Overview
A purchase of index tokens (NORM) is subject to a variety of risks, which could cause the index token to lose value over short or long periods of time or be subject to operational disruptions. You should expect the index token's price and total return to fluctuate within a wide range. Index tokens are subject to the following risks, which could impact index token's price and performance.
2
Principal Strategy
The index token uses an indexing approach that may be subject to errors in data, methodology and/or assumptions, which could negatively impact the value of the index token.
The index token is designed to track the top 50 crypto assets by market cap and enable broad-based exposure to the entire crypto asset category with a single ERC-20 token. A complete look at index token asset exclusion and inclusion criteria can be found in the Normal documentation. By receiving exposure to the index token, you receive exposure to the underlying 50 assets (currently only 18) that are tracked by the index. The index token exclusion and inclusion criteria is based on various inputs which may include price data from various third-party exchanges and markets as well as supply data. These inputs may be subject to technological error, manipulative activity, or fraudulent reporting from their initial source. The index is based on a flexible set of rules, and includes certain assumptions that may be flawed and/or may adversely impact the index's ability to accurately establish or maintain an index of top cryptocurrencies. The failure of one or more of the assumptions built into the index methodology could have an adverse effect on the index token and its corresponding value.
3
Market Price vs. Net Asset Value (NAV) Risk
The Net Asset Value of the crypto assets held by the index token may deviate from the price of the index token, and so there are times when the index token may trade at a premium or a discount to the underlying assets.
Net Asset Value (NAV) is the market value of all the crypto assets tracked by the index and held by the index token. Due to changes in the supply or demand for the index token at any single point in time, the price of one NORM may deviate from the NAV of the index. Although it is expected that the market price of an index token will approximate its NAV, there may be times when the market price and the NAV differ significantly on secondary markets. Thus, you may pay more or less than NAV when you buy the index token on the secondary market, and you may receive more or less than NAV when you sell those tokens.
Index tokens are fully redeemable for their underlying assets. This means an investor in the network is able to redeem the underlying in-kind crypto assets or their equivalent market value in the event index token price deviates with a discount to NAV, enabling them to arbitrage the price back from its NAV deviation.
4
Crypto Market Risk
The index token reflects the market activity of the crypto assets it tracks, including price fluctuations and illiquidity.
The crypto asset category is known for both price volatility and events of reduced liquidity. These market conditions may result from a variety of factors, including supply and demand, change in interest rates or currency exchange rates, governmental developments, and consumer preferences. These factors may not impact all crypto assets equally. The market tends to move in cycles, with prolonged periods of rising and falling prices. The goal of the index token is to mirror the overall crypto asset market, which means that the Net Asset Value of the index token and its market price are subject to these same fluctuations in value.
5
Index Sampling Risk
The index methodology, including the selection of the underlying crypto assets and rebalancing / reconstituting the index portfolio, may negatively impact tracking efficiency, impacting the value of the index token in comparison to other assets.
While the goal of the index token is to track the broader performance of the crypto asset category, limitations in asset selection and index rebalancing/reconstitution may result in lower tracking efficiency with the broader market. At any given time, the index, and the corresponding holdings of the index token, may under-represent digital assets that are increasing in value and/or overrepresent digital assets that are declining in value. Should this be the case, the index token may underperform relative to other instruments that do invest in such digital assets and use a different methodology.
The index token employs a perpetual rebalancing algorithm directing deposits and withdrawals to the most optimal crypto asset. This algorithm creates the ability to rebalance the index token holdings on a continual basis. However, the index weights applied to each crypto asset may be updated less frequently, meaning that rebalancing that could achieve more favorable results for index token-holders may occur on a delayed basis. This could have an adverse effect on the index token and on the value of an investment in the index token.
6
Wallet Risk
Accessing the Normal platform, along with the ability to view your balances and transactions, and make deposits and withdrawals for the index token, requires authentication via a non-custodial crypto wallet. Normal Finance has contracted with third-party service providers to enable authentication and non-custodial wallet creation for users without an existing wallet.
Non-custodial crypto wallets are secured using public key cryptography. Your private key should never be shared with anyone. Exploitation of your crypto wallets private key can lead to the loss of funds within your wallet, your index tokens, and your ability to access the Normal platform and/or redeem index tokens.
In the event the private key of your wallet is exploited, lost, forgotten, or sabotaged in any way, Normal Finance is not liable for any loss of funds, lack of access to the Normal platform, unauthorized index token redemptions, or any other damages caused by this exploitation.
7
Smart Contract Risk
The structure and function of the index token is governed by blockchain-based smart contracts, which may be susceptible to exploitation or other adverse events.
The underlying crypto assets of the index token are custodied in smart contracts. Only authorized withdrawals from investors signed by their authenticated non-custodial crypto wallet can be executed by the smart contracts. Normal is unable to withdraw or affect investors’ crypto assets in any way and is strictly limited to withdrawing the index token annual fee on a monthly basis.
The index token utilizes smart contracts to govern its architecture, execution, and custody. The index token smart contracts have not yet been thoroughly audited by external security auditors and could be exploited. If this were to occur irregularities surrounding minting, redeeming, buying, and selling index token tokens could occur. This could impact the ability of participants to create or redeem index tokens, which could impact the price at which the index token trades on secondary markets.
In the event one of these smart contracts is exploited, Normal will take necessary action to restrict any attackers access and deploy a fix to the contract. Normal maintains the authority to pause select functionality within each smart contract in the case of an emergency and will unpause this functionality once all risks have been mitigated.
Upon purchase of the Normal index token, you as the investor assume all smart contract risk and agree to not hold Normal liable for any damages. Any loss of funds due to a smart contract vulnerability is the exclusive responsibility of the investor. Normal is not responsible for the remedy of these damages, but maintains the right to issue financial remedies on a case by case basis.
8
Platform Risk
The index token operates on multiple blockchains including Ethereum, Polygon and other Layer 2 networks, as well as non-EVM networks such as Solana, Polkadot, and others. The functionality and/or value of the index token may be impacted by any changes or adverse events to these blockchains.
The index token is an ERC-20 token deployed to the Polygon blockchain. Any downtime, network congestion, or exploit impacting the Polygon blockchain could adversely impact the functioning of the index token, such as the creation and redemption of index tokens, and the value of the token.
9
Exchange Risk
The value of the index token is based on the value of its underlying crypto assets, and the value of those crypto assets is typically established by cryptocurrency exchanges and other cryptocurrency trading venues. These platforms may be subject to operational disruptions or other events or behavior that disrupt the market for, and the pricing of, those crypto assets.
Exchanges and other trading venues on which both the index token and its underlying crypto assets trade are relatively new and, in most cases, are less regulated than exchanges for securities, derivatives and other currencies. These platforms may be more exposed to adverse events and improper behavior including fraud, security breaches, and insolvency. Such events could have a significant impact on the pricing and liquidity of the index token's underlying crypto assets, which could impact the corresponding value of the index token, or the index token itself. Exchanges or other platforms may also not maintain a continuous market for certain crypto assets, including the index token. This could impact the liquidity and the corresponding price of those crypto assets and/or the index token and the operations of the index token, such as the creation and redemption process.
10
Service Provider Counterparty Risk
Normal Finance has contracted with multiple third-party service providers to provide certain operational support to the index token. These service providers could be the subject of an adverse event, such as a cyberattack, security breach or operational failure, which could impact the ability to deposit or withdraw crypto assets, and the ability to create or redeem the index token. This could impact both the value and liquidity of the index token.
Normal Finance contracts with Onramper, a service provider, to perform the following functions on behalf of Normal:
- Facilitate fiat to crypto purchases using various payment methods with delivery to the index token vault smart contracts
Normal Finance also contract with Magic, a service provider, to perform the following functions on behalf of Normal:
- Authenticate users via email, phone number, and social providers
- Create non-custodial crypto wallets for user authenticated using the methods above
- Secure and manage the private keys of these non-custodial crypto wallets
A failure to successfully perform any of the above functions could impair the ongoing operation of the index token and its corresponding value.
11
Trade Risk
When using these third-party service providers for buying and selling crypto assets, it’s important to keep in mind the change between the expected trade price and the executed price. This is known as slippage and will vary across service providers based on their liquidity partners and order execution.
Each of these service providers may also include a variety of transaction fees to trades on their platform, including, but not limited to processing fees and blockchain network fees.
12
No FDIC or SIPC Protection
Normal Finance, the Normal Index smart contracts, and any third-party crypto trading providers - such as Onramper, Coinbase, and others - are not banking institutions or otherwise members of the Federal Deposit Insurance Corporation ("FDIC") or the Securities Investor Protection Corporation ("SIPC"). The index token and its underlying crypto assets are not subject to the protections of FDIC or SIPC member institutions.
13
Regulatory Risk
As crypto assets have grown in popularity and market size, various countries and jurisdictions have begun to develop regulations governing the crypto asset industry. To the extent that future regulatory actions or policies limit the ability to buy, sell or redeem crypto assets or utilize them for payments, the demand for crypto assets may be reduced. Furthermore, regulatory actions may limit the ability of end-users to convert digital assets into fiat currency (e.g., U.S. dollars) or use digital assets to pay for goods and services. Such regulatory actions or policies could result in a reduction of demand, and in turn, a decline in the underlying digital asset unit prices, and a corresponding decline in the value of the index token.
14
Annual Total Returns
The index token will hold investments that track the index regardless of current or projected performance of the index or of the actual crypto assets that are held. Past performance of any of the underlying crypto assets or of the index is not indicative of future results of those crypto assets or of the index.
15
Tax Information
Prior to any decision to purchase the index token, it is recommended that you consult a tax professional to determine the tax implications of buying, holding or selling the index token.If you sell, exchange, or spend cryptocurrency, you may also have to pay capital gains tax on any profit you made from the transaction. It is important to keep accurate records of your cryptocurrency transactions and report them accurately on your tax return to avoid penalties and interest. Please consult a tax specialist to find out about your unique tax situation.