Kava: A DeFi Winner

Kava: A DeFi Winner

After over 4 years now, DeFi shows no signs of slowing down. A clear winner in the DeFi space is Kava–a place where you can earn, borrow, or exchange assets; a digital exchange and bank merged into one app. It has helped expose non-Ethereum assets to DeFi because it's a cross-chain by design. Let's delve straight into the origins of Kava and how it can improve your crypto portfolio!

The History of Kava

The project launched its Kava token at the end of October, 2019 on the Binance ecosystem as a Binance Chain Evolution Proposal 2 (BEP2) token. It was backed by the likes of Binance, Ripple, Cosmos, and others. Kava launched their mainnet on the 14th of November, 2019 and with it moved away from the BEP2 standard.

The first product introduced was Kava Mint, where users were able to mint the Kava stablecoin USDX. Although unstable at the start, Kava's vision was to offer people lending and borrowing services to stabilise it. Kava later introduced the Kava Swap platform to do this.

Kava Swap's biggest advantage over the competition is that it unlocked liquidity beyond the Ethereum ecosystem. You're for the first time able to make decentralized loans backed by crypto-assets outside the Ethereum ecosystem, like Bitcoin (BTC), Ripple (XRP), Cosmos (ATOM), and Binance Coin (BNB).

On June 10th 2020, the Kava 3 mainnet upgrade was completed and in October the same year, the HARD protocol went live. The end result was Kava Lend, the first cross-chain decentralized borrowing and lending service.

On Aug 30 2021, Kava further expanded their products with the Kava Swap. It's the Automated Market Maker (AMM) of the Kava Chain or in other words a cross-chain decentralized exchange. It's simply a protocol that allows us to trade our funds instantly from a pool of shared liquidity. Liquidity providers are financially motivated to provide it.

The Team Behind Kava

The company behind Kava is Kava Labs. The CEO and Co-Founder of Kava Labs is Briar Kerr. Brian is a well-known venture backed entrepreneur. He started his career as the Founder of Fnatic Gear, valued at $175 million by Forbes. He also works on an advisory board of several blockchain projects. The rest of the team members also have strong experience, coming from analytics, development, and managing projects, which composes a well rounded team.

Head and shoulder photo portraits in black and white of six key personnel of Kava Labs. These are shown in a grid layout style of three columns and two roles. From top-left to bottom-right the core team members include; CEO Brian Kerr (Head of Product), Scott Stuart (Co-Founder), Ruaridh O’Donnell (Lead Software Engineer and Co-Founder), Kevin Davis (Senior Engineering Manager), Stand Press (Head of Marketing), and Aaron Choi (Head of Business Development in Asia).

What is Kava?

Besides coffee in some countries, Kava is an all-in-one cross chain DeFi hub that provides seamless DeFi integration to most major crypto assets. Their purpose is to open up DeFi to liquidity of other crypto assets, while providing the low gas fees, guaranteed by the Cosmos network.

Consensus Mechanism

The Kava blockchain is built on the Cosmos network, so it uses the same consensus method, namely Tendermint. It also uses the Practical Byzantine Fault Tolerance (PBFT) consensus mechanism for Proof-of-Stake tokens. The Kava network can assign new block generation randomly through validators, using a multi-round voting process. The proposed block is then confirmed and completed if a ⅔ supermajority of validators agree on it. Here are some reasons why this is important:

  • Fast settlement: only around 1 second to complete a transaction (Ethereum takes 6 minutes, Bitcoin 1 hour)

  • Short blocktimes: 1-3 seconds

  • High throughput: 10,000 transactions per second (tps)

  • Does not allow for incorrect transactions: If they incur, the system will stall until the problem is solved

How does it work?

The Kava app offers you 3 main services - minting, lending, and swapping. You can log in with one of the 3 currently supported wallets to use these. Trust Wallet and Keplr are online wallets which offer convenience, while Ledger is a hardware wallet enabling you to take your crypto offline.

Kava Mint

Kava Mint was the first application offered on the Kava platform. It allows you to mint USDX, Kava's stablecoin pegged to the US dollar.

You can deposit any of the many supported crypto-assets to your Kava wallet to do this. You can then create a collateral debt position (CDP). This means you can open a request on the protocol where you put up your collateral to mint (i.e. borrow) a certain amount of USDX.

You must provide more funds than you'll take out due to the decentralized nature of the lending. In other words, the lenders' position must always be secured by collateral, otherwise the protocol can't guarantee the safety of the lenders' funds.

Once the CDP is closed, either by liquidation or by user closing it, the position is closed and a small amount of Kava is burned as a stability fee. This fee differs from asset to asset.

A schematic of the Kava crypto-asset handling process. Image shows several stages including crypto depositing, creation of stable coins, auctions and returned crypto.

Another important factor we have to take into account is the asset price fluctuation. It's unrealistic to back the loans by 1:1 ratio since crypto assets are of the more volatile nature. The best way to explain this is with a simple example:

Say you want to take out a loan, backed up by 1 BNB on your account, at the time worth 500$. If 1:1 loans were acceptable, you would be able to mint 500$ worth of USDX. The next day, there would be a market crash and the price of BNB would fall to 400$. From the moment the price of BNB falls below your loan value of 500$, your 1 BNB isn't enough to cover the costs of your 500 USDX minted and you would have to get liquidated.

All USDX minted (borrowed), must be overcollateralized to prevent this from happening. The minimum crypto collateral, measured in USD, must be at least 1.5x of the USDXs minted. That said, it's strongly recommended to keep it minimally above 2.75x. It's important to know how to calculate your ratio. Let's look at another example:

Your collateral is worth:

5 KAVA · 5.44 USD/KAVA = 27.2 USD

Your mint costs:

9.88 USDX ≈ 9.88 USD

The ratio is in this case:
27.2 USD / 9.88 USD ≈ 2.75

If the price in the example above falls to the liquidation price of 2.96 USD, the collateral of 5 KAVA tokens is worth now:

5 KAVA · 2.96 USD/KAVA = 14.8 USD

The ratio threshold of your liquidation is then roughly 1.5x:

14.8 / 9.88 ≈ 1.5

If you need a more detailed explanation, you can refer to the Official Kava Medium blog.

Kava Lend

Kava Lend is a decentralized money market built on the Kava platform. It enables the lending and borrowing of cross-chain assets, like BTC, XRP, BNB, and Binance USD (BUSD) as well as Kava's USDX, KAVA, SWP, and HARD.

The HARD token is the native governance token of the Kava Lend. All HARD tokens are distributed in the form of rewards and are locked by a smart contract. Investing the HARD token for a longer time will generate you better rewards.

In order to test out Kava Lend, we supplied 5.4 KAVA tokens worth of liquidity. We immediately started to earn HARD tokens as a reward without any time restrictions, like with staking. The liquidity you supply can also be leveraged to take out a loan against it. You just click Borrow / Repay and you can borrow approximately 50% of the collateral - it's just that easy!

Kava Swap

Kava Swap, introduced in Q3 last year, added another critical dimension to the Kava project - exchanging. The protocol leverages the Kava infrastructure, cross-chain bridges, and security. Its aim is to provide fast, easy, and cheap exchange of assets without having to leave the Kava ecosystem.

Here are the 2 main things you can do on the Kava Swap:

  • Swap assets: you can exchange cross-chain assets that are offered.

  • Supply liquidity: like all AMMs, Kava Swap needs liquidity providers as well.

Each application on the Kava platform works in tandem with the others. You can create a CDP to mint the USDX, which you can then place in Kava Lend to earn HARD or use to purchase other assets on the Kava Swap. Kava Swap was a necessary building block along the way, as users now don't have to leave the Ecosystem in order to properly manage their minting or borrowing.

Let's take a look at how Kava compares to arguably its biggest competitor - MakerDAO.

How does Kava compare to MakerDAO?

MakerDAO is a decentralised autonomous organisation (DAO) built on the Ethereum network. The cryptocurrencies used on the platform are MKR and DAI, which are the governance token and the stablecoin respectively. Although you could exclusively put Ethereum as collateral, the platform evolved with the eventual introduction of multi-collateral DAI. Let us take a look at how the 2 compare.

MakerDAO

Kava

Services

Mint (Borrow)

Mint, Borrow, Lend, Swap

Fees

Medium - High

Very Low

Transaction Time

~6 minutes

1-3 seconds

Battle-Tested

More

Less

Stablecoin

Stable

Unstable

Both platforms offer you the stablecoin for their platform, pegged to the USD, Maker's DAI and Kava's USDX. Both support several different assets while they differ in their risk fee. Both projects have a governance component; the MKR and KAVA tokens offer voting rights to the MakerDAO and the Kava project, respectively.

That said, the KAVA token is a staking asset used for network security, unlike MKR. Users stake KAVA to validators, which are dedicated nodes that propagate blocks.

On the other hand, the MakerDAO with its DAI is far more battle-tested than the Kava platform. MKR is also listed on a wider array of exchanges, where the main volume for KAVA comes from Binance.

Tokenomics

KAVA token

KAVA is the native token behind the Kava ecosystem. KAVA is a proof-of-stake token. Holders have the potential to earn 3%-20% depending on how much is staked in the network. Its target inflation rate is 7%, which equates to approximately ⅔ of the total Kava supply being staked.

Kava Tokenomics

Genesis supply

100 million KAVA

Current total supply

157 million KAVA

Market cap

620 million USD

Total value locked (TVL)

390 million USD

Besides inflationary, Kava also has deflationary mechanics - namely the burning of Kava in the form of a stability fee, when repaying a CDP.

USDX stablecoin

The Kava stablecoin USDX is a critical component in the ecosystem. Stablecoins are a special class of cryptocurrency pegged to and backed by a reserve asset. Typically, it's pegged to 1 USD. It's of the utmost importance that the USDX justifies the adjective stable in stablecoin since Kava Mint's main purpose is to mint USDX.

Having an unstable stablecoin can be a big deterrent for new participants, since they're taking on more risk than they should have. If the current price of 1 USDX is 0.95 USD, this means that if you take 100 USDX, it's like taking a 95 USD loan. If the USDX price rises to 1 USD, your USDX-denominated loan has now risen from 95 to 100 USD. 5 USD may not sound much, but with big money involved it's an unnecessary risk the user should be free from.

The chart shows the movement of the USDX price, measured in USD. Before Kava Lend was introduced, the prices ranged from 0.7 to 0.8 USD. Ever since then, the price has been closer to 1 USD, however quite large deviations have occurred over the past 6 months as well.

As we can observe, the USDX only started to resemble a stablecoin after the implementation of the Kava Lend. It has since been oscillating around the 1 USD mark, however the volatility is still quite high and it's not that uncommon to see prices as low as 0.95$.

There have been several propositions by the community, including taking the Terra Luna project as an example. The idea was that users should be able to exchange the USDX to KAVA, where 1 USDX would be artificially priced at 1 USD, irrelevant of the real price at the moment. That said, if the price of USDX is above the 1 USD peg, users can mint more USDX and use it to purchase KAVA cheaper on the Kava Swap.

HARD token

HARD token is the governance token of the Kava Lend. Holders have responsibility to manage key parameters of the protocol like what assets are offered, the rewards' distribution, platform fees, etc. you can earn HARD as a reward to lend out your assets.

When designing the Kava Lend, the team contemplated if you can use the KAVA token to govern the Kava Lend as well. The 3 major obstacles that prevented this were:

  1. Development of Kava Lend is needed according to the active Kava Lend participants.

  2. Clear supplier / borrower incentives is a must. If KAVA token was to be used as a governance token for the Kava Lend, the team argues would have to inflate the supply of the KAVA token upwards of 50%, beyond a healthy, rational degree.

  3. KAVA token needs to be preserved as the platform's reserve asset, responsible for the recapitalisation of the Kava Lend platform. If other functionalities were randomly assigned to the token, it could create a cascade of problems and could undermine its value.

There will be a max supply of 200 million HARD tokens. Kava team decided that in order to ensure a fair distribution of the token, there won't be any seed or private sale. In total, 80 million HARD tokens were distributed, while the rest are being gradually released each month. For a more detailed release schedule, see the official spreadsheet.

The HARD distribution is as follows: 40% will be reserved for incentives, 25% for treasury, 20% will be rewarded to KAVA stakers and 10% to the team. Finally, 5% was offered at an IEO.

Kava Swap token

The governance token of the Kava Swap is SWP. In the first year of the launch, 24 million SWP tokens altogether will be distributed as rewards to the liquidity providers. The majority of the rewards will reward liquidity providers from pools containing the native Kava ecosystem tokens, like the KAVA-USDX and SWP-USDX.

Altogether 250 million SWP tokens were minted with the genesis block, which will be released over a 4-year period. The initial SWP token allocation is as follows:

55% will be given out to the community, 25% will be reserved for treasury, the team will receive 15% and the last 5% will be used to grow the ecosystem.

No seed or private sale of the SWP token happened to ensure a fair distribution of the token.

How can I make money on Kava?

1. Supplying liquidity on Kava Swap

Another way for you to make some passive income opportunities is to provide liquidity (LP) on the Kava Swap. To do that, tap Add on any pair of assets you want to provide liquidity for. You have to provide both assets in a 1:1 ratio.

Switch to the Liquidity tab and input the amount of any one of the two assets. The other one will be automatically calculated. Confirm the transaction and you'll start earning. That said, providing liquidity on any decentralized exchange comes at some unique risks. Besides a rug-pull (stolen funds), impermanent loss can also affect you.

The ratio of the funds in a pool must always stay 1:1. If the price of KAVA drops, this means more KAVA and less USDX in the pool. If you were to remove your liquidity, you would have proportionally more KAVA and less USDX.

2. Lending assets

You can also lend out any of the assets supported on the Kava Lend. The good news is, you can opt out at any moment, no time limit exists to it. If you want an optimal APY, check the current rate for each asset.

The net lending APY for KAVA, which is at the time of writing at approximately 59%. Not bad, considering there are no time restrictions.

3. Staking KAVA

It has become very easy to stake KAVA. You can do it straight out of your Trust or Keplr wallet. Click on staking, specify the amount of KAVA you want staked, and start earning passive income! Keep in mind, it takes 21 days to unstake your Kava, so always keep a little bit extra in your wallet to manage any payments.

What the Future Holds

Kava 9 update

The team provides little information about their future roadmap, but we know that the Kava 9 update is at the time of writing less than 48 hours away from being implemented on the mainnet. The update was successfully implemented on the testnet and will go live on the mainnet on 19 January, 2022 at 16:00 UTC.

Kava mainnet will upgrade to version 44 of the Cosmos SDK (software development kit). The Inter-Blockchain Communication protocol (IBC) will connect the Kava ecosystem to all IBC-enabled chains and possibly bring some new liquidity into it. The core infrastructure for the bridge between Ethereum and Kava is being implemented. Although the main focus will be on fully enabling IBC, it's clear that tapping into Ethereum's liquidity is next. For more information, you can check their Medium blog post.

Strengths and weaknesses

The idea that gave birth to the Kava project is simple, yet groundbreaking. That said, having a good idea is one thing, but writing a success story with it is another. It's important to look at the project as a whole in order to be able to get a more wholesome picture.

Strengths

Weaknesses

Cheap transactions, high speed, and fast finality: low gas fees and high throughput makes for an extremely pleasurable experience on the Kava Swap platform.

USDX stability: a current obstacle the team will have to tackle before larger adoption and usage occurs.

Beautiful app, nice visuals: beautiful colours with user-friendly modern dAPP.

Centralised liquidity: most of the volume of the KAVA traded comes from the Binance exchange. This questions the efficiency of the current voting system.

Experienced team: well-rounded to be able to make the project successful in the long term.

Poor communication: the whitepaper needs more detail added to help developers along with better website updates on progress.

Utility: it enables users to conduct DeFi with non-Ethereum based crypto-assets and provides extremely low transaction fees and fast processing.

Relatively small: some investors will recognise this as an opportunity, but others will be put off by the increased risk to the project.

Besides internal, external forces are also at play and only time will tell which project has the determination, skill, and luck to make it in the big league.

The Final Word

Despite its challenges, Kava shows promising potential. It's solving a few problems while providing easy-to-use DeFi exposure to a significant chunk of liquidity at the same time. It's a go big or go home project. The team is aiming for the former, but going big comes with big challenges. The road travelled isn't an easy one. Even if they keep delivering on their promises, a certain chance that a project fails is always there due to completely random reasons. If you're interested to find out more about Kava, check out the exciting links below!

FAQs

What is Kava?

Kava is a cross-chain DeFi platform that includes minting, lending, borrowing, and swapping. It's like the MakerDAO, Aave, and Uniswap for multiple chains all in one app.

What tokens and assets are supported in the Kava app?

Besides its native assets - KAVA, USDX, HARD, and SWP, the Kava app also supports BNB, BUSD, and the BTCB and XRPB which are Binance Smart Chain tokenized representations of BTC and XRP respectively.

How can I make money on Kava?

You can stake KAVA in your wallet, lend assets on Kava Lend, provide liquidity on Kava Swap, or mint USDX to increase your returns from your DeFi pursuits.

Kava is built with the Cosmos SDK. What benefits does that bring?

The nature of the Cosmos' consensus mechanism allows for fast block time (1-3 seconds), fast finality (1 second), and high throughput (10,000 tps), which result in cheap transactions.

Will Kava moon?

Nobody can see the future. Like all projects, investors have to decide what their optimal risk-reward ratio is and manage their investments accordingly.

Resources

DeFi refresher

Some points in this article were quite technical and if you didn't quite understand it all, we have you covered. Here is a quick DeFi refresher to jog your brain.

Atomic Wallet's Website

Visit the Atomic Wallet website to get started with a crypto-wallet. You can use it to buy and store all your crypto-assets conveniently all from one site.

Atomic Wallet's Latest Blogs

We provide you with the latest news from the world of crypto here.

Is Zilliqa the Next Kava?

If you're interested in new investment prospects, perhaps check out Zilliqa (ZIL) and how it made great returns over the past year here.

Kava Labs Medium Blog

If you're interested in Kava, make sure you follow their Official Medium Blog.

Kava's Official Website and Application

Visit the official Kava page or the Kava app directly to start your Kava DeFi experience.

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