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 SOL. We created this summary to help you understand the basics of SOL as well as some of the risks involved in trading it. While we tried to describe the key features of SOL here, this summary isn’t meant to tell you everything you’d want to know before investing in SOL. You should also do your own research on SOL to make sure you are comfortable investing in it.
Description of SOL
SOL is the native token of the Solana network (the “Solana Network”). The Solana Network is an open-source, smart-contract platform. The Solana Network was designed to offer faster transaction settlement times, lower fees and the ability to support high-usage decentralized applications (“dapps”) in multiple programming languages. Dapps are not governed by any central body and are instead controlled by the logic written into smart contracts, which self-execute once their predefined terms are met. Like the Ethereum Network, the Solana Network significantly lowers the entry barrier for developers to create their own dapps.
The Solana Network is supported by Solana Labs, which is a core contributor to the development of the network, and the Solana Foundation, which is a Swiss non-profit organization dedicated to growing the Solana community and incentivizing development of the network. The Solana Network derives from a whitepaper published in 2017 in which Anatola Yakovenko set out, among other things, the innovative features to be implemented in the Solana Network, including a timestamp system known as proof-of-history (“PoH”).
PoH is a distinguishing feature of the Solana Network as it is a system that allows it to achieve faster transaction settlement times than other comparable networks. PoH addresses a specific challenge faced by blockchain networks. Namely, in order for nodes (i.e., computers) to validate transactions, they must agree on the time and sequence in which events occurred, which can take a significant amount of time. The PoH system attempts to solve this problem by creating a historical record that can be used to verify that an event has occurred at a specific point in time. As a result, nodes can create the next block without having to coordinate with the entire network first because they can trust the timestamp and ordering of the messages that they’ve received.
SOL has three main functions in the Solana Network. Namely, it can be: (i) staked or delegated using the network’s DPoS protocol to facilitate the validation of transactions and the earning of rewards; (ii) used to pay transactions fees associated with transactions on the network; and (iii) used to access the dapps and smart contracts available via the network.
Staking SOL
The Solana Network uses a delegated proof-of-stake (“DPoS”) consensus protocol, which is essentially a voting and reputation system to secure the network and validate transactions. DPoS relies on third-party validator nodes to verify transactions included in each new block. Validators are incentivized with SOL 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. As validators amass larger amounts of stake delegations from different token holders, this acts as “proof” to the network that the validator’s consensus votes are trustworthy, and their votes are therefore weighted proportionally to the amount of stake the validator has attracted. Once a validator verifies a block of transactions, subject to any fees charged by the Validator, the validator and all of its delegators split the SOL reward proportionally to each delegator’s share of all assets delegated to the validator.
Bitbuy provides staking functionality for users in respect of SOL, allowing users to delegate their SOL 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 SOL described below, all of which continue to apply to SOL staked through the Bitbuy platform.
Validator Rewards
Validators are network node operators that verify the accuracy of data being recorded on the blockchain. Validators are rewarded with newly issued SOL and the reward is based on the current inflation rate, the total number of SOL staked on the network and an individual validator’s uptime. Validators also charge a commission which is deducted before any rewards are distributed to the holders of staked SOL. Each time rewards are issued, the commission is deposited in the validator’s account and the remaining rewards are simultaneously deposited in all of the stake accounts that are delegated to that validator, proportionally to the amount of actively delegated stake in each account.
Supported Validators
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.
Epochs
The Solana protocol uses a “leader schedule” to determine which validator is responsible for appending transactions to the Solana ledger at any given time. Each epoch, which is the period of time during which a leader schedule is valid on the Solana protocol, lasts roughly two days.
Warming-Up and Cooling-Down Periods
When you delegate or un-delegate SOL, the delegated SOL does not change state immediately. Newly delegated tokens are considered “activating” or “warming up” and are not eligible to earn rewards until they are fully activated. Newly un-delegated tokens are considered “deactivating” or “cooling down” and are not able to be withdrawn until deactivated. The Solana protocol only allows tokens to finish changing state at the beginning of a new epoch. Bitbuy may, in its sole discretion, allow users to withdraw up to an equivalent amount of SOL as such user then holds in the cooling down period, prior to such SOL having fully transitioned states.
There is a limit to how much total stake can change state in a single epoch across the entire Solana Network. If such limit is reached for a particular epoch, a portion of all activating and deactivating stake up to the global limit will finish changing state at the beginning of the next epoch. The remaining stake would stay as “activating” or “deactivating” for at least one more epoch, until the beginning of the next epoch, and so on.
Network Inflation
The Solana Network uses newly issued SOL to pay rewards, and the initial inflation rate is 8% per year. The “deflation” rate – the rate by which the inflation rate decreases per year – is 15%. As such, the inflation rate will decrease by 15% per year until the inflation rate reaches the expected long-term inflation rate of 1.5%.
Staking Rewards and Fees
The Solana protocol computes and distributes staking rewards once per epoch. If a reward is accrued in a given epoch, it will be issued in the first block of the following epoch. When rewards are received by Bitbuy, 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 SOL rewards is proportionate to the amount of SOL that you had staked when the epoch began.
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 SOL: (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, lock-up or cooling-down period, you will be able to hold, sell or withdraw your rewards.
Custody
In Solana, a staking account is used to delegate tokens to validators, and this differs from a typical Solana wallet address which is only able to send and receive SOL from other accounts on the network. A staking account supports more complex operations including those required to manage the delegating of tokens.
SOL is staked from dedicated accounts held with BitGo, our custodian. BitGo will continue to hold the private keys required to control SOL held in these accounts.
Slashing
Validators miss out on SOL rewards if they fail to participate when called upon, and their existing stake can be destroyed if they behave dishonestly. On the Solana network, slashing is not automatic and after a safety violation the Solana network will temporarily cease operation. Once halted, other validators may propose that the stake delegated to the validator responsible for the safety violation be slashed once the network restarts.
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 Solana validator is slashed, Bitbuy has no obligation to replace any lost SOL 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 SOL they had staked.
Risks
Multiple events in 2022 have caused significant amounts of downtime on the Solana network. On January 21, 2022, a denial-of-service attack caused an outage that lasted approximately 48 hours. On February 2, 2022, the Wormhole bridge, a protocol that allows users to move tokens and NFTs between various blockchains, experienced an exploit leading to losses totalling over USD$320 million. At the time, this was the second largest DeFi exploit ever and remains the largest attack on the Solana Network to date.
Governance mechanisms are not currently integrated into the Solana Network, meaning that members of the Solana community do not have a say in the future development of or changes to the Solana Network. Rather, decisions about changes to the Solana Network are made by the Solana Foundation and Solana Labs.
Like other crypto assets, there are also some general risks associated with acquiring and staking SOL. 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 SOL here and in our risk statement, these aren’t all of the risks associated with trading in SOL. You should also do your own research on SOL 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.
Regulatory Information
Bitbuy is offering crypto contracts to purchase and sell SOL 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 SOL, including an opinion that SOL is not itself a security and/or derivative.