Crypto Asset Statement - DAI

About this Statement

Coinsquare Capital Markets Inc. (“Coinsquare”) is offering crypto contracts to purchase and sell DAI in reliance on a prospectus exemption granted by the Canadian Securities Administrators (CSA) in the exemptive relief decision dated July 5, 2022. The statutory rights of action for damages and the right of rescission in section 130.1 of the Securities Act (Ontario) and similar legislation in the other CSA jurisdictions do not apply in respect of a misrepresentation in this statement to the extent that a crypto contract is distributed under the above-noted prospectus relief.

No securities regulatory authority in Canada or any other jurisdiction has expressed an opinion about any of the crypto assets (or crypto contracts) that are available through Coinsquare’s platform, including an opinion that the crypto assets are not themselves securities and/or derivatives.

Coinsquare has compiled the information contained in this Crypto Asset Statement to the best of its ability based on publicly available information.  Coinsquare is providing this Crypto Asset Statement on an “as is” basis and makes no representation or warranty as to accuracy or completeness of the contents.   

About DAI

Danish entrepreneur Rune Christensen is credited to the formation of MakerDAO – a decentralized autonomous organization – back in 2014. MakerDAO is the creator of DAI Stablecoin. On December 18, 2017, DAI and its associated smart contracts were officially launched on the main Ethereum network. The price of DAI was successfully kept close to one US dollar during its first year of existence, even though the price of Ether, the only collateral available at the time, declined by more than 80% during the same time period. In 2018, MakerDAO formed the Maker Foundation, run from Copenhagen, which is the organization facilitating the development of MakerDAO.

Risks

As with all assets, investing in DAI is not without some general risks. Many of these risks are identified and explained in our Risk Statement. In addition to the general risks, we outline some risks that are specific to DAI below. While we make an effort to identify every source of risk, we encourage you to do your own research and ensure you are comfortable investing in DAI.

Stability of DAI’s US Dollar Peg and MakerDAO’s influence

As a stablecoin, pegged to the US Dollar, DAI’s value depends on maintaining its peg. DAI is “soft-pegged” to the US Dollar backed by a portfolio of diversified collateral crypto assets.1 MakerDAO designed and implemented a Target Rate Feedback Mechanism (TRFM) as an automated algorithm or mechanism to maintain DAI’s stability. Since the target price of DAI is fixed at $1 USD, the TRFM engages when the value of DAI dips below $1 or swings above $1 USD. The TRFM adjusts the Collateralized Debt Position (CDP), which essentially makes it cheaper or more expensive to create DAI. The change to the CDP also has intended (and typically realized) effects on the supply and demand for DAI, as the collateral requirement to create DAI changes.2,3

The TRFM and its parameters are configured by MakerDAO through its governance protocol. A significant configuration is the Sensitivity Parameter. The Sensitivity Parameter determines how fast or slow the TRFM will act by controlling the maximum rate of change (i.e. % per minute). For example, if the Sensitivity Parameter is configured to “5% per 15 minutes” then the price of DAI can only be adjusted a maximum of 20% in any given hour. The purpose of this parameter is to ensure that there is enough time to facilitate mass settlement if an attacker compromises the oracle sources of the protocol. The MakerDAO governance protocol allows MKR holders to vote to change the Sensitivity Parameter, such that in the event the oracles were hacked, the DAO could limit the speed at which the price of DAI could change.2

MakerDAO’s oracles are used to provide real-time price information to calculate the value of all CDPs at any given time. The Maker protocol wants all CDPs to exceed the value of DAI at all times. In the event that a CDP declines in value enough that the DAI it collateralizes is worth more than the CDP, the CDP is liquidated to protect the protocol against further losses.

Based on the above information, there are some key risks to the stability of DAI’s US Dollar peg. Firstly, the continued function of the Target Rate Feedback Mechanism is essential to DAI’s price. If the TRFM fails to act appropriately, or is compromised in any way, the price of DAI could be de-pegged. Additionally, the Sensitivity Parameter is a significant source of potential risk. Since this parameter controls the maximum price change over a given period of time, and is intended to mitigate losses and facilitate settlement in the event of a hack, its compromise or failure could result in significant changes to the DAI price. Both of the aforementioned risks are controlled by MakerDAO, which inherently makes the distribution of MKR tokens a risk to DAI. Since MakerDAO is governed by MKR holders, large holders of MKR could theoretically risk the stability of DAI through their voting choices. Finally, the stability of DAI’s price is reliant on the security of MakerDAOs oracle sources. MakerDAO has created a unique system for protecting their oracles called the Oracle Security Module.4 Based on the above information, the potential exists for DAI to lose its peg to the US dollar. Investors should consider this risk when evaluating DAI

DAI’s reliance on the Multiple Networks

DAI is available on multiple networks. It’s commonly traded as an ERC-20 token on the Ethereum network. Additionally it is available as a BEP-20 on the BNB Smart Chain, and also on the Polygon network, Fantom network, Avalanche C-Chain, and it’s own unique (DAI) network. Consequently, it is dependent on the continued stability of each of those networks. Any fundamental issues in the Ethereum, BNB Smart Chain, Fantom, Polygon, Avalanche or DAI network may impact DAI’s smart contract or token value. Investors should consider this dependency when evaluating DAI.5

Coinsquare’s Due Diligence for Digital Assets

To be made available for trading on Coinsquare’s platform, a digital asset must pass the following due diligence reviews:

  1. Coinsquare Securities Law Assessment
  2. Coinsquare Digital Asset Security Audit
  3. New Digital Asset Business Case

Coinsquare undertakes these three levels of due diligence in order to determine whether the digital asset is compliant with our legal and regulatory obligations, is secure, and has historical data supporting a beneficial business case. Coinsquare’s New Product Committee must provide final approval for a new digital asset to be made available on the platform.

References:

  1. Maker Blog. “Busting MakerDAO Myths: Seven Misconceptions About Dai.” November 11, 2020. https://blog.makerdao.com/busting-makerdao-myths-seven-misconceptions-about-dai/
  2. Sharon Manrique. “What is DAI, and how does it work?” Medium.com. https://medium.com/mycrypto/what-is-dai-and-how-does-it-work-742d09ba25d6
  3. The Maker Team. “The Dai Stablecoin System.” MakerDAO. December 2017. https://makerdao.com/whitepaper/Dai-Whitepaper-Dec17-en.pdf
  4. MakerDao. “Oracle Module.” Maker Protocol Technical Docs. 2020. https://docs.makerdao.com/smart-contract-modules/oracle-module
  5. CoinMarketCap. “DAI.” https://coinmarketcap.com/currencies/multi-collateral-dai/

Published Date: July 5, 2022