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 is about 10%. Validator rewards are a function of amount staked and the remainder belongs to treasury.

How does DOT compare to Bitcoin?

DOT differs from Bitcoin in a few key ways.

First, DOT powers the proof-of-stake process for Polkadot, a blockchain entirely separate from the Bitcoin blockchain. Since Polkadot uses proof-of-stake instead of the proof-of-work method of Bitcoin, DOT 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 DOT and Bitcoin is their age. Polkadot’s was launched on May 26, 2020, compared to Bitcoin’s 12 or so years. Despite this difference in age, however, Polkadot has rapidly reached decentralization and has raised almost $300M in funding.

Additionally, the Bitcoin blockchain does not perform any other functions besides processing transactions. DOT, however, allows developers to use the Polkadot blockchain to connect other blockchains and build their own tokens.

Just like Bitcoin, DOT is decentralized. No single entity maintains the 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 DOT 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 DOT 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 DOT’s value would have a material impact on Bitcoin.

Risk statement

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 Polkadot, 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 Polkadot;
• 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.

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. In addition to these general risks, DOT presents an elevated short history risk. Further, the Polkadot community is not under any legal or regulatory obligation to disclose material information to the public regarding its activities. Holders of DOT have no recourse to Polkadot or Wealthsimple if DOT declines in value for any reason.

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 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: September 28, 2021