Crypto Asset Statement - Polkadot
About this Statement
Coinsquare Capital Markets Inc. (“Coinsquare”) is offering crypto contracts to purchase and sell Polkadot in reliance on a prospectus exemption granted by the Canadian Securities Administrators (CSA) in the exemptive relief decision dated October 12, 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.
Founded in 2016 by Gavin Wood, former co-founder and CTO of Ethereum, Polkadot facilitates an internet where independent blockchains can exchange information and transactions in a trustless way via the Polkadot relay chain. Security and stability are Polkadot’s key organizational values, and it achieves this by uniting multiple blockchains. DOT is the protocol’s token. The DOT token serves three distinct purposes: governance over the network, staking and bonding.
As with all assets, investing in Polkadot is not without some general risks. Many of these risks are identified and explained in our Risk Statement.
The relevant sections in the Risk Statement are as follows:
Platform Risk, Short History Risk, Price Volatility, Potential Decrease in Global Demand for Digital Assets, Potential for Illiquid Markets, Transfers of Digital Assets are Irreversible, Concentration Risks, Uncertainty in Regulation, Financial Institutions May Refuse to Support Transactions Involving Digital Assets, Digital Assets’ Blockchain May Temporarily or Permanently Fork and/or Split, Cyber-Security Risk, Airdrops, Issues with Cryptography Underlying Digital Asset Networks, Internet Risk, Open Loop System, Risk if Entity Gains a 51% Share of Digital Asset Network, Possible Increase in Transaction Fees, Possible Increase in Service Fees, Limited Canadian Investor Protection Fund Account, No Voting Rights, Custody of Digital Assets, Custody Risk Insurance, Threats to Coinsquare’s Physical Assets, Covid-19 Outbreak, Use of Leverage, Halting, Suspending, and Discontinuing Digital Assets.
In addition to the general risks, we outline some risks that are specific to Polkadot 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 Polkadot.
Competition with Other Layer-1 Proof-of-Stake Platforms
Polkadot is a delegated proof-of-stake blockchain which is primarily used to process transactions and deploy smart contracts. Other blockchain platforms such as Ethereum, Cardano, Tezos,, Cosmos, Solana, Avalanche, and Binance Smart Chain provide very similar services. The number of platforms providing similar services poses a risk to DOT investors, as the platform may not be competitive enough to gain market share, with negative consequences for DOT’s market sentiment, market cap and token price.
Reliance on Web3 Foundation Development
Polkadot is developed primarily by a group called the Web3 Foundation, while community involvement is more focused on developing products and services, known as parachains, on top of the core protocol1. The project is heavily reliant on its core founders and the Web3 Foundation for its continued technical development. Significant influence from a single entity shows signs of centralization and could be harmful to the network if that entity ever acts in a way that is not in the best interests of the network. This scenario has impacts for the network and DOT’s token value, and should be considered by investors.
As with staking any crypto asset, staking DOT is not without risk. Many of the risks of staking DOT are explained in our Risk Statement https://coinsquare.com/en-ca/ccml-rs/
in the following sections:
What is Staking, How Does Coinsquare Help You Earn Staking Rewards?, Validators, Custody, Slashing, Unbonding Periods, Rewards, Fees, Risks Related to Staking, Reliance on third party vendors, Slashing and missed rewards, Due diligence on validators may be insufficient, Illiquidity during unbonding periods, Due diligence on Digital Assets may be insufficient, Short History risk.
In addition to these general staking risks, we outline some information and risks that are more specific to DOT below.
Polkadot is designed to facilitate the transfer of data between multiple unrelated blockchains. This process works through the interaction of three types of blockchains known as the relay chain, parachains, and bridges. The relay chain is the main blockchain of Polkadot. The relay chain helps map addresses to account information, coordinate communications and provide consensus through a pooled security mechanism utilizing a nominated proof-of-stake (“NPoS”) protocol. Similarly to delegated proof-of-stake, a set of decentralized validators are selected by nominators (token holders who nominate their tokens for staking with a validator). DOT holders then nominate their tokens for staking with a validator, earning Era Points for the validator for activites that process transactions, create new blocks, and secure the network. Upon the completion of an Era, validators are paid rewards commensurate to their Era Points, and those rewards are then distributed proportionally to those who have staked DOT through nomination with that validator.
Staking rewards are computed and distributed after each successful era. If a reward is accrued after during an era, it will be issued immediately upon the completion of the era. When rewards are received by Coinsquare, Coinsquare will provide statements to users indicating the amount of the rewards that the user is entitled to as well as the total rewards that were earned and any fees payable. For each era, your share of DOT rewards is proportionate to the amount of DOT that you had staked when the era began.
Coinsquare’s staking service is designed to automatically stake any rewards (“auto re-staking”) that are earned by clients through the staking service. This means that when rewards are distributed to any client account, those rewards immediately enter that network’s bonding period. Once the bonding period is complete, the rewarded amount joins the pre-existing staked balance to earn rewards through the staking service. Currently, Coinsquare does not offer the ability for clients to opt out of the reward auto re-staking mechanism. However, if a client withdraws enough of their staked balance, causing the total staked amount to fall below the minimum stake amount for that asset, no rewards earned from then onwards will be automatically staked and instead will be credited to the client’s unstated holdings. Any assets that were in the bonding period when the staked amount fell below the minimum amount will enter the unbonding period immediately upon completing the bonding period, after which it will be added to that client’s unstaked holdings.
The estimated rewards percentage that appears throughout the Coinsquare app is a calculated annual percentage yield (APY) rate, which is derived from an APY rate that reported to us from our Staking partner, BitGo. The reported rate is then reduced by Bitgo’s fee and Coinsquare’s fee, leaving the estimated rewards percentage that is displayed to in the app. The displayed rate is approximately what you can expect to earn by staking the asset, but is subject to fluctuations based on various factors for each network. Coinsquare evaluates the net rewards paid to clients against the calculated and displayed estimated rewards percentage on an ongoing basis, at least quarterly.
Each crypto asset for which Coinsquare provides staking services is subject to specific fees because of the unique nature of each blockchain network. These fees are calculated on a percentage basis in relation to the amount of rewards earned. Coinsquare’s service fee may be up to 30% of net rewards earned by a user (as more fully described in our fee schedule https://coinsquare.com/en-ca/ccml-fs/).
Coinsquare receives net rewards from its Custodian, BitGo. This means that BitGo’s fees of 9% of gross rewards are removed on-chain from the total amount earned by the validator before the net amount is distributed to CCML. CCML then takes the amount received, removes the fee as explained below, and distributes the remaining amount proportionally to each user that had assets staked for the entirety of the period in which the rewards were earned.
With respect to any rewards earned on your staked DOT: (i) Coinsquare’s custodian, BitGo, will be entitled to a fee (as described above) and may pay a portion of that fee to any third-party service provider it selects to act as validator; (ii) any remaining portion of the rewards (the “Net Rewards”) will be delivered to one of Coinsquare’s custodial wallets with BitGo; (iii) Coinsquare will be entitled to a fee of up to 30% in respect of the Net Rewards (the “Coinsquare Services Fees”); and (iv) after the Coinsquare Service Fee has been paid, your account will be credited with any remaining portion of the rewards, and, subject to any unbonding, lock-up or cooling-down period, you will be able to hold, sell or withdraw your rewards.
Currently, the third-party service provider we use is our custodian, BitGo. BitGo is regulated as a trust company under the Division of Banking in South Dakota. Pursuant to Coinsquare’s relationship with BitGo, BitGo may act as the validator in respect of staked crypto assets or may select a third-party service provider to act as the validator. BitGo currently has a contractual relationship with Figment, whereby Figment acts as validator for the crypto assets stored in Coinsquare’s custodial wallets with BitGo. Headquartered in Toronto, Figment is one of the world’s largest blockchain infrastructure and services providers.
Each era, which is the period of time during which validators earn era points, lasts one day.
Validators miss out on DOT rewards if they fail to participate when called upon, and their existing stake can be destroyed if they behave dishonestly.
Coinsquare may, at its sole discretion, transfer reimbursements for slashing penalties it receives from BitGo to its users less any administrative costs or expenses Coinsquare incurs in reimbursing users. In the event a supported Polkadot validator is slashed, Coinsquare has no obligation to replace any lost DOT or otherwise provide any compensation for any losses. Negative impacts of slashing will be allocated to all clients using the staking service in proportion to the amount of DOT they had staked.
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:
- Coinsquare Securities Law Assessment
- Coinsquare Digital Asset Security Audit
- 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.
- “Who Is Building Polkadot?” Web 3 Foundation, July 22, 2022. https://polkadot.network/about/
Published Date: Jan 5 2024