockchain competition.

Be the first

Novelty in product offering is an edge given to the first market participant that offers a product that their blockchain competition hasn’t released before. Or they won’t be able to for some time. A blockchain example of this strategy is BitGo . BitGo built its brand on the association with secure cryptocurrency storage and fund processing for enterprises. In the early days of Bitcoin, it utilized 2-of-3 multisig wallet technology and secured its label as the first company to offer it to professional customers. Later on, driven by that association, they offered other custodial services for financial clients ( crypto exchanges , but not only that). They covered support of other cryptocurrencies and offered easy to use APIs on top of their platform, extending their offering to products for the retail market. Examples include Secure Wallets or Instant Payments to circumvent Bitcoin’s requirements for 10-minute block confirmation time.

Address regulation

Another part of BitGo’s business – still highly connected to their initial offering – is regulatory compliance . National regulators are demanding more and more from financial institutions and from startups interested in using cryptocurrencies. Therefore, those ventures need to invest more resources into becoming fully compliant with regulations. Being able to outsource those obligations and associated processes (as well as paying for it in a pay-as-you-go model) is a big advantage for new market shakers. Not to mention a steady stream of income for BitGo. Nicely done!

Implement sustainable processes

Another way to implement a sustainable level of innovation in blockchain is to focus on handling processes in a new and improved way . By processes I mean both internal – visible only within the company – and external, related to the way customers or external resources are handled. A company that’s a good blockchain example of mastering process innovation is ShapeShift . On the surface, it looks like a plain, straightforward exchange for all possible combinations of cryptocurrencies . The difference is that users don’t deposit their funds on the platform and then try to bid against each other, as is the case with other crypto exchanges. The ShapeShift platform offers spot rates for all the pairs it supports. The user can only accept the rate and exchange one asset for another one.

Under the hood, ShapeShift uses a complex matching engine to integrate with many other cryptocurrency exchanges (both distributed and traditional centralized exchanges). It can shift funds from one exchange to the other, to internal wallets and to distributed p2p transaction engines. At the same time, it tries to squeeze as much as it can from the market spread to make a profit for itself (arbitration) . The internal optimization of these processes increases ShapeShift’s profitability and a risks profile it’s willing to accept. To the end user, the whole process is very smooth.

Have a tech combination that’s hard to copy

The complexity of your product gives you an edge in a very particular sense – it’s difficult to copy you. The blockchain example is actually a great one. Bitcoin or, generally speaking, blockchain technologies are highly complex technical combinations of cryptographic techniques, distributed computing, efficient data storage and clever algorithms. If you combine all the experts in those blockchain technologies under one roof, you’ll get a truly remarkable combination . This is exactly what Blockstream did – they hired quite a few Bitcoin Core Developers with unique skills and enthusiasm to work on complex technical problems. Then they started to work on difficult problems no one has worked on earlier, but in an organized fashion. Lightning, Sidechains, Segregated Witness, Confidential Transactions, Satellite to broadcast Bitcoin blockchain from space, and so on.

Unique blockchain example? Patent it!

Companies can also seek protection from blockchain competition by patenting their technologies and other intellectual properties. One of the companies headed down this route is Accenture , one of the biggest accounting and consulting firms in the world. Together with Dr. Giuseppe Ateniese, they’ve patented technology that could allow them to offer blockchain technologies with an exceptional feature: editable blockchains . It appears to go against blockchain common sense – it’s advertised as an immutable ledger where the data that is already stored can’t be amended. Yet, in many business scenarios mistakes can happen. Having an ability to edit the data in a way that’s still fully controllable by the consortium (yet the previous data won’t be accessible after the edit) might be a feature that draws the attention of enterprises. Having that feature protected by a patent certainly gives Accenture a head start.

Adapt to fix problems

Many different blockchain technologies and companies/organizations behind them compete against each other. They all try to innovate and by doing it, they’re amending the rules of their blockchain technology . If the community around a particular technology is small, it’s not that difficult. They simply agree on the change and the date when all community members should upgrade the software. The problems start when the project is really successful, with a big community gathered around it. Then, changing its internal rules of operation is not that easy. Not all the community members agree with the change, or simply not all of them are ready to upgrade.

Solving this particular problem is a foundation upon which Tezos works . They created a blockchain technology with an on-chain governance model embedded into the protocol . All of the changes to the internal operations of the protocol can be voted on . If sufficient backing is found, the changes can be implemented and will be automatically accepted. This stands in stark contrast to the governance model of Ethereum or Bitcoin. As we know, a disagreement between the involved group of developers resulted in them forking to respectively Ethereum Classic and Bitcoin Cash. This innovation could still potentially give Tezos an advantage against their blockchain competition (their legal issues are another matter), as they can be very flexible in their approach toward future developments and challenges.

Blockchain competition – conclusions

The blockchain ecosystem is a fertile ground for experimentation and innovation. At Espeo Blockchain, we’re often amazed at the novel ways our clients try to utilize blockchain. It goes without saying that the truly innovative projects are a joy to work on. That’s why we’re always looking for more! To be able to compete against constant innovation in a long term perspective, companies have to think wider . Innovate fast, or try to protect your innovations from the competitors by hiding them in internal processes or protect your knowledge using patents. If you’re not sure how to innovate using blockchain, custom blockchain training might be a good idea.

You can read more about crypto payments and blockchain challenges on our blog. And if you have an innovative blockchain example of yours, let us know below.