This DOT Sale Information Memorandum provides further information on the status and characteristics of DOTs, the functions attaching to them, their intended use within Polkadot. In particular, please see the section entitled ‘RISK FACTORS’ for more information on the risks associated with participating in the first general sale of DOTs (the DOT Sale). This DOT Sale Information Memorandum should be read in conjunction with the information set out on the Foundation’s website (www.polkadot.network), as well as the Terms and Conditions for the DOT Sale (the Terms and Conditions).
This DOT Sale Information Memorandum has been prepared for information purposes only and is not intended to provide any form of advice to you and should, therefore, not be relied upon by you when considering whether to participate in the general sale of DOTs. If you are in any doubt as to the information provided in this DOT Sale Information Memorandum, you should seek independent professional advice.
Please note that participation in the general sale of DOTs requires prior familiarity with the use of cryptocurrencies, such as Ether, as well as an understanding of how to establish an Ethereum wallet, and you should consider your proficiency in such matters when determining whether you wish to participate in the general sale of DOTs.
The Web 3.0 Technologies Foundation (the Foundation) is a Swiss Stiftung established under Article 80 et seqq. Swiss Civil Code founded by Dr. Gavin Wood and is predominantly focused on the development, deployment and maintenance of “Web 3.0” – a project aiming to promote the development of innovative technologies and applications in the field of cryptographically-enabled decentralised software protocols.
The Foundation’s statutory purpose is nurturing and stewarding cutting-edge technologies and applications in the field of cryptographically-powered decentralized software protocols. The Foundation’s principal focus is research, development, deployment and maintenance of Web 3.0 technologies, comprising the "Polkadot" multichain protocol, the “Webchain” smart-contract platform and the "Shh" messaging protocols and their various support technologies, in addition to advocacy and education, developer-adoption, support of middleware and base-layer/demonstration applications relating to this protocol set (Web 3.0 Technologies). The founder, Dr. Gavin Wood, has reserved his right to change the statutory purpose of the Foundation in accordance with Article 86a of the Swiss Civil Code.
Swiss foundations are subject to a mandatory supervision by a federal or cantonal authority. The Foundation’s application for approval by Eidgenössische Stiftungsaufsicht (Federal Foundation Supervisory Authority) has been submitted and is currently pending.
Swiss foundations are required to appoint a statutory auditor. The current statutory auditor of the Foundation is MUTARA Treuhand AG, having its seat in Baar, Switzerland.
Foundation council members
The Foundation Council is the governing body responsible for the management of the Foundation. The current members of the Foundation Council are Dr. Gavin Wood (President and Founder), Dr. Aeron Buchanan (Vice President), Peter Czaban, Mathias Bucher and Reto Trinkler.
The Polkadot protocol is intended to be a scalable heterogeneous multi-chain technology (Polkadot). Unlike previous blockchain implementations that have focused on providing a single chain of varying degrees of generality over potential applications, Polkadot itself will not provide any inherent application functionality at all. Rather, Polkadot will provide the bedrock relay-chain upon which a large number of validatable, globally-coherent dynamic data-structures may be hosted. We call these data-structures “parallelized” chains or parachains, though there is no specific need for them to be blockchain in nature.
In other words, Polkadot may be considered equivalent to a set of independent chains (e.g. the set containing Ethereum, Ethereum Classic, Namecoin and Bitcoin) except for two very important points: pooled security and trust-free interchain transactability.
These points are why the Foundation considers Polkadot to be “scalable” in its design. In principle, a problem to be deployed on Polkadot may be substantially parallelized - scaled out - over a large number of parachains. Since all aspects of each parachain may be conducted in parallel by a different segment of the network, the system has some ability to scale.
Polkadot is intended to provide a bare-bones piece of infrastructure leaving much of the complexity to be addressed at the middleware level. This is a conscious decision intended to reduce development risk, enabling the requisite software to be developed within a short time span and with a good level of confidence over its security and robustness.
DOTs will be a blockchain token created with and native to Polkadot for the purpose of carrying out key functions central to the operation of Polkadot.
Role of DOTs within Polkadot
DOTs are intended to perform three key functions in Polkadot, namely: (i) to facilitate participation by holders of DOTs in protocol governance, (ii) to facilitate participation by holders of DOTs in the relay-chain’s proof of stake consensus mechanism and (iii) to serve as a value metric.
It is intended that the first function of DOTs will be to entitle holders to exercise certain functions in relation to the governance of Polkadot, including the determination of fee structures and associated fee waivers, the addition or removal of parachains and upgrades and changes to the Polkadot protocol as a whole. These functions are not formally granted to the holders of DOTs, but rather the underlying code of Polkadot will enable a holder of DOTs to participate in the decision-making process in respect of these activities.
It is intended that the second function of DOTs will be to facilitate the consensus mechanism that underpins Polkadot. As detailed further below under the heading “Active participation in Polkadot” in order for the protocol to function and allow for valid transactions to be carried out across parachains, Polkadot will rely on holders of DOTs to play active roles. Active participants will put certain proportions of their DOTs at risk (referred to as “bonding”) on an ongoing basis in order to act as a disincentive for malicious participation in the consensus mechanism. Please see“Reallocation and deletion of DOTs” for further information. Depending on the activity undertaken, the time during which DOTs are bonded within the protocol and the number of DOTs required to make up the security bond in respect of such activity, will vary.
It is intended that the third function of DOTs will be to provide a value mechanism within Polkadot, such that rewards for active participation in the network can be denominated in DOTs, with higher value contributions being rewarded with a higher number of DOTs.
Functions conferred by DOTs on their holders
It is intended that holders of DOTs will have certain functions within the Polkadot protocol, including:
- the ability to actively participate in the operation of Polkadot by acting as a validator, nominator or fisherman;
- the ability to participate in the decision-making process in relation to fee structures and associated fee waivers that are proposed to be implemented within Polkadot;
- the ability to participate in the decision-making process in relation to adding or removing parachains; and
- the ability to participate in the decision-making process in relation to global upgrades and / or changes to Polkadot.
DOTs will not confer any ownership or voting right or interest in the Foundation, nor will a holder of DOTs be entitled to any share of the income of the Foundation or any other party. Further, a holder of DOTs will not be entitled to any proceeds raised in connection with the sale of DOTs, nor will a person have any right against the Foundation or any other person in respect of any funds provided in connection with the general sale of DOTs.
Active participation in Polkadot
As noted under the section headed “Functions conferred by DOTs on their holders” and “Uncapped supply of DOTs”, Polkadot will be designed to encourage active participation in Polkadot by holders of DOTs. Active participation in this context involves a holder of DOTs performing at least one of the following roles within Polkadot:
- Validators: it is intended that these participants will play a crucial role in adding new blocks to the relay-chain and, by extension, to all parachains such that parties can complete cross-chain transactions via the relay-chain. In performing this role, validators will perform two functions. First, ratifying the information contained in an assigned set of parachain blocks (such as the identities of the transacting parties, the subject matter of the contract etc.) to confirm that the transaction is valid. The second role will be to participate in the consensus mechanism to produce the relay chain blocks based on validity statements from other validators. Any instances of non-compliance with the consensus algorithms developed and chosen by Polkadot results in punishment by removal of some or all of their DOTs, thereby discouraging bad actors. Good performance, however, will be rewarded, with validators receiving transaction fees in the form of DOTS in exchange for their activities.
- Nominators: it is anticipated that these participants may not be willing or capable of engaging in the validation of transactions occurring on Polkadot. Instead, these participants may nominate validators to carry out validation work on their behalf and contribute to the security bond of their nominated validators. It is anticipated that a significant number of DOTs in existence at any particular point in time are likely to be bonded to validators for the purpose of being staked to enable the carrying out of the validation activities that form the basis of the consensus mechanism employed in Polkadot. Bonding DOTs to a validator requires nominators to perform due diligence and constant analysis in order to select the validators which are the most likely to behave according to the Polkadot protocol rules. Nominators receive a pro-rata increase or reduction in their DOT holding according to the growth or depletion of the security bond to which their DOTs were contributed.
- Fishermen: it is intended that these participants do not participate in the process of validating transactions in the same way as validators or nominators, but rather they act as a mechanism to deter bad actors by monitoring activity across the Polkadot protocol to determine whether any of the other participants have acted in breach of the rules governing Polkadot. Fisherman will be required to provide significantly fewer DOTs by way of a security bond in order to participate in Polkadot but will receive proportionately larger DOT rewards (in comparison to rewards received by validators and nominators in proportion to the size of their security bond) upon demonstrating proof that a particular breach has occurred.
Reallocation and deletion of DOTs
Certain active participant behaviour may result in a punitive reduction of that participant’s security bond (through deletion or reallocation) or a reduction in the amount of their DOT reward. The extent of the punishment will depend on the misbehaviour in question and will be pre-determined by the protocol.
Allocation of DOTs
The Foundation intends to create 10 million DOTs as part of the Polkadot genesis block. Of those 10 million DOTs, it is intended that 5 million DOTs will be made available for sale through private sale agreements and a first general sale or otherwise distributed as determined by the Foundation at its sole discretion. Participants in the private sale will receive a minimum 15% discount on the final price per DOT in the first general sale. Participants participating within the first hour following commencement of the first general sale will receive a 15% discount on the final price per DOT in the first general sale. Participants participating in the first 24 hours following commencement of the first general sale (other than those participating in the first hour) may receive up to a maximum 15% discount on the final price per DOT in the first general sale, which will be awarded at the sole discretion of the Foundation and calculated pursuant to the DOT Sale smart contract protocol.
For the avoidance of doubt, this means that (i) there is no guarantee that there will be any discount offered after the expiry of the first hour following commencement of the DOT Sale; and (ii) to the extent that any discount is offered after the expiry of the first hour following commencement of the DOT Sale, the period during which such discount is offered may be significantly shorter than 24 hours following the commencement of the DOT Sale and/or the level of discount offered may be significantly lower than 15% on the final price per DOT in the DOT Sale.
Of the remaining 5 million DOTs in the Polkadot genesis block, it is intended that 2 million DOTs will be reserved for participants in one or more later general sales or otherwise distributed to the public in some other fashion to be determined by the Foundation at its sole discretion. The remaining 3 million DOTs will be allocated to the Foundation to be retained or distributed at its sole discretion.
Timeframe for receipt of allocated DOTs
The initial development cycle for Polkadot is expected to be at least two years following the completion of the first general sale. This estimated time period anticipates a research phase culminating in a set of technology proofs-of-concept, a series of prototypes with an eventual formal protocol specification, the deployment of a testnet, a fully refined implementation, an external auditing process and a bounty programme. To the extent that these phases are successful in developing Polkadot, the Foundation will proceed to make the Polkadot genesis block available for deployment such that participants in the first general sale can access DOTs allocated to them.
Access to DOTs once allocated
Upon a deployment of the Polkadot genesis block, participants in the private and general sales of DOTs will be able to access their DOTs using the private key corresponding to the Ethereum address used for contribution in the DOT Sale. DOTs are able to be accessed through using the key with the compatible Polkadot software.
Uncapped supply of DOTs
It is intended that the Polkadot genesis block will contain 10 million DOTs. The overall supply of DOTs over time will not be fixed, nor will it be subject to a pre-determined upper limit. DOTs will be subject to an as yet determined inflation model which envisages that the supply of DOTs will increase each year and are likely to be designed to incentivise participants such that a sufficient proportion (yet to be determined, but perhaps as high as 50%) of all DOTs in issue at any point in time will be bonded for the purposes of supporting the proof of stake consensus mechanism that underpins Polkadot.
Value of DOTs
As detailed in this DOT Sale Information Memorandum, it is intended that DOTs perform certain functions within Polkadot, one of which is to act as a value mechanism. However, the Foundation can make no comment at this stage as to the value of any DOTs sold.
Ability to trade DOTs
The right of a participant in the DOT Sale to access their allocation of DOTs upon a deployment of the Polkadot genesis block will not be capable of being transferred or traded.
Following the deployment of the Polkadot genesis block, it is expected that a large proportion of all DOTs in issue at any point in time will be bonded for the purposes of supporting the proof of stake consensus mechanism that underpins Polkadot, and consequently will be illiquid and will not be capable of being transferred or traded.
In respect of those DOTs in existence that are not bonded for the purposes of supporting the proof of stake consensus mechanism that underpins Polkadot, the Foundation does not intend to provide, develop or support any infrastructure to enable the trading of DOTs, and the possibility of any third party offering such infrastructure will be entirely outside the control of the Foundation.
DOTs not intended as a virtual currency
It is not the intention of the Foundation for DOTs to be used as a virtual currency and, as detailed in the “Role of DOTs” and “Ability to trade DOTs” sections above, DOTs are largely illiquid by design. The Foundation does not intend to provide, develop or support any mechanism by which DOTs can be exchanged into an underlying value of fiat currency. On this basis, the Foundation considers that it is unlikely that DOTs would be appropriate for use as a form of virtual currency. Notwithstanding this, it is possible that under the laws of certain jurisdictions, DOTs may be considered virtual currencies. The Foundation provides no comment as to what such classification may entail for holders of DOTs, and any potential holders seeking further information as to the potential impact of holding a virtual currency should seek independent legal advice.
The following risks entail circumstances under which, our business, financial condition, results of operations and prospects could suffer. The list of risk factors below is not exhaustive and the Foundation does not express any view as to the likelihood of any of the contingencies detailed below occurring. You may wish to seek professional advice in relation to the possible risks that may arise as a result of your participation in the DOT Sale.
Risks associated with the development and deployment of Polkadot
Polkadot may not be successfully developed or may not function as intended and the Polkadot Genesis Block may not be deployed as intended or at all
Polkadot is at a very early stage of development. The Foundation may have to make changes to the specifications of Polkadot or DOTs for any number of legitimate reasons or the Foundation may be unable to develop Polkadot in a way that realizes those specifications or any form of a functioning network. To the extent that Polkadot is successfully developed and the Polkadot genesis block is deployed, Polkadot and/or DOTs, may not meet participant expectations at the time of participating in the DOT Sale and may be different from those set out in the White Paper. Furthermore, despite the Foundations efforts to develop and deploy the Polkadot genesis block and subsequently to develop and maintain Polkadot, it is still possible that Polkadot will experience malfunctions or otherwise fail to be adequately developed or maintained, which may negatively impact Polkadot and/or DOTs.
The development of Polkadot will require significant capital funding, expertise and the Foundation’s time and effort. Polkadot may fail to attract sufficient interest from key stakeholders or require significantly more funding or time in development than the Foundation currently envisages, which may result in suspension or cancellation of development of Polkadot. If the Foundation is not successful in its efforts to demonstrate to users the utility and value of Polkadot, there may not be sufficient demand for DOTs for the Foundation to proceed with the deployment of the Polkadot genesis block. As a result, or if the deployment of the Polkadot genesis block does not occur, participants may lose all of the funds provided in connection with the DOT Sale.
Polkadot may not be deployed as intended at all
Due to the decentralised nature of Polkadot, there is no guarantee that the Polkadot genesis block (to the extent that it is developed) will be deployed as intended or at all. As DOTs are native tokens to Polkadot, they will not come into existence, whether as part of the Polkadot genesis block or otherwise, if there is no deployment of the Polkadot genesis block.
The Foundation may not be successful in engaging the services of its preferred software developer(s)
The Foundation may not have or may not be able to obtain the technical skills and expertise needed to successfully develop Polkadot and progress it to deploy the Polkadot Genesis Block. There is a general scarcity of management, technical, scientific, research and marketing personnel with appropriate training to develop and maintain Polkadot.
Risks associated with the general sale of DOTs
The DOT Sale, or any part of it, may not be completed or may not be completed as planned
Whilst the Foundation intends to hold the DOT Sale as described on the Foundation’s website, there is no guarantee that the first general sale will be completed or go ahead as is currently envisaged by the Foundation. The Foundation may need to suspend or change the structure of the first general sale, including imposing restrictions on certain aspects of the sale, in a short space of time and may not be able to provide advance notice of such changes. In addition, the Foundation expresses no view as to the expected level of interest in participation in the DOT Sale.
No guarantee of that participants will benefit from discount to the price per DOT offered in the first hour of the DOT Sale
The availability of the 15% discount on the final price per DOT to be offered to participants participating in the first hour of the DOT Sale will be subject to such participant’s transactions being processed on the Ethereum blockchain prior to the expiry of the first hour of the first general sale.
No guarantee of that participants will benefit from any discount to the price per DOT following the expiry of the first hour of the DOT Sale
Participants participating in the first 24 hours following commencement of the first general sale (other than those participating in the first hour) may receive up to a maximum 15% discount on the final price per DOT in the first general sale, which will be awarded at the sole discretion of the Foundation and calculated pursuant to the DOT Sale smart contract protocol. For the avoidance of doubt, this means that (i) there is no guarantee that there will be any discount offered after the expiry of the first hour following commencement of the DOT Sale; and (ii) to the extent that any discount is offered after the expiry of the first hour following commencement of the DOT Sale, the period during which such discount is offered may be significantly shorter than 24 hours following the commencement of the DOT Sale and/or the level of discount offered may be significantly lower than 15% on the final price per DOT in the DOT Sale.
Participants in the DOT Sale may lose up to the entire value of funds contributed
In the event that Polkadot is not successfully developed or is not deployed, participants in the first general sale may not receive any DOTs. In these circumstances, participants in the first general sale will lose the full value of funds provided in connection with the first general sale. Please refer to the Terms and Conditions for further information.
Risks associated with DOTs
The applicable law relevant to the Foundation and / or DOTs may change
The law applicable to the Foundation and / or the DOTs, including the DOT Sale, may change in a manner that means the Foundation is no longer permitted to complete the first general or second sale of DOTs or allocate the DOTs as intended.
DOTs may have no economic value and any value may be subject to extreme volatility
The Foundation expresses no view as to the economic value of DOTs and it is possible that DOTs will have no economic value at all. Any economic value that DOTs do have, whether such value arises solely in the context of the use of DOTs in Polkadot or otherwise, may be subject to extreme volatility resulting in a total loss of all economic value, which shall be borne solely by holders of DOTs.
The inflation model will cause material dilution in the percentage holdings of DOTs for passive participants
Passive holders of DOTs, that is holders of DOTs that do not perform validating, nominating or fisherman roles within Polkadot, may see their percentage holdings of DOTs dilute over time as more DOTs come into existence as a result of the as yet determined inflation model. Over time, this may result in the dilution of a passive participant’s holdings of DOTs to close to zero in percentage terms.
‘Bad actors’ may lose some or all of their DOTs
It is envisaged that holders of DOTs who are deemed to be ‘bad actors’ under the governance framework of Polkadot may lose some or all of their DOTs.
Nature of the legal relationship between holders of DOTs is uncertain
The legal nature of the relationship (if any) between the holders of DOTs and the liabilities and obligations of holders of DOTs is uncertain.
The Foundation is not currently regulated
The Foundation is not currently regulated by any regulatory, supervisory or governmental authority and participants in the private sales and general sales will not, therefore, be afforded the benefit of any regulatory protections, including in relation to the protection of any funds contributed through private sales or through any general sale of DOTs.
Regulatory treatment of DOTs is uncertain
As the sale of tokens is a nascent practice, the treatment of DOTs by regulatory and governmental authorities is uncertain and may vary across jurisdictions. The legal and regulatory treatment of DOTs may be prone to change in the future, which may have a materially adverse impact on the legal status of DOTs, the economic value (if any) of DOTs and the liquidity of DOTs, as well as the development, function or governance of Polkadot and / or the Foundation itself.
There may not be a secondary market for DOTs
As it is intended that the majority of DOTs created will be illiquid, and as the Foundation does not intend to provide, develop or support any infrastructure to allow for the trading of DOTs, the nature and extent of any secondary market for DOTs cannot be predicted. As a consequence, any person intending to participate in the first general sale should consider lack of liquidity in DOTs as a risk.
Alterations to the allocation of DOTs in accordance with the private sale agreements or terms and conditions of the public sale
In the event that the Foundation is no longer obliged to allocate DOTs to a participant in accordance with the private sale agreements or terms and conditions of the general sale (for example, where the issue of DOTs by the Foundation to a participant becomes illegal in a particular jurisdiction prior to the Polkadot genesis block date), DOTs that would otherwise be allocated to the relevant participants(s) will be allocated to the Foundation or such other persons, as may be determined by the Foundation in its sole discretion.
Risks associated with blockchains and distributed ledger technologies
External developments in the interoperability of blockchain technologies
Blockchain technologies may develop in such a way that different blockchains become interoperable without the need for a relay-chain. The Foundation considers that such developments would be likely to have a material adverse impact on the economic value (if any) of DOTs.
Viruses and other malicious code
The Foundation may not be able to ensure that material made available to participants by the Foundation or any third party in relation to Polkadot will be free from viruses or any other code that has contaminating properties or is otherwise destructive in its effect.
The blockchain on which the funds sent to the Foundation pursuant to the DOT Sale and the cryptographic wallet in which funds are stored may be subject to successful attacks, including but not limited to double-spend attacks, majority mining power attacks, "selfish-mining" attacks, and race condition attacks.
Advances in code cracking and other technical advances
Advances in code cracking, or technical advances such as the development of quantum computers, could present risks to Polkadot, which could result in the theft or loss of DOTs.
Loss of private keys
The loss or destruction of a private key used by a participant to access the Ethereum address through which they will access their DOTs may be irrecoverable. Widespread loss or destruction by participants of private keys may adversely affect the functioning of Polkadot and the economic value (if any) of DOTs.
Risks associated with the Foundation
The Foundation may change its statutory purpose
Swiss foundations are required to adhere to their statutory purpose. The founder of the Foundation has reserved the right to alternate the Foundation's purpose in accordance with Article 86a of the Swiss civil code. Such alternation of the purpose requires approval from the competent foundation supervisory authority and may only be requested once a period of ten years has elapsed since the foundation was established or since the last alteration requested by the founder.
The supervisory authority may provide dispensation to the Foundation from its duty to appoint a statutory auditor
Swiss foundations must appoint a statutory auditor and are subject to an ordinary or limited audit. The supervisory authority may however provide a dispensation to a foundation from its duty to appoint a statutory auditor in the event that each of the following conditions are met:
- the total amount of the balance sheet of the foundation is less than CHF 200,000.00 in two subsequent years;
- the foundation is not publicly calling for donations or other grants; and
- the audit is not required in order to reliably assess the assets and earnings situation of the foundation.
The Foundation could, if desired, request a dispensation from the obligation to appoint an auditor (if above requirements were fulfilled) and would subsequently not be subject to an audit.
The supervisory authority may interfere with the activities of the Foundation
Swiss foundations are generally subject to a mandatory supervision by a federal or cantonal authority. The Foundation’s application for approval by Eidgenössische Stiftungsaufsicht (Federal Foundation Supervisory Authority) has been submitted and is currently pending.
According to the Swiss Civil Code the supervisory authority has to ensure that the assets of a foundation are used for their declared purpose. In general, the supervisory authority may therefore give appropriate binding instructions to the foundation’s bodies and sanction any misconduct by the Foundation. Further information as to the extensive rights and duties of the supervisory authority in respect of a Swiss foundation are set out in the Swiss Civil Code. It is therefore possible that the supervisory authority of the Foundation may intervene in its activities (once the Foundation’s application for approval has been accepted).
The Foundation may be dissolved and its assets transferred
The Foundation may be dissolved and its assets transferred. According to Swiss law, the competent supervisory authority shall dissolve a foundation on application or of its own accord if its statutory purpose has become unattainable and the relevant foundation cannot be maintained by modifying its foundation deed or if its objects have become unlawful or immoral. Any interested party may file an application or bring an action for the dissolution of a Swiss foundation.
According to the foundation deed of the Foundation, in the event of a dissolution, the Foundation Council shall transfer the remaining assets to other organizations and / or foundations with a similar purpose (e.g. university and / or institute with a focus on new technologies in the field of open and decentralized software architectures) in Switzerland.
Use of proceeds
The Foundation intends to use a substantial amount of all of the proceeds of the DOT Sale to finance the development of Web 3.0 Technologies, including Polkadot.
To this end, the Foundation intends to work closely with third parties. The Foundation intends to enter into a software development agreement with Parity Technologies Limited (Parity Technologies) under which Parity Technologies will conduct research and develop the Polkadot protocol and, following a deployment of the Polkadot genesis block.
Parity Technologies is a technology company incorporated in England and Wales. Dr. Gavin Wood, a member of the Foundation council, holds a majority shareholding in Parity Technologies and certain other Foundation council members also hold shares or other equity interests. There is, however, no group relationship between the Foundation and Parity Technologies.