Ethereum Network Risk

The Protocol is expected to be network agnostic in the long run but will be built on top of the Ethereum Network to start. The functionality of the Protocol is subject to a number of factors relating to the capabilities and development of the Ethereum Network, such as the nascency of its development, its dependence on the internet and other technologies, its dependence on the role played by users, developers and validators and the potential for malicious activity. For example, the realization of one or more of the following risks could materially adversely affect the Protocol:

• IRREVERSIBLE TRANSACTIONS - The loss or destruction of a private key required to access a digital asset may be irreversible. If a private key is lost, destroyed or otherwise compromised and no backup of the private key is accessible, the owner would be unable to access the digital asset corresponding to that private key and the private key will not be capable of being restored by the Ethereum Network. You are solely responsible for the safekeeping of your private key.

• NETWORK UPGRADES - The Ethereum Network is in the process of implementing software upgrades and other changes to its protocol. For example, in 2020, the Ethereum Network may begin the first of several stages of an upgrade called Serenity, or Ethereum 2.0. Ethereum 2.0. is a new iteration of Ethereum that would amend its consensus mechanism to include proof-of-stake and sharding. A digital asset network’s consensus mechanism is a material aspect of its source code, and any failure to properly implement such a change could have a material adverse effect on the functionality of the Protocol.

• KEY CONTRIBUTOR RISK - The Ethereum Network is still in the process of developing and making significant decisions that will affect policies that govern the supply and issuance of ETH as well as other Ethereum Network protocols. For example, the Ethereum Network has on two separate occasions reduced the quantity of ETH rewarded per block and may make additional changes in the future, see “Overview of the ETH Industry and Market—Creation of New ETH” for additional information. The open-source nature of many digital asset network protocols, such as the protocol for the Ethereum Network, means that developers and other contributors are generally not directly compensated for their contributions in maintaining and developing such protocols. As a result, the developers and other contributors of a particular digital asset may lack a financial incentive to maintain or develop the network, or may lack the resources to adequately address emerging issues. Alternatively, some developers may be funded by companies whose interests are at odds with other participants in a particular digital asset network. As a result, there may be a lack of consensus or clarity on the governance of any particular decentralized digital asset network, which may stymie such network’s utility and ability to grow and face challenges. Historically the Ethereum Network’s development has been overseen by the Ethereum Foundation and other core developers. The core developers evolve over time, largely based on self-determined participation. To the extent that a significant majority of users and miners adopt amendments to the Ethereum Network, the Ethereum Network will be subject to new protocols that may adversely affect the performance of the network. If a significant majority of users and miners adopt amendments to a decentralized network based on the proposals of such core developers, such network will be subject to new protocols that may adversely affect the functionality of the Protocol.

• SCALABILITY - Many digital asset networks face significant scaling challenges due to the fact that public blockchains generally face a tradeoff between security and scalability. One means through which public blockchains achieve security is decentralization, meaning that no intermediary is responsible for securing and maintaining these systems. For example, a greater degree of decentralization generally means a given digital asset network is less susceptible to manipulation or capture. In practice, this typically means that every single node on a given digital asset network is responsible for securing the system by processing every transaction and maintaining a copy of the entire state of the network. As a result, a digital asset network may be limited in the number of transactions it can process by the capabilities of each single fully participating node. As of June 30, 2020, the Ethereum Network could handle approximately 13 transactions per second. In an effort to increase the volume of transactions that can be processed on a given digital asset network, many digital assets are being upgraded with various features to increase the speed and throughput of digital asset transactions. As of December 31, 2022, the Ethereum Network handled approximately 10 transactions per second. In an effort to increase the volume of transactions that can be processed on a given digital asset network, many digital assets are being upgraded with various features to increase the speed and throughput of digital asset transactions. For example, in 2023, the Ethereum Network may begin the final stages of a series of upgrades initially referred to as Ethereum 2.0 that include sharding. As corresponding increases in throughput lag behind growth in the use of digital asset networks, average fees and settlement times may increase considerably. For example, the Ethereum Network has been, at times, at capacity, which has led to increased transaction fees. Since January 1, 2020, ETH transaction fees have increased from $0.08 per ETH transaction, on average, to a high of $200.27 per transaction, on average, on May 1, 2022. As of December 31, 2022, ETH transaction fees stood at $2.73 per transaction, on average. Increased fees and decreased settlement speeds could affect the scalability of the Protocol. There is no guarantee that any of the mechanisms in place or being explored for increasing the scale of settlement of Ethereum Network transactions will be effective, or how long these mechanisms will take to become effective, which could adversely impact the functionality of the Protocol.

• 50% ATTACK - If a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority of the validating power on the Ethereum Network, it may be able to alter the Ethereum Blockchain on which transactions in ETH rely by constructing fraudulent blocks or preventing certain transactions from completing in a timely manner, or at all. The malicious actor or botnet could also control, exclude or modify the ordering of transactions. Although the malicious actor or botnet would not be able to generate new tokens or transactions using such control, it could “double-spend” its own tokens (i.e., spend the same tokens in more than one transaction) and prevent the confirmation of other users’ transactions for so long as it maintained control. To the extent that such malicious actor or botnet did not yield its control of the validating power on the Ethereum Network or the ETH community did not reject the fraudulent blocks as malicious, reversing any changes made to the Ethereum Blockchain may not be possible. Further, a malicious actor or botnet could create a flood of transactions in order to slow down the Ethereum Network. Although there are no known reports of malicious activity on, or control of, the Ethereum Network, it is believed that certain groups of coordinating or connected ETH holders may together have more than 50% of outstanding ETH, which if staked and if the users run validators, would permit them to exert authority over the validation of ETH transactions. This risk is heightened if over 50% of the processing power on the network falls within the jurisdiction of a single governmental authority. If network participants, including the core developers and the administrators of validating pools, do not act to ensure greater decentralization of ETH, the feasibility of a malicious actor obtaining control of the validating power on the Ethereum Network will increase, which may adversely affect the security of the Protocol.

• FORKING RISK - The Ethereum Network operates using open-source protocols, meaning that any user can download the software, modify it and then propose that the users and validators of ETH adopt the modification. When a modification is introduced and a substantial majority of users and validators’ consent to the modification, the change is implemented and the network remains uninterrupted. However, if less than a substantial majority of users and validators’ consent to the proposed modification, and the modification is not compatible with the software prior to its modification, the consequence would be what is known as a “hard fork” of the Ethereum Network, with one group running the pre-modified software and the other running the modified software. The effect of such a fork would be the existence of two versions of ETH running in parallel, yet lacking interchangeability. For example, in September 2022, the Ethereum Network transitioned to a proof-of-stake model, in an upgrade referred to as the “Merge.” Following the Merge, a hard fork of the Ethereum Network occurred, as certain Ethereum miners and network participants planned to maintain the proof-of-work consensus mechanism that was removed as part of the Merge. This version of the network was rebranded as “Ethereum Proof-of-Work”. A fork may also occur as a result of an unintentional or unanticipated software flaw in the various versions of otherwise compatible software that users run. Such a fork could lead to users and validators abandoning the digital asset with the flawed software. It is possible, however, that a substantial number of users and validators could adopt an incompatible version of the digital asset while resisting community-led efforts to merge the two chains. This could result in a permanent fork. A future fork could create complications that adversely affect the operation of the Protocol. In the event of a fork, the Protocol will use its discretion to determine which network should be the appropriate network for the Protocol's purposes and may not have the ability to ensure that forked collateral assets will be accessible.

• SMART CONTRACT RISK - Moreover, in the past, flaws in the source code for digital assets have been exposed and exploited, including flaws that disabled some functionality for users, exposed users’ personal information and/or resulted in the theft of users’ digital assets. The cryptography underlying ETH could prove to be flawed or ineffective, or developments in mathematics and/or technology, including advances in digital computing, algebraic geometry and quantum computing, could result in such cryptography becoming ineffective. In any of these circumstances, a malicious actor may be able to exploit or hack the Protocol. Moreover, functionality of the Ethereum Network may be negatively affected such that it is no longer attractive to users, thereby dampening demand to support the Ethereum Network. Even if another digital asset other than ETH were affected by similar circumstances, any reduction in confidence in the source code or cryptography underlying digital assets generally could negatively affect the demand for digital assets and therefore adversely affect usability of the Protocol.

• ILLICIT ACTIVITIES - The Protocol uses third-party services to screen prospective users of the protocol against various watch lists, including the Specially Designated Nationals List of the Treasury Department Office of Foreign Assets Control (“OFAC”) and countries and territories identified as non-cooperative by the Financial Action Task Force. If a user were nevertheless to transact with such a sanctioned entity user would be at increased risk of potential criminal or civil lawsuits.