Most recent update: [March 11th , 2022]
No securities regulatory authority has expressed an opinion about the Crypto Contracts or Kusama, made available on the VirgoCX Platform, including an opinion that Kusama is not itself a security and/or derivative.
What Is Kusama (KSM)
Kusama often called Polkadot’s “wild cousin,” is a side project of Polkadot, which counts as one of the most successful interoperable blockchains, the two share the same codebase. Kusama’s goal is to provide a scalable blockchain platform that enables developers from different chains to deploy their applications. Kusama has been created on Substrate, which is a blockchain building kit created by Parity Technologies.
Projects that deploy on Kusama are able to access an interoperable, highly scalable, and sharded network that has features not yet available on Polkadot, this is why Kusama is often described as a Canary network for Polkadot, as projects on Kusama gain access to features not yet deployed on Polkadot. The Kusama platform is designed to provide a testbed for developers looking to deploy their own blockchain and use Kusama as a test platform before deploying on Polkadot. Many projects prefer Kusama to launch their final project or application. Kusama has a significantly low barrier for entry when it comes to deploying parachains, it also has low bond requirements for validators and is traditionally used by startups and projects that want to indulge in experimentation.
How Does Kusama Work?
Kusama functions similarly to Polkadot, except that it is much faster than the latter. Users on Kusama have access to a wide array of features and innovations such as forkless on-chain updates, on-chain governance, and XCMP or cross-chain message passing. Kusama’s governance mechanism is entirely permissionless and decentralized, with KSM token holders having a significant say in the future platform’s longevity, allowing it to evolve consistently.
As mentioned earlier, Kusama is similar to Polkadot, and like Polkadot, it consists of two chains.
- The Relay Chain - The Relay Chain is Kusama’s main blockchain, it is on this blockchain that all transactions on Kusama are finalized. The Relay Chain uses parallel processing, which allows it to process transactions from all chains on the ecosystem simultaneously, giving it unprecedented scalability.
- Parachains - Parachains are custom blockchains that are created and deployed by developers. Parachains use the computing resources of the Relay Chain to confirm transactions and are highly specialized and interconnected, allowing them to create a thriving ecosystem. Kusama parachains are also highly interoperable, allowing seamless data transmission between each other. Substrate helps developers to quicken the process of creating and maintaining parachains, making them more accessible.
User roles on Kusama and Polkadot are also very similar.
- Builders - Users that create parathreads, parachains, and other network features are known as builders.
- Validators - Validators are users that validate data in parachain blocks, validators also participate in consensus and can vote on any proposals or changes on the network.
- Nominators - Nominators are users that secure the Relay Chain by selecting validators. These users allocate their votes to validators by delegating their staked KSM tokens to them.
- Collators - Collators connect the parachain to the Relay Chain by staking their KSM tokens and creating blocks that contain updated transactions.
- Governance actors - These are the users that are responsible for the future direction of Kusama.
History Of Kusama
Kusama was launched in 2019 as a parallel and complementary network to the Polkadot network, both projects have almost similar code bases and identical structures. The critical difference between Polkadot and Kusama is speed, with Kusama allowing developers to deploy their projects and any updates at much faster speeds than Polkadot. DOT Indicator token holders were able to claim their KSM tokens in July 2019 through an Ethereum transaction, this allowed them to be part of Kusama’s Genesis block.
Kusama was then launched a little over a month later with Proof-of-Authority. The only validators that could generate blocks were those that the Web-3 Foundation and Parity ran. The only functionality available on Kusama at that time was intended to allow potential validators to signal their intent to validate. Kusama transitioned to Proof-of-Stake after a couple of months, with the network currently running with 130 validators.
Founders Of Kusama
Kusama was built by the team behind Polkadot, Parity Technologies, it was founded by Dr. Gavin Wood, co-founder of Ethereum and a renowned programmer and computer scientist. The team behind Kusama consists of some of the world’s pioneering blockchain engineers and is funded by grants from the Web-3 Foundation, the foundation also supports Kusama with community development and research initiatives.
Unique Features Of Kusama
Kusama’s key selling point is that it is a blockchain created predominantly for developers, allowing them to test their projects on the network. The platform uses a Nominated Proof-of-Stake consensus mechanism and utilizes a heterogeneously sharded design. The Nominated Proof-of-Stake is a variation of Proof-of-Stake and is usually utilized in Substrate-based blockchains, Kusama can also perform upgrades without undergoing a hard fork and enable cross-chain message passing, facilitating communications between parachains on Kusama.
Kusama also features decentralized and permissionless on-chain governance, allowing KSM token holders to vote on governance proposals or any critical updates and changes on Kusama. The on-chain governance on Kusama is much faster than that on Polkadot, allowing projects to develop at an extremely rapid pace on Kusama.
How Is Kusama Secured?
Kusama uses a variation of the Proof-of-Stake consensus mechanism, known as Nominated Proof-of-Stake (NPoS). Nominated Proof-of-Stake uses nominators (users who have staked KSM) who elect nodes to participate in the validation process, nominators are rewarded if their nominator is selected. Any validator that does not meet the required performance metrics or act maliciously or dishonestly has their stake slashed.
Kusama also utilizes a queuing mechanism based on Merkle trees to resolve cross-chain transactions. The nominators are responsible for shifting a transaction from the output queue to the input queue on the target parachain.
Currently, there is a total supply of 9,651,217 KSM and a circulating supply of 8,470,098 KSM, however, the maximum supply of KSM tokens is not fixed and instead increases at a rate of 10% per year. The distribution of the newly minted KSM token depends on the proportion of the staked KSM tokens, if half of all KSM tokens are staked, then validators receive 100% of the newly minted tokens. However, if the amount of tokens staked is above or below 50%, then the Kusama Treasury ends up receiving a part of the inflation rewards.
Kusama was initially launched as an airdrop available to users that participated in the Polkadot token sale, the tokens were distributed 1:1. Users without DOT tokens were able to access KSM through a frictional faucet, which has since been discontinued. Kusama has also not undergone any redenomination, unlike Polkadot.
Risks Associated With Kusama
Like any project, Kusama does have risks associated, some may view Kusama’s role in taking on risk from Polkadot as a risk. In order to mitigate risks from the Polkadot blockchain, Kusama has to take on added risk, and projects on Kusama could be at risk due to any potential issue that could be caused by a test carried out by another chain or by Kusama itself. With blockchain being hyper innovative, there could be technical glitches that could affect parachains on Kusama. However, most of the risks on Kusama are those that other blockchains are at risk from as well.
Prior to listing Kusama on the VirgoCX Platform, VirgoCX performed due diligence on Kusama and determined that Kusama is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:
- The creation, governance, and location of Kusama and/or its primary development team;
- The supply, demand, maturity and liquidity of Kusama; and
- Legal and regulatory risks associated with Kusama.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.