Coinsquare Capital Markets Inc. (“Coinsquare”) is offering crypto contracts to purchase and sell Solana 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.
In late 2017, founder Anatoly Yakovenko published a whitepaper draft detailing a new timekeeping technique for distributed systems called Proof of History (PoH). In blockchains like Bitcoin and Ethereum, the time required to reach a consensus on the order of transactions is a limitation for scalability. Anatoly believed his new technique could automate the transaction ordering process for blockchains, leading to the origin of the scale-friendly Solana. The founding team included former Apple engineers in addition to some Qualcomm veterans. They initially named the project Loom but later rebranded it to Solana to avoid confusion with the Ethereum Layer-2 scaling solution, Loom Network.
As with all assets, investing in Solana 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 Solana 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 Solana.
Solana appears to be far more centralized in comparison to other networks and blockchains, as all governance and decision-making on the Solana ecosystem appears to be controlled by the Solana Foundation and Labs. Typically, most networks employ community or token voting (governance) systems. This could lead to risks in the decisions made solely by the foundation working against the best interest of some individuals. However, Solana insiders own over 48%, and the Solana Foundation owns 13% of the entire supply of Solana, giving it complete majority control over voting or network validation.1, 2
Additionally, in July 2022, an American investor filed a class action lawsuit claiming that the Solana Foundation, Anatoly Yakovenko, Solana Labs, Multicoin Capital, and FalconX profited from the sale of an unregistered security, in reference to SOL token. The lawsuit claims that insiders were able to dump their holdings to retail investors for a profit and also explains that the centralized nature of the Solana network was hidden to mislead investors.2 Investors should consider the centralization of the Solana network, and the pending lawsuit, when evaluating SOL.
Over the past two years, Solana’s network has experienced numerous instances of network outages. From January to June 2022, the network saw five separate instances of outages with varying durations. Numerous outages have had notable negative effect on market sentiment toward Solana, which has been reflected in declines in SOL token price following some outages.3
Additionally, in 2022, Solana was evaluated and ranked as the second worst DeFi protocol out of over 240 different protocols analyzed by DeFi Safety. The report claimed that Solana’s poor node infrastructure contributes to its frequent outages, and that improper handling of archival node information, poorly designed block explorers, and unaudited node clients (software) with less diversity than competing blockchains also contributed to Solana’s abysmal ranking.4 Investors should consider the propensity for and history of network outages when evaluating Solana.
As with staking any crypto asset, staking SOL is not without risk. Many of the risks of staking SOL are explained in our Risk Statement https://coinsquare.com/en-ca/ccml-rsa/
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 SOL below.
The Solana Network uses a delegated proof-of-stake (“DPoS”) consensus protocol to secure the network and validate transactions. DPoS relies on third-party validator nodes to verify transactions included in each new block. Validators are incentivized with SOL rewards in exchange for verifying transactions. To ensure compliance with the protocol rules, validators must “stake” assets, thus risking loss of the staked asset should the validator fail to comply with the rules of the blockchain (a process called “slashing”).
DPoS networks allow for SOL holders to participate in staking without operating a validator node. Instead, holders may delegate the right to stake their assets to a validator. As validators amass larger amounts of stake delegations from different token holders, this acts as “proof” to the network that the validator’s consensus votes are trustworthy, and their votes are therefore weighed proportionally to the amount of stake the validator has attracted. Once a validator verifies a block of transactions, subject to any fees charged by the Validator, the validator and all of its delegators split the SOL reward proportionally to each delegator’s share of all assets delegated to the validator.
Coinsquare provides staking functionality for users in respect of SOL, allowing users to delegate their SOL to approved validators and earn the applicable staking rewards. However, there are various risks associated with staking and such risks are in addition to the generalized risks pertaining to SOL described below, all of which continue to apply to SOL staked through the Coinsquare platform.
Validators are network node operators that verify the accuracy of data being recorded on the blockchain. Validators are rewarded with newly issued SOL and the reward is based on the current inflation rate, the total number of SOL staked on the network and an individual validator’s uptime. Validators also charge a commission which is deducted before any rewards are distributed to the holders of staked SOL. Each time rewards are issued, the commission is deposited in the validator’s account and the remaining rewards are simultaneously deposited in all of the stake accounts that are delegated to that validator, proportionally to the amount of actively delegated stake in each account.
Currently, the third-party service provider we use is 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 designated Staking wallets with BitGo. Headquartered in Toronto, Figment is one of the world’s largest blockchain infrastructure and services providers.
The Solana protocol uses a “leader schedule” to determine which validator is responsible for appending transactions to the Solana ledger at any given time. Each epoch, which is the period of time during which a leader schedule is valid on the Solana protocol, lasts roughly two days.
When you delegate or un-delegate SOL, the delegated SOL does not change state immediately. Newly delegated tokens are considered “activating” or “bonding” and are not eligible to earn rewards until they are fully activated. Newly un-delegated tokens are considered “deactivating” or “unbonding” and are not able to be withdrawn until deactivated. The Solana protocol only allows tokens to finish changing state at the beginning of a new epoch.
There is a limit to how much total stake can change state in a single epoch across the entire Solana Network. If such limit is reached for a particular epoch, a portion of all activating and deactivating stake up to the global limit will finish changing state at the beginning of the next epoch. The remaining stake would stay as “activating” or “deactivating” for at least one more epoch, until the beginning of the next epoch, and so on.
The Solana Network uses newly issued SOL to pay rewards, and the initial inflation rate is 8% per year. The “deflation” rate – the rate by which the inflation rate decreases per year – is 15%. As such, the inflation rate will decrease by 15% per year until the inflation rate reaches the expected long-term inflation rate of 1.5%. The current supply of SOL tokens can be found at any time at https://explorer.solana.com/supply and additional details on the inflation schedule can be found at https://solana.com/docs/economics/inflation/terminology#inflation-rate-.
The Solana protocol computes and distributes staking rewards once per epoch. If a reward is accrued in a given epoch, it will be issued in the first block of the following epoch. 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.
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 Coinsquareprovides 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 SOL: (i) Coinsquare’s custodian, BitGo, will be entitled to a fee 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 as disclosed in the CCML Fee Schedule (https://coinsquare.com/en-ca/ccml-fs/) in respect of the Net Rewards (the “Coinsquare Service Fee”); 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.
In Solana, a staking account is used to delegate tokens to validators, and this differs from a typical Solana wallet address which is only able to send and receive SOL from other accounts on the network. A staking account supports more complex operations including those required to manage the delegating of tokens.
SOL is staked from dedicated accounts held with BitGo, our custodian. BitGo will continue to hold the private keys required to control SOL held in these accounts.
Validators miss out on SOL rewards if they fail to participate when called upon, and their existing stake can be destroyed if they behave dishonestly. On the Solana network, slashing is not automatic and after a safety violation the Solana network will temporarily cease operation. Once halted, other validators may propose that the stake delegated to the validator responsible for the safety violation be slashed once the network restarts.
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 Solana validator is slashed, Coinsquare has no obligation to replace any lost SOL 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 SOL they had staked.
To be made available for trading on Coinsquare’s platform, a digital asset must pass the following due diligence reviews:
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.
