Crypto Asset Statement
Last Updated: 22 Nov, 2022
About this Summary
Bitbuy Technologies Inc. (“Bitbuy” or “we”) believes that our users should understand the crypto assets that they are able to trade using our crypto trading platform (the “Platform”). One of the crypto assets we offer on the Platform is ether (“ETH”). We created this summary to help you understand the basics of ETH as well as some of the risks involved in trading it. While we tried to describe the key features of ETH here, this summary isn’t meant to tell you everything you’d want to know before investing in it. You should also do your own research on ETH to make sure you are comfortable investing in it.
Description of Ether
ETH is the native digital currency of a decentralized, open-source computer network known as the Ethereum Network. The Ethereum Network, like the Bitcoin network, records all transactions on a decentralized, transparent and immutable public ledger, known as a “blockchain”. The open-source Ethereum Network software code includes the protocol that governs the creation of ETH and the cryptographic operations that verify and secure ETH transactions. In contrast to the Bitcoin network, the Ethereum Network supports peer-to-peer contracts, known as smart contracts, as well as decentralized applications.
In 2013, Vitalik Buterin proposed the Ethereum Network as an open-source platform that would significantly lower the entry barrier for developers to create their own smart contracts and decentralized applications. The development of the Ethereum Network, which is based on Buterin’s proposal, was ultimately spearheaded by a Swiss firm called Ethereum Switzerland GmbH. The Ethereum Network has a dedicated non-profit organization, Ethereum Foundation, which supports the ongoing development of the Ethereum Network. The Ethereum Network went live in July 2015.
ETH can function as a means of exchange and/or a store of value. However, the value of ETH is often tied to the additional use cases for the Ethereum Network. Bitcoin and Ethereum are considered protocol layers because they are the foundations that facilitate actions on their respective blockchains, similar to how the internet protocol HTTP (Hypertext Transfer Protocol) facilitates communication over computer networks. On top of the protocol layer, there is an “application layer” where third party developers can create their own programs. A primary difference between the Bitcoin Network and the Ethereum Network is the ease of developing on the application layer of the Ethereum Network. Solidity, the language that allows developers to program applications that run on the Ethereum Network, is less restrictive compared to developing on the Bitcoin Network and allows for developers to program smart contracts, fungible and non-fungible tokens and decentralized applications.
The Merge and the Shanghai Upgrade
On September 15, 2022, the Ethereum Network transitioned from a “proof-of-work” (“PoW”) protocol to a “proof-of-stake” (“PoS”) protocol (the “Merge”) whereby the original execution layer of the Ethereum Mainnet (the “Mainnet”) was merged with Ethereum’s new proof-of-stake consensus layer, the Beacon Chain. The Merge eliminated the need for energy-intensive mining and instead enabled the network to be secured using staked ETH. PoW secured the Mainnet from Ethereum’s genesis until the Merge. The successful completion of the Merge represents an official transition to using the Beacon Chain as the engine of block production. Following the Merge, mining is no longer the means of producing valid blocks. Instead PoS validators have adopted this role and are now responsible for processing the validity of all transactions and proposing blocks. As Mainnet merged with the Beacon Chain, it also merged the entire transaction history of Ethereum, so nothing was lost in the Merge.
To simplify and maximize focus on a successful transition to proof-of-stake, the Merge upgrade did not include certain anticipated features (such as the ability to withdraw staked ETH). The “Shanghai upgrade” is planned to follow the Merge. After the completion of the Shanghai upgrade, users will be able to withdraw staked ETH and rewards from the network. The Shanghai upgrade is anticipated to roll-out six to twelve months following the Merge. However, this may change, and unforeseen circumstances could see the Shanghai upgrade delayed. Moreover, it is possible that issues may arise during the Shanghai upgrade, which could result in a partial or complete loss of staked assets.
Since the Merge, Ethereum now uses a consensus mechanism to achieve distributed consensus in a delegated proof-of-stake (“DPoS”) protocol. The DPoS mechanism relies on third-party validator nodes to verify transactions included in each new block. Validators are incentivized with ETH 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 users to participate in staking without operating a validator node. Instead, holders may delegate the right to stake their assets to a validator. These staked assets do not leave the holder’s wallet as delegation only permits the validator to stake the owner’s assets on their behalf. Once a validator verifies a block of transactions, the validator and all of its delegators split the ETH reward proportionally to each delegator’s share of all assets delegated to the validator.
Bitbuy provides staking functionality for users in respect of ETH, allowing users to delegate their ETH 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 ETH described below, all of which continue to apply to ETH staked through the Bitbuy platform.
Validators are network node operators that verify the accuracy of data being recorded on the blockchain. Validators are typically rewarded in crypto assets for their transaction confirmation activities and the reward is based on the number of validators operating on the network. The size of rewards is generally inversely proportional to the number of validators on the network. The rewards payable to validators are automatically calculated by the Ethereum Network, and validators are paid when staking rewards are distributed.
Currently, the third-party service provider we use is our custodian, BitGo. BitGo is regulated as a trust company under the Division of Banking in South Dakota. Pursuant to Bitbuy’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 Bitbuy’s custodial wallets with BitGo. Headquartered in Toronto, Figment is one of the world’s largest blockchain infrastructure and services providers.
In PoS Ethereum, time is divided into “slots” of 12 seconds. 32 slots equal 1 epoch (approximately 6.4 minutes). Each slot may or may not have a block in it. The total number of validators is split up in committees and one or more individual committees are responsible to attest to each slot. One validator from the committee is randomly chosen to be the aggregator, while the other 127 validators are attesting. The selected validator is responsible for the creation of a new block and distributing it to other nodes on the Ethereum network. After each epoch, the validators are mixed and merged to new committees. There is a minimum of 128 validators per committee.
Activation and Unbonding
Once staking is initiated, a validator enters a queue to become “activated” which takes approximately 7.5 hours. Once initiated, the network acknowledges the ETH to be deposited to the staking smart contract. Once completed, the ETH deposit is officially accessible to the Beacon Chain and remains in a “pending state” until activated. Since only four validators are activated per epoch, activation may take days or even weeks to complete. Once activated, the validator begins accruing rewards for securing the network.
Withdrawing staked ETH or rewards from a validator is not supported until the completion of the Shanghai upgrade. Once the Shanghai upgrade is completed, it will be possible to withdraw all or some of one’s stake (“unbonding”). Similar to the activation of a validator, a queue will be formed for users attempting to unbond their stake and withdraw their assets. This queue is estimated to consist of 6 validators per epoch.
The Ethereum network issues staking rewards from user fees paid to the network and with the distribution of newly issued ETH. The current post-Merge inflation rate is 0.49%.
Staking Rewards and Fees
Ethereum computes and issues staking rewards once per epoch. Any accrued rewards in a given epoch are issued in the first block of the subsequent epoch. When rewards are received, Bitbuy 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. For each epoch, your share of ETH rewards is proportionate to the amount of ETH that you had staked when the epoch began.
Withdrawing staked ETH or rewards is not supported until the completion of the Shanghai upgrade. Once the Shanghai upgrade is completed, it will be possible to unbond and withdraw all of one’s stake.
Each crypto asset for which Bitbuy provides 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.
With respect to any rewards earned on your staked ETH: (i) Bitbuy’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 Bitbuy’s custodial wallets with BitGo; (iii) Bitbuy will be entitled to a fee of 30% in respect of the Net Rewards (the “Bitbuy Service Fee”); and (iv) after the Bitbuy Service Fee has been paid, your account will be credited with any remaining portion of the rewards, and, subject to any unbonding or lock-up period, you will be able to hold, sell or withdraw your rewards.
ETH is staked from dedicated accounts held with BitGo, our custodian. BitGo will continue to hold the private keys required to control ETH held in these accounts.
Validators miss out on ETH rewards if they fail to participate when called upon, and their existing stake can be destroyed if they behave dishonestly. There are two primary behaviours that can be considered dishonest: proposing multiple blocks in a single slot (equivocating) and submitting contradictory attestations. The amount of ETH slashed depends on how many validators are also being slashed around the same time. Slashed validators will be unable to withdraw their ETH or re-stake until after the Shanghai upgrade.
Bitbuy may, at its sole discretion, transfer reimbursements for slashing penalties it receives from BitGo to its users less any administrative costs or expenses Bitbuy incurs in reimbursing users. In the event a supported Ethereum validator is slashed, Bitbuy has no obligation to replace any lost ETH 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 ETH they had staked.
The Ethereum Network’s move from a PoW algorithm to a PoS mechanism is still in its early stages, and unforeseen events may result in its users potentially adopting the new mechanism or rejecting it in favour of other protocols. This could have an adverse impact on the value of ETH.
Though the Merge transitioning Ethereum from a PoW to a PoS consensus mechanism was successful, it is only the first milestone on the network’s overarching goal of achieving 100 thousand transactions per second. The Shanghai upgrade is expected to go live in the second half of 2023, but this expectation is not guaranteed, and the Shanghai upgrade could be delayed further. The Shanghai upgrade is necessary for users to be able to unbond and withdraw ETH from the Ethereum network.
One of the more controversial issues surrounding the Merge that the Beacon Layer and its proof-of-stake consensus protocol has rendered thousands of “miners” obsolete. There is no place in the new Ethereum network for mining, and it is possible that miners may push for the continuation of a separate proof-of-work Ethereum that will run independently of the Ethereum blockchain. This hard fork could have an adverse effect on the value of the proof-of-stake Ethereum.
Like other crypto assets, there are also some general risks associated with acquiring and staking ETH. We describe many of these general risks in the risk statement we publish on our website, including risks relating to: (i) volatility; (ii) access, loss or theft, (iii) control of processing power; (iv) settlement of transactions on crypto asset networks; (v) momentum pricing; (vi) private keys; (vii) internet disruptions; (viii) faulty code; (ix) network development and support; (x) regulatory risk; (xi) network forks; (xii) air drops; (xiii) voting rights; (xiv) cybersecurity incidents and other systems and technology problems; (xv) unforeseeable risks; (xvi) reliance on third-party vendors in staking; (xvii) slashing, jailing and missed rewards; (xviii) illiquidity during unbonding periods; (xix) due diligence on validators; (xx) uncertain tax consequences; and (xxi) the risk that staking rewards may not be received.
While we tried to describe the key risks associated with ETH here and in our risk statement, these aren’t all of the risks associated with trading in ETH. You should also do your own research on ETH to make sure you are comfortable acquiring it.
How Bitbuy Decides to List Crypto Assets
Bitbuy reviews crypto assets before making them available for trading on the Platform. In making our decision to list a new crypto asset, we consider publicly-available information about the crypto asset, including (among other things) its creation, design, governance, usage, supply, demand, maturity, utility, liquidity, material technical risks and legal and regulatory risks.
To date, we have only made crypto assets available for trading on the Platform which have significant supply, demand and liquidity. In our experience, crypto assets with these qualities tend to also satisfy the other criteria we evaluate as part of our review. That being said, our review process is fulsome and flexible, and we don’t prioritize any one factor over another. You should review the risk statement published on our website for more information about our procedures for determining whether to make a crypto asset available for trading on the Platform.
Bitbuy is offering crypto contracts to purchase and sell ETH in reliance on a prospectus exemption contained in the exemptive relief decision Re Bitbuy Technologies Inc. dated November 30, 2021. 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 provinces and territories of Canada would not apply in respect of a misrepresentation in this statement.
No Canadian securities regulatory authority has expressed an opinion about ETH, including an opinion that ETH is not itself a security and/or derivative.