What is Polkadot?
Polkadot is an interoperable and heterogenous blockchain that allows multiple unrelated blockchains to transfer any type of data (not just tokens) between them, including between private and public blockchains. Polkadot features a main blockchain called the Relay Chain, to which are connected various user-created parallel chains called parachains. Each parachain features components specialized for their own use cases and have the ability to control their own governance. Polkadot ensures shared security, meaning that all parachains connected to the Relay Chain benefit from the economic security provided by the Relay Chain validators.
Polkadot also has bridges, which is a connecting layer allowing Polkadot to communicate with external networks such as Ethereum and Bitcoin. Polkadot is 100% open source and anyone can contribute to the codebase and build their own blockchain on the platform. Furthermore, Polkadot uses NPoS (Nominated Proof-of-Stake) as its consensus mechanism, which encourages DOT holders to participate as nominators.
Dr. Gavin Wood (co-founder of Ethereum) and Robert Habermeier are the co-founders of Polkadot. Web3 Foundation, co-founded by Dr. Wood, contracted Parity Technologies to develop Polkadot. Polkadot launched in May 2020 as a proof-of-authority protocol, with governance in the control of a single user. In July 2020, control over the protocol was transferred to the network's proposed on-chain governance system. Users now drive the development of the platform through referendums. Although Parity and Web3 can still develop and submit proposals of their own, they must also go through the governance system.
What is DOT?
DOT is the native token of the Polkadot protocol and serves three main functions in Polkadot, namely (i) allowing users to govern the network, (ii) facilitating the consensus mechanism and securing the network through staking, and (iii) adding new parachains by tying up (“bonding”) DOT. Anyone can be a nominator by bonding their DOT tokens to a dedicated validator. Bonding helps increase the network’s cost of attack and allows DOT holders to earn staking rewards. When messages are sent between two blockchains on the network, DOTs are also used to pay for fees.
There is no maximum supply of DOT and the annual inflation rate is targeted at 10%. Validator rewards are a function of the amount of DOT staked on the network relative to total supply.
How does DOT staking work?
On Polkadot, certain nodes called validators process transactions and run the network. Validators on Polkadot are responsible for the same thing as miners in proof-of-work systems such as Bitcoin: ordering transactions and creating new blocks so that all nodes can agree on the state of the network. Holders of DOT can participate in staking by either running their own validators, nominating a validator directly, or joining a nomination pool. Nominating a validator directly allows DOT stakers to select their own validators, while nomination pools select validators on their users’ behalf. The Polkadot network pays staking rewards to participants that stake their DOT.
Wealthsimple Crypto allows you to stake DOT. 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 DOT on Wealthsimple Crypto is set out below.
Polkadot validators receive interest on their DOT for staking based on the number of validators operating on the network. The number of validators operating on the network determines the amount of rewards distributed. If there are few validators, rewards will generally be higher to encourage more DOT holders to stake and contribute to securing the network. Conversely, if there are many validators operating on the network, rewards will generally be lower. Interest rewarded to validators is automatically calculated by the Polkadot protocol and paid to validators when staking rewards are distributed.
Polkadot validators receive a fee (referred to as a "commission") based on a percentage of rewards earned by DOT staked with them. This fee is deducted automatically by the Polkadot protocol and paid to validators when staking rewards are distributed.
Wealthsimple Crypto arranges to stake DOT with validator nodes operated by the following infrastructure providers:
Figment Inc. is a staking as a service provider based out of Canada.
Polkadot uses an epoch and era based system to organize staking rewards and other network operations. An epoch is a period of time that lasts for 6 hours, during which validators and nomination pools can initiate staking or earn rewards. . At the end of one era, or 24 hours, newly staked DOT become eligible to earn rewards, and rewards earned by previously eligible stakers are distributed to nominated validators and validator nodes.
Warm-up and Cool-down Periods
When a validator is created or when a staker nominates their DOT for staking, the stake does not become active until the subsequent era. This allows time for the stake to be registered on the network and for the network to reach consensus on the new stake distribution.
Similarly, when a staker decides to unstake their DOT from a validator or nominator, there is an unbonding period of 28 days. During this period, the unstaked DOT does not generate any rewards, and the DOT cannot be transferred until the unbonding period is complete. 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 DOT remains locked and cannot be moved or transferred. This is to ensure the security and stability of the Polkadot network and prevent double-spending attacks.
Staking DOT at Wealthsimple Crypto generally adheres to the network’s warm-up and cool-down periods, so when you elect to stake or unstake your DOT it will take time before rewards begin to accrue, or for your DOT to become accessible.
The Polkadot network currently has a targeted inflation rate of 10%. The distribution of new DOT supply is intended to be distributed to stakers. The amount distributed to each is determined by how many units of DOT are staked on the network relative to the total supply.
The Polkadot network computes and issues staking rewards once per era. Rewards accrued in a given era are issued in the first block of the following era.
When rewards are received, Wealthsimple Crypto will calculate and distribute your share of DOT staking rewards to your Crypto Account. For each era, your share of DOT staking rewards is proportionate to the amount of DOT that you had staked and was warmed up when the era 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 DOT 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 DOT
DOT 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 DOT held in these stake accounts.
On Polkadot, slashing is a penalty for a validator’s dishonest behavior, such as proposing multiple blocks in a single slot or submitting contradictory attestations. A minor and unintentional offense may lead to a small penalty, while a major or malicious offense can lead to a significant portion (or even all) of the staked DOT being slashed.
In the event that a supported Polkadot validator is slashed, Wealthsimple Crypto has no obligation to replace any lost DOT or otherwise provide compensation for any losses. The negative impact of slashing will be allocated to all clients using the Staking Functionality at the time of slashing event, in proportion to the amount of DOT they had staked.
Before trading 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 DOT, including an opinion that DOT is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of DOT prior to making it available on Wealthsimple Crypto and has concluded that DOT 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 DOT based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of DOT, 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 DOT;
- The supply, demand, maturity, utility and liquidity of DOT;
- Material technical risks associated with DOT, including any code defects, security breaches and other threats concerning DOT 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 DOT, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of DOT.
As part of its assessment, Wealthsimple reviewed and considered:
- the design and operation of staking DOT, 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 DOT. 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. Each of these risks are described in more detail in our in-app Product Disclosure.
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading DOT. 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 23, 2023. 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: August 31, 2023