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.
Cardano prioritizes openness and transparency and publishes weekly updates on its roadmap. Its blockchain development consists of five eras, namely: Byron (Foundation), Shelley (Decentralization), Goguen (Smart contracts), Basho (Scaling), Voltaire (Governance). Each era focuses on a specific functionality related to the goal of the platform.
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 Crypto 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 Crypto 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 Crypto 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.
Similarly, when a staker decides to undelegate their ADA from a pool, there is a cool-down period of 2 epochs (10 days) before the stake becomes inactive and stops earning rewards. During this period, the stake remains in the pool but does not contribute to the pool's stake or rewards. This allows time for the network to adjust to the new stake distribution and avoid sudden changes that could destabilize the network.
It's important to note that during the warm-up and cool-down periods, 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 Crypto adheres to the network’s warm-up and cool-down periods, so when you elect to stake or unstake your ADA it will take time before rewards begin to accrue, or for your ADA to become accessible.
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.
The Cardano network computes and issues staking rewards once per epoch. Rewards accrued in a given epoch are issued in the first block of the following epoch.
When rewards are received, Wealthsimple Crypto 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 Crypto.
Wealthsimple Crypto 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 Crypto’s custodians. Wealthsimple Crypto’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.
How does ADA compare to Bitcoin?
ADA differs from Bitcoin in a few key ways.
First, ADA powers the proof-of-stake process for Cardano, a blockchain entirely separate from the Bitcoin blockchain. Since Cardano uses proof-of-stake instead of the proof-of-work method of Bitcoin, ADA tokens are staked as part of the validation mechanism, in contrast to BTC which are mined as a result of the proof-of-work algorithm.
The second major difference between ADA and Bitcoin is their age. ADA was launched in September 2015, with Cardano’s mainnet launching in September 2017, compared to Bitcoin’s 12 or so years. Despite this difference in age, however, Cardano has reached decentralization relatively rapidly and as of September 2021 holds the third spot in terms of market cap behind only Bitcoin and Ethereum, but still trails behind Bitcoin by a significant amount.
Additionally, the Bitcoin blockchain does not perform any other functions besides processing transactions. ADA, however, allows developers to use the Cardano blockchain to create and design self-executing/enforcing contracts, and exchanges and staking pools to integrate with the Cardano blockchain.
Just like Bitcoin, ADA is decentralized. No single entity maintains the ADA network, meaning that the token is divided between a potentially unlimited number of users, none of whom have ultimate control over the system.
However, it should be noted that although ADA is different from Bitcoin, it is far from independent from it. Bitcoin, the coin with a larger market (by a long shot), can influence the price of all other cryptocurrencies. If Bitcoin crashes, there’s a good chance that ADA will feel the burn too (not directly as they operate entirely distinctly, but through overall market sentiment.) It is not clear, but unlikely, that a significant drop in ADA’s value would have a material impact on Bitcoin.
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. First and foremost, no Canadian securities regulatory authority has expressed an opinion about ADA, including an opinion that ADA is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of ADA prior to making it available on Wealthsimple Crypto and has concluded that ADA is not and is unlikely to be deemed a security or derivative. However, there is a risk that this conclusion could change in the future and the impact of this on an asset’s value is outlined in our Product Disclosure.
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; and
- 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.
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.
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 Product Risk Disclosure for additional information regarding these risks, as well as other general risks associated with using the Wealthsimple Crypto platform. In addition to these general risks, ADA presents an elevated short history risk.
Further, the Cardano community is not under any legal or regulatory obligation to disclose material information to the public regarding its activities. Holders of ADA have no recourse to Cardano or Wealthsimple if ADA declines in value for any reason.
WDA has prepared this Crypto Asset Statement based on publicly available information. Although WDA has taken steps to obtain information from apparently reliable sources, information contained in this Crypto Asset Statement may be inaccurate, incomplete or out-of-date. We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading or staking ADA. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc. dated June 18, 2021. Please be aware that the statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply to a misrepresentation in this Statement.
Last updated: May 30, 2023
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