About this Summary
Coinut Canada Ltd. (“Coinut” 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 goes beyond a peer-to-peer money system as it 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.
Bitcoin (“BTC”) and ETH share many similarities. Both rely on underlying networks with associated blockchains, utilize “private keys” and “wallets” to enable transfers and track ownership, facilitate the creation of new supply via “mining”, include software source code that governs the cryptographic operations that verify and secure transactions and allow participants in the network to modify the open-source software and persuade other users and miners to adopt the proposed modification.
Like BTC, 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.
Mining in the Ethereum Network is capped at 16 million ETH per year. Unlike BTC, there is no aggregate cap on the total number of ETH that may be mined. There is a possibility that ETH miners will move from the current “proof-of-work” (“PoW”) protocol to a “proof-of-stake” (“PoS”) protocol, whereby miners settle and validate transactions according to the amount of coin they lock within the system. PoS protocols are desirable because they require a significantly lower amount of computing power and effort.
Like other crypto assets, there are some general risks associated with investing in 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; and (xv) unforeseeable risks. We also point out some risks that are specific to ETH below. 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 investing in it.
Moving from PoW to PoS Consensus Mechanism
The Ethereum Network is attempting to move from a PoW algorithm to a PoS mechanism that may result in its users potentially adopting the new mechanism or rejecting it in favour of other smart contract protocols.
As the use of the Ethereum Network increases, average fees and settlement times can increase significantly. Increased fees and decreased settlement speeds could preclude certain use cases for the Ethereum Network and can reduce the demand for and price of ETH. There is no guarantee that any of the mechanisms in place or being explored or developed for increasing the scale of settlement of transactions on the Ethereum Network, including the move from a PoW to PoS consensus mechanism, will be effective, or how long these mechanisms will take to become effective.
Significant Energy Consumption
Because of the significant computing power required to mine ETH, the Ethereum Network’s energy consumption may ultimately be deemed to be or indeed become unsustainable. This potential unsustainability could pose a risk to broader acceptance of the Ethereum Network. While the move from a PoW to a PoS consensus mechanism would decrease the energy requirements of the Ethereum Network, there is no guarantee that the move from a PoW to PoS consensus mechanism will be effective or that the move will become effective within the proposed timeline.
How Coinut Decides to List Crypto Assets
Coinut 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. 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.
Coinut is offering crypto contracts to purchase and sell ETH in reliance on a prospectus exemption contained in the exemptive relief decision Re Coinut Canada Ltd. 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.
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