Crypto Asset Statement – Aave (AAVE) – Coinberry

NO SECURITIES REGULATORY AUTHORITY IN CANADA OR ANY OTHER JURISDICTION HAS EXPRESSED AN OPINION ABOUT CRYPTO CONTRACTS OR ANY OF THE CRYPTO ASSETS MADE AVAILABLE THROUGH THE PLATFORM (as hereinafter defined), INCLUDING AN OPINION THAT THE CRYPTO ASSETS ARE NOT THEMSELVES SECURITIES AND/OR DERIVATIVES.

Coinberry is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Coinberry Limited dated August 19th 2021 [link]. 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 Crypto Asset Statement or the Statement of Crypto Asset and Crypto Contract Risks.

Together with the Statement of Crypto Asset and Crypto Contract Risks, the provisions of which are incorporated herein, this Crypto Asset Statement, lists certain specified risks associated with Aave. The risks identified in this Crypto Asset Statement and in the Statement of Crypto Asset and Crypto Contract Risks may not be all of the risks related to the Crypto Assets and Crypto Contracts and there may be other additional unknown risks, that may exist.

Background

Aave was founded by Stani Kylechov in November 2017 as EthLend and was rebranded to Aave in September 2018. Aave is an open-sourced, decentralized finance and non-custodial protocol which lets its holders earn interest on deposits and borrow assets with a variable or stable interest rates. It also enables ultra-short duration, uncollateralized flash loans designed to be integrated into other products and services. Aave operates on the Ethereum blockchain and the Polygon network.

Due diligence

Coinberry has performed due diligence with respect to Aave to satisfy itself as to the viability of offering it on the Platform. Our due diligence included, but was not limited to, a review of the following:

Liquidity of the market
Total market capitalization
Timeline since Crypto Asset inception
Crypto Asset availability for custody with existing custodians
The current developer ecosystem
Whether Aave has been classified as a security or a derivative by any Canadian jurisdiction or the jurisdiction with which Aave has the most significant connection

Risks Associated with Investing in Aave

Underlying Value Risk

Aave represents a relatively new form of digital value. The Aave token has 3 roles: Governance, Incentives and Migration tool. Each asset in the Aave protocol has specified values related to its risk, which influences how they are loaned and borrowed. Just as oil is priced by the supply and demand of global markets, as a function of its utility to, for instance, power machines and create plastics, so too is Aave priced by the supply and demand of global markets for its own utility. If these means of valuing Aave prove to be fundamentally flawed, then the market may undergo a repricing of Aave, which could have an adverse impact on its price.

Collateral Risk

Each loan issued using the Aave protocol is guaranteed by collateral that may be subject to volatility. Sufficient margin and incentives are needed for the loan to remain collateralized in adverse market conditions. If the value of the collateral falls below a threshold, part of it is auctioned to repay part of the loan and keep the ongoing loan collateralized. Additionally, certain crypto assets cannot be used as collateral. Even though collateral is part of the Aave protocol and not the Aave token, adverse or volatile market conditions may cause a lack of collateral to have a negative effect on the price of the Aave token itself.

Regulation of Aave

The regulation of Aave continues to evolve in North America and within foreign jurisdictions, which may restrict the use of Aave or otherwise impact the demand for Aave.

Volatility of Aave

The risks of trading Aave are high as the decentralized finance sector is volatile and speculative which can lead to sharp and sudden movements in prices. As with all investments, it is not uncommon for the value of Aave to quickly drop when there is a shift in the demand and supply which will ultimately impact the price.

Counterparty Risk

Crypto assets that are exposed to the risk of a single point of failure in their governance will bring about high counterparty risks both in terms of centralization and trust. For this reason, they cannot be considered to be a warrant of the solvency of the Aave protocol.

Loss of “Private Keys”

The loss or destruction of certain “private keys” (numerical codes required by Coinberry to access its Crypto Assets) could prevent Coinberry from accessing its Aave. Loss of these private keys may be irreversible and could result in the loss of all or substantially all of the Aave held in trust by Coinberry.

Strong Competition in the Space

There are several other crypto assets in the decentralized lending space that could take a substantial part of the market and may impact the price of Aave.

Your Holdings May Become Illiquid

You may not always be able to liquidate your Aave at your desired price. It may become difficult to execute a trade at a specific price when there is a relatively small volume of buy and sell orders in the marketplace, including on trading platforms that offer Aave. Unexpected market illiquidity may cause major losses to the holders of Aave. The large size of Aave that Coinberry may hold increases the risks of illiquidity by both making the Aave difficult to liquidate and in liquidating, Coinberry may affect Aave’s price significantly.

Susceptible to Error and Loss

There is no way to prevent all technical glitches and human errors. As with all Crypto Asset transactions, Aave transfers are irreversible. An improper transfer (whereby Aave is accidentally sent to the wrong recipient), whether accidentally or resulting from theft, can only be undone by the receiver of the Aave agreeing to send the Aave back to the original sender in a separate subsequent transaction. Coinberry receives transfer instructions from its clients and relies on the accuracy of the instructions provided by the client. To the extent Coinberry erroneously transfers, whether accidentally or otherwise, Aave in incorrect amounts or to the wrong recipients, Coinberry may be unable to recover the Aave, leading to its loss.

Risks Associated with the Aave Network

Dependence on Aave Developers

While many contributors to Aave’s software are employed by companies in the industry, a portion of them are not full-time Aave devotees. As a result, there are no contracts or guarantees that they will continue to contribute to Aave’s software development.

Disputes on the Development of the Aave Protocol may lead to Delays in the Development of the Protocol

There may be disputes between contributors on the best paths forward in building and maintaining Aave’s software which may lead to delays in the development of the protocol and thereby adversely affect its price.

Competitors to Aave

To the extent, a competitor to Aave gains popularity and greater market share, the use of Aave could be negatively impacted, which may adversely affect its price. Similarly, Aave and the price of Aave could be negatively impacted by competition from incumbents in the credit card, payments and lending industries.

Risks Associated with Trading Platforms that offer Aave

Regulation of Trading Platforms that offer Aave

Trading platforms that offer Aave are spot markets in which Aave can be exchanged for fiat currencies (CAD, USD, etc). Coinberry seeks to ensure that the trading platforms on which it transacts are reputable, stable and operating in compliance with applicable laws.

Limited Operating History of Aave Trading Platforms

Aave trading platforms have a limited operating history. Since 2017 several Aave trading platforms have been closed or experienced disruptions due to fraud, failure, security breaches or distributed denial of service attacks. In many of these instances, the customers of such trading platforms were not compensated or made whole for the partial or complete loss of funds held at Aave trading platforms. The potential for instability of Crypto Asset trading platforms and the closure or temporary shutdown of exchanges due to fraud, business failure, hackers, distributed denial of service attacks or malware or government-mandated regulation may reduce confidence in Aave, which may adversely affect its price.

Hacking of the Aave protocol May Have a Negative Impact on Perception of the Security of the Aave Network

A compromise of the Aave protocol took place in November of 2020 that used two flashloans to swap a series of stablecoin; a technique that exploited the vault withdrawal method. The price value of Aave plunged 28%. Any further hacks to Aave may further negatively impact the price of Aave.

Hacking of Aave Trading Platforms May Have a Negative Impact on Perception of the Security of the Aave Network

Aave trading platforms that adhere to best practices are insured, and most of these have not been hacked, or if they have, the loss has been minimal. Although there is ample evidence which indicates that almost all of the economic trading volumes in Aave occur on the top ten global trading platforms, many of which are regulated by the New York State Department of Financial Services and carry insurance for their hot wallet assets, such exchanges, or other, smaller or less reputable exchanges, may get hacked. Aave’s price is at risk if a platform is hacked as it can shake consumer confidence for those that do not understand the difference between a weakness in the platform versus a weakness in Aave and its protocol.

Different Prices of Aave on the Aave Trading Platforms

Most platforms operate as isolated pools of liquidity, and so when demand spikes for a specific platform the market price for Aave on that platform can also spike, making it trade at a premium to other platforms. This tendency is common geographically, with Asian platforms frequently trading at a premium to platforms in Europe or America.

Closure of Aave Trading Platform(s)

Between 2013 and 2021, a number of Crypto Asset trading platforms have been closed due to fraud, failure or security breaches. In many of these instances, the customers of Aave trading on these trading platforms were not compensated or made whole for the partial or complete losses of their account balances. While smaller Aave trading platforms are less likely to have the infrastructure and capitalization that make larger Aave trading platforms more stable, larger Aave trading platforms are more likely to be appealing targets for hackers and “malware” (i.e., software used or programmed by attackers to disrupt computer operation, gather sensitive information or gain access to private computer systems).

Liquidity Constraints on Aave Markets

While the liquidity and traded volume of Aave are continually growing, they are still maturing assets. We may not always be able to acquire or liquidate crypto assets we hold in trust at a desired price. It may become difficult to execute a trade at a specific price when there is a relatively small volume of buy and sell orders in the marketplace, including on trading platforms that offer Aave. When transacting in the Crypto Asset markets, Coinberry will be competing for liquidity with other large investors, including speculators, miners, investment funds and institutional investors. Unexpected market illiquidity, and other conditions beyond our control, may cause major losses to the holders of a Crypto Asset, including Aave. The large position in Aave that we may acquire increases the risks of illiquidity by making our Aave difficult to liquidate. In addition, the liquidation of significant amounts of Aave by Coinberry may impact the overall market price of Aave.

Risk of Manipulation on Aave Trading Platforms

Some Aave trading platforms have been known to permit and/or report artificially high order volumes and/or trading volumes. Aave trading platforms are not required to adopt policies and procedures for the purpose of detecting and preventing manipulative and deceptive trading activities and, in the event that manipulative and deceptive trading activities are detected, Aave trading platforms may not have procedures for, or jurisdiction to, sanction or otherwise deter such activities and/or to detect, investigate and prosecute fraud.

Settlement of Transactions on the Aave Network

There is no central clearing house for cash-to-Aave transactions. Current practice is for the purchaser of Aave to send fiat currency to a bank account designated by the seller, and for the seller to broadcast the transfer of Aave to the purchaser’s public Aave address upon receipt of the cash. The purchaser and seller monitor the transfer with a transaction identification number that is available immediately upon transfer and is expected to be included in the next block confirmation. When Coinberry purchases Aave from an Aave trading platform, there is a risk that the Aave trading platform will not initiate the transfer on the network upon receipt of cash from Coinberry, or that the bank where the Aave trading platform’s account is located will not credit the incoming cash from Coinberry for the account of the Aave trading platform.

Risk Statement

Please make sure to review the Statement of Crypto Asset and Crypto Contract Risks for additional discussion of general risks associated with the Crypto Contracts and Crypto Assets made available on Coinberry.

Last Updated August 18, 2021