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Read me if you can! An analysis of ICO white papers
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Read Me If You Can! An Analysis of ICO White Papers
Shadi Samieifar Conceptualization;Methodology;Software;Validation;Formal analysis;Investigation;Data Curation;W Dirk G. Baur Conceptualization;Methodology;Formal analysis;Writing - Original Draft;Writing - Review & Editing;Su PII: DOI: Reference:
S1544-6123(19)31021-9 https://doi.org/10.1016/j.frl.2020.101427 FRL 101427
To appear in:
Finance Research Letters
Received date: Revised date: Accepted date:
20 September 2019 20 December 2019 31 December 2019
Please cite this article as: Shadi Samieifar Conceptualization;Methodology;Software;Validation;Formal analysis;Inve Dirk G. Baur Conceptualization;Methodology;Formal analysis;Writing - Original Draft;Writing - Review & Editing;Su Read Me If You Can! An Analysis of ICO White Papers, Finance Research Letters (2020), doi: https://doi.org/10.1016/j.frl.2020.101427
This is a PDF file of an article that has undergone enhancements after acceptance, such as the addition of a cover page and metadata, and formatting for readability, but it is not yet the definitive version of record. This version will undergo additional copyediting, typesetting and review before it is published in its final form, but we are providing this version to give early visibility of the article. Please note that, during the production process, errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain. © 2020 Published by Elsevier Inc.
Highlights ICOs democratise entrepreneurial finance by allowing small investors to participate. Key information about an Initial Coin Offering (ICO) is outlined in a white paper. White paper is an important source of information for ICO investors. There is no standard form or legal requirement for white papers. The white paper's length and text complexity are correlated with the ICO success.
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Read Me If You Can! An Analysis of ICO White Papers Shadi Samieifara Dirk G. Baurb UWA Business School
Abstract Initial Coin Offerings (ICOs) are a new form of venture capital financing that raised more than 30 billion US dollars between 2016 and 2019. ICOs opened up the venture capital market to a more diverse investor base previously limited to “sophisticated” investors. This study analyses 1,258 white papers and finds that the length is positively correlated with the amount raised during the ICO and the likelihood of successfully completing the ICO. In contrast, the readability grade of the white paper is only positively correlated with the amount raised. The study highlights the role of voluntary disclosure in the ICO market.
Keywords: Initial Coin Offering (ICO), Token Sale, Voluntary Disclosure, Blockchain, Entrepreneurial Finance JEL: G24; G32; L26
a
Corresponding author. Email: [email protected] , Shadi Samieifar acknowledges the Commonwealth Government‟s financial support through an „Australian Government Research Training Program Fees Offset‟. b
Email: [email protected]
2
1. Introduction The blockchain technology has received a lot of attention and controversy recently (Yeung and Galindo, 2019). Some claim the technology to be revolutionary while others argue that it is overhyped and without any real applications. Even if there are indeed no “real” applications, there are certainly financial applications of the blockchain technology. The most well-known and successful application is Bitcoin with a market value in excess of USD 160 billion as at July 2019 1. Another financial application is the financing of firms or projects through initial coin offerings (ICOs) (Cohney et al., 2019). Between April 2017 and July 2019, ICOs raised over USD 30 billion and about 20 individual projects have raised more than USD 100 million each (Coin Schedule, 2018). An ICO is a public and global form of financing based on the sale of a digital token using the blockchain technology. There are two types of tokens: (i) security tokens offer a share of future earnings, voting rights or ownership rights, (ii) utility tokens convey rights to access or use a product or service or have some other specific functions in the ecosystem of the organisation. The largest ICOs tend to use utility tokens with no explicit rights to the ownership or the future cash flows of the firm (Howell et al., 2019). ICOs are not only a new form of financing but also an example for the potential democratisation of finance enabled by the blockchain technology (Chen, 2018, Preston, 2017, Tapscott and Tapscott, 2017) since they allow low net-worth individuals from all over the world to participate in the entrepreneurial finance market that was previously limited to “sophisticated” high net-worth individuals. Generally, ICO issuers use three forms to voluntarily disclose information and thereby reduce information asymmetries and influence investors: (i) White paper (Cohney et al., 2019), (ii) Github and (iii) Online information tools (Bourveau et al., 2018). Issuers typically outline key information about their projects in their white papers with characteristics borrowed from IPO prospectuses, business plans, and marketing documents. In contrast to IPOs, however, the ICO process is informal in the sense that many ICO issuers, entrepreneurs and the community of coders behind ICOs tend to operate outside the control of regulators. This informality of the ICO market raises serious concerns about the reliability of disclosed information by issuers. As a result, the ICO market is riskier and more open to abuse2.
1
2
https://coinmarketcap.com
For example, many ICO issuers fail to even discuss the principal-agent problem in their white papers let alone embed this in code. Additionally, despite the mantra of “code is law” and “decentralisation” among blockchain advocates, many ICO issuers retained centralised control through undisclosed code, which allows ICO issuers to alter the code in the future (Cohney et al., 2019). Interestingly, even Bitcoin which is the best example of a decentralised public blockchain is governed
3
This paper attempts to understand how specific white paper characteristics affect the success of an ICO. We hypothesize that the readability and length of a white paper affect the amounts raised through an ICO. Given the hype about blockchain and cryptocurrencies, it is possible that investors merely have a quick look at the documents and make their decision based on the length of the document and its appearance.
An alternative to reading white papers is the use of ICO rating websites (Boreiko and Vidusso, 2019).3 Florysiak and Schandlbauer (2018) argue that ICO ratings are based on easy-to-extract information such as team size, KYC, or the number of social media channels which implies that the ratings are not based on an actual reading or analysis of white papers. If the above is the case, it implies that not even experts read white papers. Indeed, the size and complexity of many white papers suggest that retail investors do not have the skills or the time to study the white papers, which is reflected in the title of this article “Read me if you can!”
Finally, there is not only complexity in the context of white papers but also in the context of regulation. Regulatory complexity and implied uncertainty is due to different regulations across jurisdictions (Collomb et al., 2019, Dobrauz-Saldapenna and Klebeck, 2019, Kaal, 2018), ambiguous regulatory situations because of the wide variety of ICO forms and structures (Zetzsche et al., 2018), conflicts of laws and jurisdictions because of the geographic (often global) distribution of team members of ICOs, their contributors, and their investors (Barsan, 2017), and the highly technical and dynamic nature of the technology underpinning cryptocurrencies and ICOs (Andrés et al., 2019). If the ICO market is becoming more regulated, it could affect the ICO information disclosure requirements and as a consequence increase the length and the complexity of white papers published by ICO issuers. We study 1,258 white papers and find that the complexity and length positively affect the amount raised which indicates that investors might interpret a longer and more complex white paper, representative of a better project and buy more tokens. We also find that the likelihood of successfully completing4 the ICO is positively associated with the length of a white paper and that the white
by an elite group of core developers with informal centralised power. These developers neither have any formal responsibility nor are they subject to any formal accountability (Yeung and Galindo, 2019). 3
ICO rating websites play an important role in the ICO market, as well as in the coverage of a particular ICO campaign. Broader coverage can then lead to a more successful token sale (Boreiko and Vidusso, 2019). Since some of these websites offer pay-to-list services or premium listings to increase the visibility of particular ICOs, business opportunities from potential new clients may encourage the website owners to give a higher ranking to their clients. This may introduce biased rankings and explain significant variations of ratings across rating websites. 4
4
If an ICO raises sufficient funds to continue its project, it is considered as a successfully completed ICO.
papers‟ complexity and length increase over our sample period. This implies that ICO issuers either understood how investors use white papers or that the quality of projects improved over time.
2. Literature review Studies on the economics of digital assets are growing fast with only a handful in 2017 to more than 100 working papers focusing on ICOs in 2019 (Howell et al., 2019). This study contributes to the literature on entrepreneurial finance, voluntary disclosure (Healy and Palepu, 2001) and the nascent literature on the economics of digital assets. It complements a number of recent empirical papers examining token sales and initial coin offerings. Many of these studies analyse a variety of factors (Adhami et al., 2018, Amsden and Schweizer, 2018, Bourveau et al., 2018, Fisch, 2019, Momtaz, 2018, Howell et al., 2019), but not many focus on the characteristics of white papers and the complexity – readability grade- of the information provided. Although several readability measures exist, the Fog Index is one of the most popular in the accounting and finance literature, e.g. it is applied to financial disclosure documents in Biddle et al. (2009), Lehavy et al. (2011), Li (2008) and Miller (2010). More recently, readability scores have been used for the study of ICO white papers by Florysiak and Schandlbauer (2018) , Bourveau et al. (2018) and Zhang et al. (2019).
3.
Sample Description
We collect information on ICOs from icobench.com. The initial sample includes all ICOs listed on icobench.com that ended before 01/08/2018. This sample includes 2,150 attempted ICOs of which 1,124 successfully completed the ICO stage. Among all ICOs in the initial sample, 1,258 provided a downloadable white paper at the time of our data collection of which 843 are related to successfully completed ICOs which raised enough funds to continue their projects. Table 1 shows descriptive statistics for the 1,258 observations included in the analysis. Focusing on the sample of successfully completed ICOs with available white papers, the average amount raised is USD 19.36 million and the median is USD 6.50 million.5 The considerable difference between the mean and the median is mainly due to the largest ICO in which EOS raised more than USD 4bn6. The average length of the white papers is 33.47 and ranges from 2 pages to 127 pages. The average text complexity measured by the Fog grade7 is 13.87 and varies between 7.84 and 19.91. Finally, the average file size of white papers in PDF format is 3.65 megabytes (MB) and varies between 0.08 MB and 76.67 MB. The wide range of values is potentially related to the lack of regulatory disclosure requirements.
5
In the US, venture-backed companies on average received USD15.63 million in venture capital funding in 2018. See https://nvca.org/pressreleases/latest-nvca-yearbook-highlights-record-levels-reached-u-s-venture-ecosystem-2018/ 6 Our results are not dependent on this large ICO. We employ several robustness checks and find that our estimates are robust to the inclusion or exclusion of extreme ICOs. 7 The fog grade is calculated as follows: Fog grade = 0.4 x (Average number of words in sentences + Percentage of polysyllable words in the text)
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Table 1: Descriptive Statistics Panel A: Successfully completed ICOs with available white papers Statistic
N
Mean
St. Dev.
Raised (in million USD)
843
19.36
147.21
Log USD Raised
843
15.46
1.72
Page number
811
33.47
16.68
Log page number
811
3.38
0.54
Fog grade
808
13.87
1.96
Size (in MB)
823
3.65
5.54
Log size
823
14.50
1.15
Mi
Q25
Medi
Q75
n
%
an
%
2.00
6.50
0.0 02 7.8
14.5
1
1
2.0
22.0
0
0
0.6 9
12.3
4
4
0.0 8 11. 29
7 16.6
15.69
6 42.0
31.00
3.09
7.8
17.1
0
3.43
3.74 15.2
13.91
0.91
0
1.84
13.7
4.10 15.2
14.48
6
7
Max
4,197.96
22.16
127.00
4.84
19.91
76.67
18.20
Panel B: All attempted ICOs with available white papers Statistic
Page number
N 1,191
Mea
St.
1,191
Fog grade
1,258
Size (in MB)
1,203
Log size
1,203
Q25
Media
n
%
31.3
16.39
1.0
20.00
29.00
40.00
127.00
3.00
3.37
3.69
4.84
12.22
13.84
15.21
20.00
0.81
1.73
3.67
87.73
13.65
14.41
15.16
18.34
13.7 0 3.45 14.4 2
%
Max
Dev.
3.30
n
Q75
n
7
Log page number
Mi
0 0.57
2.22
5.75
1.16
0.0 0 5.0 5 0.0 6 11. 10
Raised: the amount raised during ICO in USD. Log USD Raised: natural logarithm of the amount raised during ICO in USD. Page number: white paper length. Log page number: natural logarithm of white paper length. Fog grade is the Gunning Fog readability grade of the white paper text. Fog grade = 0.4 x (Average number of words in sentences + Percentage of polysyllable words in the text). Size (in MB): white paper file size in MB (file format: pdf). Log size: natural logarithm of white paper file size in bites (file format: pdf).
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Figure 1 shows the evolution of ICOs from February 2017 to July 2018 represented by monthly averages of the amounts raised, text complexity (readability grade) 8, length and size of white papers and the price of Bitcoin. The length measure exhibits the strongest trend increasing from 17 pages in February 2017 to 46 in July 2018. Table 2 shows the correlations and variance inflation factors (VIF). Although there are statistically significant correlations, the maximum variance inflation factor in this table is 1.36 suggesting that multicollinearity is not an issue, e.g. Hair et al. (1995) state that a VIF of less than 10 indicates inconsequential collinearity.
Figure 1: Monthly averages of ICO amount raised, white paper characteristics and Bitcoin price
*EOS which raised more than $4bn is excluded
Table 2: Correlations and variance inflation factors (VIFs) Upper triangular: Successfully completed ICOs with available white papers Lower triangular: All attempted ICOs with available white papers
Log USD raised Log page num
8
Log page num
Fog grade
Log size
Log BTC price
0.22***
0.13***
0.12***
0.05
0.14***
0.48***
0.29***
The text complexity correlates to the Fog readability grade. The higher the fog readability grade, the more complex the text is.
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Fog grade
0.14***
Log size
0.50***
0.06
Log BTC price
0.20***
0.06*
0.19***
1.36
1.03
1.32
VIF
0.08*
0.11** 0.24***
1.12
Correlation estimates are Pearson correlation coefficients. Significant codes: * = p < .05, ** = p < .01, *** = p < .001 VIF estimates based on Model 3 in Table 3
4.
Econometric Analysis
We use the following model to test the association between the text complexity, length and size of the white paper, the price of Bitcoin, and the success of an ICO: ICOSuccessi,t = α0 + β1 Readabilityi,t + β2 White paper length i,t + β3 White paper file sizei,t + β4 BTCt + εi,t
Consistent with prior studies in entrepreneurial finance (Ahlers et al., 2015) and the recent literature on ICOs (Fisch, 2019, Amsden and Schweizer, 2018, Feng et al., 2018, Ante et al., 2018), we use the amount raised in the ICO as the main proxy for success. The amount raised as a success measure is based on the entire capital raising period of about 40 days on average and thus different to the firstday ICO return used by Zhang et al. (2019). Second, we examine the probability of successfully raising enough funds through an ICO (Adhami et al., 2018, Bourveau et al., 2018). The success measures are estimated with OLS and with a logit model, respectively. We focus on the three characteristics of the white paper. The first characteristic is white paper length measured as the natural logarithm of the number of pages (e.g. Bourveau et al. (2018)). The second characteristic is the file size as it is applied to financial disclosure documents in prior research (e.g. see Loughran and Mcdonald (2014)). Documents that only include text have a small file size while using visual features increases the file size. It can be assumed that visual features make reading more attractive and help readers to better understand the information. We expect that the file size of white papers should have a positive association with the success of the ICO. The third characteristic of the white paper is the text complexity measured by the Fog Readability Index. Table 3 presents the estimation results and shows that there is a positive relationship between the complexity of a white paper (readability grade) and the amount raised in the ICO. It is possible that investors perceive more complex texts as indicators of more advanced projects. Another possible explanation is that readability measures such as the fog grade do not capture the specific characteristics of technical documents
(Loughran and Mcdonald, 2014). We have randomly
generated documents with the terms “blockchain”, “smart contract” and “decentralization” and found supporting evidence for this hypothesis.
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The length of the white paper has a positive association with the amount raised in the ICO. This confirms previous findings in the literature by Amsden and Schweizer (2018) and Fisch (2019) and strengthens our hypothesis that the length of a white paper impacts the success of an ICO. Further, the file size does not have a significant relationship with the amount raised in the ICO and the fog grade appears less important than the length of the white paper.
Table 3: Estimation Results of ICO amount raised on white paper characteristics (OLS) Dependent variable: Log USD Raised (1)
(2)
(3)
Quarterly FE
11.555*** (0.428) NO
0.624 (0.129) 0.056 (0.061) 0.091*** (0.032) -0.057 (0.104) 11.775*** (0.850) NO
0.715*** (0.128) 0.064 (0.061) 0.099*** (0.031) 0.053 (0.204) 11.528*** (1.093) YES
Observations R2 F Statistic
777 0.058 15.983***
773 0.061 12.502***
773 0.103 6.694***
Log page num Log size Fog grade
***
0.600 (0.126) 0.045 (0.060) 0.088*** (0.031)
Log BTC price Constant
***
Note: *p<0.1; **p<0.05; ***p<0.01 Variables are defined in Table 1
Table 4: Estimation Results of ICO completion “success” (Logit model) Dependent variable: completed
Constant
-1.862** (0.897)
(2) 0.842*** (0.140) 0.040 (0.066) 0.034 (0.032) -0.911*** (0.146) 5.114*** (1.472)
Observations Log Likelihood Akaike Inf. Crit.
1,142 -695.699 1,399.398
1,136 -668.154 1,346.308
Log page num Log size Fog grade
(1) 0.677*** (0.133) 0.003 (0.064) 0.026 (0.031)
Log BTC price
9
Note: *p<0.1; **p<0.05; ***p<0.01 Completed equals 1 if the ICO raised enough funds to continue the project and otherwise 0. Log page num is the natural logarithm of number of pages in a white paper. Log size is the natural logarithm of white paper file size in bites (file format: pdf). Fog grade is the Gunning Fog grade (readability score) of the white paper text. Fog grade = 0.4 x (Average number of words in sentences + Percentage of polysyllable words in the text). Log BTC price is the natural logarithm of Bitcoin price (USD) on the first day of ICO
The results of the logit model for the likelihood of successfully completing the ICO in Table 4 are similar except that the fog grade is insignificant and the probability is negatively related to the price of bitcoin. While this highlights the difference between the amount raised and the likelihood of completing an ICO, another contributing factor is that the number of ICOs is significantly larger in the likelihood-of-success analysis than in the amount-raised analysis (1,142 ICOs versus 777 ICOs). We also find that the results are robust with respect to using raw variables instead of logarithms and to winsorizing or trimming the data at 2% and 5% thresholds.
5.
Concluding Remarks
Due to the informality of the ICO market, ICO issuers disclose information voluntarily and as a result there is a significant variation in the quality and quantity of information across white papers. Our results indicate that publishing a longer white paper improves the success of an ICO. We also note that the average length of a white paper increased over time. This suggests that issuers understand the importance of white papers and attempt to signal their quality by publishing longer white papers. Hence, this study contributes to the relevance of voluntary information disclosure. The main source of information for evaluating ICO issuers is their white papers which cover complex topics such as the underlying blockchain technology, the economics of the token, and the business model. Our findings suggest that investors rely on simple measures such as the length of the white paper, possibly because they do not have the time or the skills to assess the future prospects of the project. For example, many households who buy retail financial products do not understand these products (Carlin, 2009). This lack of understanding and the lack of regulation may have contributed to fraud and scams in the ICO market and highlight the role of regulation, information disclosure and trust. The latter is particularly interesting in a market that is based on the “trustless” blockchain technology. Author Contribution Dirk Baur: Conceptualization, Methodology, Formal analysis, Writing - Original Draft, Writing Review & Editing, Supervision
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Shadi Samieifar: Conceptualization, Methodology, Software, Validation, Formal analysis, investigation, Data Curation, Writing - Review & Editing, Visualization, Project administration
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Read Me If You Can! An Analysis of ICO White Papers
Shadi Samieifar Conceptualization;Methodology;Software;Validation;Formal analysis;Investigation;Data Curation;W Dirk G. Baur Conceptualization;Methodology;Formal analysis;Writing - Original Draft;Writing - Review & Editing;Su PII: DOI: Reference:
S1544-6123(19)31021-9 https://doi.org/10.1016/j.frl.2020.101427 FRL 101427
To appear in:
Finance Research Letters
Received date: Revised date: Accepted date:
20 September 2019 20 December 2019 31 December 2019
Please cite this article as: Shadi Samieifar Conceptualization;Methodology;Software;Validation;Formal analysis;Inve Dirk G. Baur Conceptualization;Methodology;Formal analysis;Writing - Original Draft;Writing - Review & Editing;Su Read Me If You Can! An Analysis of ICO White Papers, Finance Research Letters (2020), doi: https://doi.org/10.1016/j.frl.2020.101427
This is a PDF file of an article that has undergone enhancements after acceptance, such as the addition of a cover page and metadata, and formatting for readability, but it is not yet the definitive version of record. This version will undergo additional copyediting, typesetting and review before it is published in its final form, but we are providing this version to give early visibility of the article. Please note that, during the production process, errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain. © 2020 Published by Elsevier Inc.
Highlights ICOs democratise entrepreneurial finance by allowing small investors to participate. Key information about an Initial Coin Offering (ICO) is outlined in a white paper. White paper is an important source of information for ICO investors. There is no standard form or legal requirement for white papers. The white paper's length and text complexity are correlated with the ICO success.
1
Read Me If You Can! An Analysis of ICO White Papers Shadi Samieifara Dirk G. Baurb UWA Business School
Abstract Initial Coin Offerings (ICOs) are a new form of venture capital financing that raised more than 30 billion US dollars between 2016 and 2019. ICOs opened up the venture capital market to a more diverse investor base previously limited to “sophisticated” investors. This study analyses 1,258 white papers and finds that the length is positively correlated with the amount raised during the ICO and the likelihood of successfully completing the ICO. In contrast, the readability grade of the white paper is only positively correlated with the amount raised. The study highlights the role of voluntary disclosure in the ICO market.
Keywords: Initial Coin Offering (ICO), Token Sale, Voluntary Disclosure, Blockchain, Entrepreneurial Finance JEL: G24; G32; L26
a
Corresponding author. Email: [email protected] , Shadi Samieifar acknowledges the Commonwealth Government‟s financial support through an „Australian Government Research Training Program Fees Offset‟. b
Email: [email protected]
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1. Introduction The blockchain technology has received a lot of attention and controversy recently (Yeung and Galindo, 2019). Some claim the technology to be revolutionary while others argue that it is overhyped and without any real applications. Even if there are indeed no “real” applications, there are certainly financial applications of the blockchain technology. The most well-known and successful application is Bitcoin with a market value in excess of USD 160 billion as at July 2019 1. Another financial application is the financing of firms or projects through initial coin offerings (ICOs) (Cohney et al., 2019). Between April 2017 and July 2019, ICOs raised over USD 30 billion and about 20 individual projects have raised more than USD 100 million each (Coin Schedule, 2018). An ICO is a public and global form of financing based on the sale of a digital token using the blockchain technology. There are two types of tokens: (i) security tokens offer a share of future earnings, voting rights or ownership rights, (ii) utility tokens convey rights to access or use a product or service or have some other specific functions in the ecosystem of the organisation. The largest ICOs tend to use utility tokens with no explicit rights to the ownership or the future cash flows of the firm (Howell et al., 2019). ICOs are not only a new form of financing but also an example for the potential democratisation of finance enabled by the blockchain technology (Chen, 2018, Preston, 2017, Tapscott and Tapscott, 2017) since they allow low net-worth individuals from all over the world to participate in the entrepreneurial finance market that was previously limited to “sophisticated” high net-worth individuals. Generally, ICO issuers use three forms to voluntarily disclose information and thereby reduce information asymmetries and influence investors: (i) White paper (Cohney et al., 2019), (ii) Github and (iii) Online information tools (Bourveau et al., 2018). Issuers typically outline key information about their projects in their white papers with characteristics borrowed from IPO prospectuses, business plans, and marketing documents. In contrast to IPOs, however, the ICO process is informal in the sense that many ICO issuers, entrepreneurs and the community of coders behind ICOs tend to operate outside the control of regulators. This informality of the ICO market raises serious concerns about the reliability of disclosed information by issuers. As a result, the ICO market is riskier and more open to abuse2.
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https://coinmarketcap.com
For example, many ICO issuers fail to even discuss the principal-agent problem in their white papers let alone embed this in code. Additionally, despite the mantra of “code is law” and “decentralisation” among blockchain advocates, many ICO issuers retained centralised control through undisclosed code, which allows ICO issuers to alter the code in the future (Cohney et al., 2019). Interestingly, even Bitcoin which is the best example of a decentralised public blockchain is governed
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This paper attempts to understand how specific white paper characteristics affect the success of an ICO. We hypothesize that the readability and length of a white paper affect the amounts raised through an ICO. Given the hype about blockchain and cryptocurrencies, it is possible that investors merely have a quick look at the documents and make their decision based on the length of the document and its appearance.
An alternative to reading white papers is the use of ICO rating websites (Boreiko and Vidusso, 2019).3 Florysiak and Schandlbauer (2018) argue that ICO ratings are based on easy-to-extract information such as team size, KYC, or the number of social media channels which implies that the ratings are not based on an actual reading or analysis of white papers. If the above is the case, it implies that not even experts read white papers. Indeed, the size and complexity of many white papers suggest that retail investors do not have the skills or the time to study the white papers, which is reflected in the title of this article “Read me if you can!”
Finally, there is not only complexity in the context of white papers but also in the context of regulation. Regulatory complexity and implied uncertainty is due to different regulations across jurisdictions (Collomb et al., 2019, Dobrauz-Saldapenna and Klebeck, 2019, Kaal, 2018), ambiguous regulatory situations because of the wide variety of ICO forms and structures (Zetzsche et al., 2018), conflicts of laws and jurisdictions because of the geographic (often global) distribution of team members of ICOs, their contributors, and their investors (Barsan, 2017), and the highly technical and dynamic nature of the technology underpinning cryptocurrencies and ICOs (Andrés et al., 2019). If the ICO market is becoming more regulated, it could affect the ICO information disclosure requirements and as a consequence increase the length and the complexity of white papers published by ICO issuers. We study 1,258 white papers and find that the complexity and length positively affect the amount raised which indicates that investors might interpret a longer and more complex white paper, representative of a better project and buy more tokens. We also find that the likelihood of successfully completing4 the ICO is positively associated with the length of a white paper and that the white
by an elite group of core developers with informal centralised power. These developers neither have any formal responsibility nor are they subject to any formal accountability (Yeung and Galindo, 2019). 3
ICO rating websites play an important role in the ICO market, as well as in the coverage of a particular ICO campaign. Broader coverage can then lead to a more successful token sale (Boreiko and Vidusso, 2019). Since some of these websites offer pay-to-list services or premium listings to increase the visibility of particular ICOs, business opportunities from potential new clients may encourage the website owners to give a higher ranking to their clients. This may introduce biased rankings and explain significant variations of ratings across rating websites. 4
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If an ICO raises sufficient funds to continue its project, it is considered as a successfully completed ICO.
papers‟ complexity and length increase over our sample period. This implies that ICO issuers either understood how investors use white papers or that the quality of projects improved over time.
2. Literature review Studies on the economics of digital assets are growing fast with only a handful in 2017 to more than 100 working papers focusing on ICOs in 2019 (Howell et al., 2019). This study contributes to the literature on entrepreneurial finance, voluntary disclosure (Healy and Palepu, 2001) and the nascent literature on the economics of digital assets. It complements a number of recent empirical papers examining token sales and initial coin offerings. Many of these studies analyse a variety of factors (Adhami et al., 2018, Amsden and Schweizer, 2018, Bourveau et al., 2018, Fisch, 2019, Momtaz, 2018, Howell et al., 2019), but not many focus on the characteristics of white papers and the complexity – readability grade- of the information provided. Although several readability measures exist, the Fog Index is one of the most popular in the accounting and finance literature, e.g. it is applied to financial disclosure documents in Biddle et al. (2009), Lehavy et al. (2011), Li (2008) and Miller (2010). More recently, readability scores have been used for the study of ICO white papers by Florysiak and Schandlbauer (2018) , Bourveau et al. (2018) and Zhang et al. (2019).
3.
Sample Description
We collect information on ICOs from icobench.com. The initial sample includes all ICOs listed on icobench.com that ended before 01/08/2018. This sample includes 2,150 attempted ICOs of which 1,124 successfully completed the ICO stage. Among all ICOs in the initial sample, 1,258 provided a downloadable white paper at the time of our data collection of which 843 are related to successfully completed ICOs which raised enough funds to continue their projects. Table 1 shows descriptive statistics for the 1,258 observations included in the analysis. Focusing on the sample of successfully completed ICOs with available white papers, the average amount raised is USD 19.36 million and the median is USD 6.50 million.5 The considerable difference between the mean and the median is mainly due to the largest ICO in which EOS raised more than USD 4bn6. The average length of the white papers is 33.47 and ranges from 2 pages to 127 pages. The average text complexity measured by the Fog grade7 is 13.87 and varies between 7.84 and 19.91. Finally, the average file size of white papers in PDF format is 3.65 megabytes (MB) and varies between 0.08 MB and 76.67 MB. The wide range of values is potentially related to the lack of regulatory disclosure requirements.
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In the US, venture-backed companies on average received USD15.63 million in venture capital funding in 2018. See https://nvca.org/pressreleases/latest-nvca-yearbook-highlights-record-levels-reached-u-s-venture-ecosystem-2018/ 6 Our results are not dependent on this large ICO. We employ several robustness checks and find that our estimates are robust to the inclusion or exclusion of extreme ICOs. 7 The fog grade is calculated as follows: Fog grade = 0.4 x (Average number of words in sentences + Percentage of polysyllable words in the text)
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Table 1: Descriptive Statistics Panel A: Successfully completed ICOs with available white papers Statistic
N
Mean
St. Dev.
Raised (in million USD)
843
19.36
147.21
Log USD Raised
843
15.46
1.72
Page number
811
33.47
16.68
Log page number
811
3.38
0.54
Fog grade
808
13.87
1.96
Size (in MB)
823
3.65
5.54
Log size
823
14.50
1.15
Mi
Q25
Medi
Q75
n
%
an
%
2.00
6.50
0.0 02 7.8
14.5
1
1
2.0
22.0
0
0
0.6 9
12.3
4
4
0.0 8 11. 29
7 16.6
15.69
6 42.0
31.00
3.09
7.8
17.1
0
3.43
3.74 15.2
13.91
0.91
0
1.84
13.7
4.10 15.2
14.48
6
7
Max
4,197.96
22.16
127.00
4.84
19.91
76.67
18.20
Panel B: All attempted ICOs with available white papers Statistic
Page number
N 1,191
Mea
St.
1,191
Fog grade
1,258
Size (in MB)
1,203
Log size
1,203
Q25
Media
n
%
31.3
16.39
1.0
20.00
29.00
40.00
127.00
3.00
3.37
3.69
4.84
12.22
13.84
15.21
20.00
0.81
1.73
3.67
87.73
13.65
14.41
15.16
18.34
13.7 0 3.45 14.4 2
%
Max
Dev.
3.30
n
Q75
n
7
Log page number
Mi
0 0.57
2.22
5.75
1.16
0.0 0 5.0 5 0.0 6 11. 10
Raised: the amount raised during ICO in USD. Log USD Raised: natural logarithm of the amount raised during ICO in USD. Page number: white paper length. Log page number: natural logarithm of white paper length. Fog grade is the Gunning Fog readability grade of the white paper text. Fog grade = 0.4 x (Average number of words in sentences + Percentage of polysyllable words in the text). Size (in MB): white paper file size in MB (file format: pdf). Log size: natural logarithm of white paper file size in bites (file format: pdf).
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Figure 1 shows the evolution of ICOs from February 2017 to July 2018 represented by monthly averages of the amounts raised, text complexity (readability grade) 8, length and size of white papers and the price of Bitcoin. The length measure exhibits the strongest trend increasing from 17 pages in February 2017 to 46 in July 2018. Table 2 shows the correlations and variance inflation factors (VIF). Although there are statistically significant correlations, the maximum variance inflation factor in this table is 1.36 suggesting that multicollinearity is not an issue, e.g. Hair et al. (1995) state that a VIF of less than 10 indicates inconsequential collinearity.
Figure 1: Monthly averages of ICO amount raised, white paper characteristics and Bitcoin price
*EOS which raised more than $4bn is excluded
Table 2: Correlations and variance inflation factors (VIFs) Upper triangular: Successfully completed ICOs with available white papers Lower triangular: All attempted ICOs with available white papers
Log USD raised Log page num
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Log page num
Fog grade
Log size
Log BTC price
0.22***
0.13***
0.12***
0.05
0.14***
0.48***
0.29***
The text complexity correlates to the Fog readability grade. The higher the fog readability grade, the more complex the text is.
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Fog grade
0.14***
Log size
0.50***
0.06
Log BTC price
0.20***
0.06*
0.19***
1.36
1.03
1.32
VIF
0.08*
0.11** 0.24***
1.12
Correlation estimates are Pearson correlation coefficients. Significant codes: * = p < .05, ** = p < .01, *** = p < .001 VIF estimates based on Model 3 in Table 3
4.
Econometric Analysis
We use the following model to test the association between the text complexity, length and size of the white paper, the price of Bitcoin, and the success of an ICO: ICOSuccessi,t = α0 + β1 Readabilityi,t + β2 White paper length i,t + β3 White paper file sizei,t + β4 BTCt + εi,t
Consistent with prior studies in entrepreneurial finance (Ahlers et al., 2015) and the recent literature on ICOs (Fisch, 2019, Amsden and Schweizer, 2018, Feng et al., 2018, Ante et al., 2018), we use the amount raised in the ICO as the main proxy for success. The amount raised as a success measure is based on the entire capital raising period of about 40 days on average and thus different to the firstday ICO return used by Zhang et al. (2019). Second, we examine the probability of successfully raising enough funds through an ICO (Adhami et al., 2018, Bourveau et al., 2018). The success measures are estimated with OLS and with a logit model, respectively. We focus on the three characteristics of the white paper. The first characteristic is white paper length measured as the natural logarithm of the number of pages (e.g. Bourveau et al. (2018)). The second characteristic is the file size as it is applied to financial disclosure documents in prior research (e.g. see Loughran and Mcdonald (2014)). Documents that only include text have a small file size while using visual features increases the file size. It can be assumed that visual features make reading more attractive and help readers to better understand the information. We expect that the file size of white papers should have a positive association with the success of the ICO. The third characteristic of the white paper is the text complexity measured by the Fog Readability Index. Table 3 presents the estimation results and shows that there is a positive relationship between the complexity of a white paper (readability grade) and the amount raised in the ICO. It is possible that investors perceive more complex texts as indicators of more advanced projects. Another possible explanation is that readability measures such as the fog grade do not capture the specific characteristics of technical documents
(Loughran and Mcdonald, 2014). We have randomly
generated documents with the terms “blockchain”, “smart contract” and “decentralization” and found supporting evidence for this hypothesis.
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The length of the white paper has a positive association with the amount raised in the ICO. This confirms previous findings in the literature by Amsden and Schweizer (2018) and Fisch (2019) and strengthens our hypothesis that the length of a white paper impacts the success of an ICO. Further, the file size does not have a significant relationship with the amount raised in the ICO and the fog grade appears less important than the length of the white paper.
Table 3: Estimation Results of ICO amount raised on white paper characteristics (OLS) Dependent variable: Log USD Raised (1)
(2)
(3)
Quarterly FE
11.555*** (0.428) NO
0.624 (0.129) 0.056 (0.061) 0.091*** (0.032) -0.057 (0.104) 11.775*** (0.850) NO
0.715*** (0.128) 0.064 (0.061) 0.099*** (0.031) 0.053 (0.204) 11.528*** (1.093) YES
Observations R2 F Statistic
777 0.058 15.983***
773 0.061 12.502***
773 0.103 6.694***
Log page num Log size Fog grade
***
0.600 (0.126) 0.045 (0.060) 0.088*** (0.031)
Log BTC price Constant
***
Note: *p<0.1; **p<0.05; ***p<0.01 Variables are defined in Table 1
Table 4: Estimation Results of ICO completion “success” (Logit model) Dependent variable: completed
Constant
-1.862** (0.897)
(2) 0.842*** (0.140) 0.040 (0.066) 0.034 (0.032) -0.911*** (0.146) 5.114*** (1.472)
Observations Log Likelihood Akaike Inf. Crit.
1,142 -695.699 1,399.398
1,136 -668.154 1,346.308
Log page num Log size Fog grade
(1) 0.677*** (0.133) 0.003 (0.064) 0.026 (0.031)
Log BTC price
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Note: *p<0.1; **p<0.05; ***p<0.01 Completed equals 1 if the ICO raised enough funds to continue the project and otherwise 0. Log page num is the natural logarithm of number of pages in a white paper. Log size is the natural logarithm of white paper file size in bites (file format: pdf). Fog grade is the Gunning Fog grade (readability score) of the white paper text. Fog grade = 0.4 x (Average number of words in sentences + Percentage of polysyllable words in the text). Log BTC price is the natural logarithm of Bitcoin price (USD) on the first day of ICO
The results of the logit model for the likelihood of successfully completing the ICO in Table 4 are similar except that the fog grade is insignificant and the probability is negatively related to the price of bitcoin. While this highlights the difference between the amount raised and the likelihood of completing an ICO, another contributing factor is that the number of ICOs is significantly larger in the likelihood-of-success analysis than in the amount-raised analysis (1,142 ICOs versus 777 ICOs). We also find that the results are robust with respect to using raw variables instead of logarithms and to winsorizing or trimming the data at 2% and 5% thresholds.
5.
Concluding Remarks
Due to the informality of the ICO market, ICO issuers disclose information voluntarily and as a result there is a significant variation in the quality and quantity of information across white papers. Our results indicate that publishing a longer white paper improves the success of an ICO. We also note that the average length of a white paper increased over time. This suggests that issuers understand the importance of white papers and attempt to signal their quality by publishing longer white papers. Hence, this study contributes to the relevance of voluntary information disclosure. The main source of information for evaluating ICO issuers is their white papers which cover complex topics such as the underlying blockchain technology, the economics of the token, and the business model. Our findings suggest that investors rely on simple measures such as the length of the white paper, possibly because they do not have the time or the skills to assess the future prospects of the project. For example, many households who buy retail financial products do not understand these products (Carlin, 2009). This lack of understanding and the lack of regulation may have contributed to fraud and scams in the ICO market and highlight the role of regulation, information disclosure and trust. The latter is particularly interesting in a market that is based on the “trustless” blockchain technology. Author Contribution Dirk Baur: Conceptualization, Methodology, Formal analysis, Writing - Original Draft, Writing Review & Editing, Supervision
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Shadi Samieifar: Conceptualization, Methodology, Software, Validation, Formal analysis, investigation, Data Curation, Writing - Review & Editing, Visualization, Project administration
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