What is Cardano?
Cardano is the first blockchain network to implement Ouroboros, the first peer-reviewed blockchain protocol with the goal of sustainable scalability and security. Guaranteed by proof-of-stake with network control distributed across stake pools, with stakers earning rewards to incentivize participation, Cardano takes a new approach with random leader selection. Each slot leader, as they are called, is asked to “settle” their transaction block by reviewing preceding blocks. Cardano describes their use of game theory and philosophy as the method behind a more fair and environmentally conscious way of validating transactions and keeping the Cardano network secure.
The Cardano Foundation is an independent non-profit organization that oversees the development of Cardano. Its team is distributed all over the world, and the Foundation works closely with Input Output HK (IOHK) and EMURGO, two blockchain research and technology companies providing investment and development support to the Cardano community. The founders of IOHK, Charles Hoskinson and Jeremy Wood, are the original brains behind the Cardano project, but they have prioritized decentralized governance of the protocol.
What is ADA?
ADA is the native token of the Cardano protocol. It can be exchanged as a store of value, with each transaction validated by the Cardano network, and it can be staked to earn incentives. The Cardano roadmap includes additional use cases for ADA with enhanced governance processes.
ADA tokens were initially distributed via token sale, with rounds of sales taking place between 2015 and 2017. The three supporting entities mentioned above, Cardano Foundation, IOHK, and EMURGO, all received a percentage of ADA (about 20% of total supply) with most ADA distributed to investors and set aside for future network incentives. There is a max supply of 45 billion ADA tokens, which has not yet been reached.
How does ADA staking work?
Cardano is a proof-of-stake (PoS) blockchain that allows users to participate in the network's consensus mechanism by staking their ADA tokens. Staking involves holding ADA in a special wallet and delegating it to a stake pool, which is a group of validators that work together to validate transactions on the network.
When a user delegates their ADA to a stake pool, they are essentially giving the pool permission to use their tokens for the purpose of validating transactions. In exchange for delegating their tokens, the user receives a portion of the rewards earned by the stake pool. These rewards are distributed in the form of newly minted ADA tokens, which are created as part of the network's monetary policy.
Wealthsimple allows you to stake ADA. For a more detailed general explanation of staking and the associated risks of staking, please refer to the Wealthsimple Crypto Product Risk Disclosure. Additional information regarding staking of ADA on Wealthsimple is set out below.
Cardano staking rewards are determined by the number of staked ADA coins and the amount of time they have been staked. The rewards received by a staker depend on the total amount of ADA staked on the network. If there are fewer staked ADA coins, the rewards will generally be higher to incentivize more ADA holders to stake their coins and participate in securing the network. Conversely, if there are more staked ADA coins, rewards will generally be lower. The interest rewarded to stakers is automatically calculated by the Cardano protocol and paid out to stakers at regular intervals.
It's worth noting that Cardano has a unique staking system, where users can delegate their stake to a pool operator who manages the technical aspects of staking on their behalf, and in return, they receive a portion of the staking rewards generated by the pool.
Cardano validators receive a fee (referred to as a "commission") based on a percentage of rewards earned by ADA staked with them. This fee is deducted automatically by the Cardano protocol and paid to validators when staking rewards are distributed.
Wealthsimple arranges to stake ADA with validator nodes operated by the following infrastructure providers:
Coinbase Crypto Services is a subsidiary of Coinbase Global Inc, based in the United States.
Cardano uses an epoch-based system to organize staking rewards and other network operations. An epoch is a period of time that lasts for 5 days, during which stake pools can earn rewards and users can delegate their ADA to different pools. At the end of each epoch, the rewards earned by each pool are calculated and distributed to the pool operator and its delegators.
Warm-up & Cool-down periods
When a stake pool is created or when a staker delegates their ADA to a new pool, there is a warm-up period of 2 epochs (10 days) before the stake becomes active and starts earning rewards in subsequent epochs. This allows time for the stake pool to be registered on the network and for the network to reach consensus on the new stake distribution.
Unlike other proof-of-stake protocols, ADA by design does not have a cool-down period to unstake assets. Users are free to unstake their staked ADA immediately.
It's important to note that during the warm-up period, the staked ADA remains locked and cannot be moved or transferred. This is to ensure the security and stability of the Cardano network and prevent double-spending attacks.
Staking ADA at Wealthsimple adheres to the network’s warm-up periods, so when you elect to stake your ADA it will become inaccessible and take time before rewards begin to accrue. Unstaking ADA at Wealthsimple occurs immediately so long as it is not in the process of being staked (warming up).
The Cardano network has a variable inflation rate that is designed to decrease over time. The current inflation rate is approximately 4.6%, but this can vary depending on the total amount of ADA staked in the network. The inflation rate is determined by a mathematical formula that takes into account several factors, including the target percentage of staked ADA, the current percentage of staked ADA, and the network's overall transaction volume.
When users elect to stake their ADA, the Cardano network will take a snapshot of the current epoch to determine which users are eligible for rewards in subsequent epochs. As an example, if you elected to stake your ADA in epoch 210, it will be recognized as staked in epoch 212 after the warm-up period. Rewards will then begin to accrue from epoch 213, and will continue to accrue in subsequent epochs until you elect to unstake your ADA.
When rewards are received, Wealthsimple will calculate and distribute your share of ADA staking rewards to your Crypto Account. For each epoch, your share of ADA staking rewards is proportionate to the amount of ADA that you had staked and was warmed up when the epoch began.
Commission rates charged by supported validators are set out above under "Supported Validators". The validator commission is automatically deducted from staking rewards before they are received by Wealthsimple.
Wealthsimple also charges you a fee equal to a percentage of staking rewards received by you. The amount of the fee for ADA is set out in our Fee Schedule. This fee is deducted when rewards are distributed to you and is in addition to the validator commission.
Custody of Staked ADA
ADA staked using the Staking Functionality is staked from dedicated accounts held with one or more of Wealthsimple's custodians. Wealthsimple's custodians will continue to hold the private keys required to control ADA held in these stake accounts.
Cardano, unlike some other proof-of-stake blockchains, does not currently implement a slashing mechanism (slashing means that validators who misbehave have some or all of their staked tokens confiscated).
It's important to note that while Cardano does not currently have a slashing mechanism, the protocol is subject to ongoing development and updates, and this could change in the future if it is deemed necessary to maintain the security and stability of the network.
Before trading or staking any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset.
No securities regulatory authority or regulator in Canada has evaluated or endorsed the Crypto Contracts or any of the crypto assets made available through the platform.
Wealthsimple has performed an assessment of whether ADA can be supported by Wealthsimple’s platform, including whether ADA is a security and/or a derivative and is being offered in compliance with securities and derivatives laws.
We evaluated ADA based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of ADA, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that first created Cardano;
- The supply, demand, maturity, utility and liquidity of ADA;
- Material technical risks associated with ADA, including any code defects, security breaches and other threats concerning ADA and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them;
- Legal and regulatory risks associated with ADA, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of ADA; and
- Statements made by regulators or securities regulatory authorities in Canada and other jurisdictions regarding whether ADA, or generally about whether the type of crypto asset, is a security and/or a derivative.
As part of its assessment, Wealthsimple reviewed and considered:
- the design and operation of staking ADA, including:
- bonding/unbonding or warm-up/cool-down periods;
- any limits on the number of active validators;
- the mechanism for selecting validators;
- slashing or similar penalties; and
- token inflation;
- any publicly available security assessments; and
- where feasible, the number and identity of validators participating in staking.
Wealthsimple monitors ongoing developments related to crypto assets available on its platform for significant changes that may affect Wealthsimple’s original assessment of those assets, including Wealthsimple’s assessment of the application of securities and derivatives laws. Any significant changes relating to ADA may result in changes to this Crypto Asset Statement and/or Wealthsimple’s ability to support ADA.
Like all other crypto assets, there are some general risks to investing in ADA. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Please review the Wealthsimple Crypto Product Risk Disclosure for additional discussion of general risks associated with the crypto assets made available through the platform.
Additional Risks / Information
ADA has elevated regulatory risk. The United States Securities and Exchange Commission (SEC) has alleged that ADA is a security under U.S. federal securities laws in one or more enforcement proceedings pending before U.S. courts against crypto trading platforms. None of The Cardano Foundation or IOHK are parties to this proceeding, and the U.S. courts have not determined that ADA is a security. In the event that a U.S. court determines that ADA is a security or there are other material developments affecting the treatment of ADA under securities laws, Wealthsimple may cease to support ADA and/or the market for ADA may be adversely affected.
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading ADA. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
Wealthsimple is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Investments Inc. dated December 18, 2023 (the Decision).
The statutory rights of action for damages and rescission in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under securities legislation of other jurisdictions of Canada, do not apply in respect of this Crypto Asset Statement to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.
Last updated: January 1, 2024