What is Kava: Just another DeFi platform, or something bigger?

In an expanding industry, Kava goes where the competition does not. Is it enough to stand out?

Various tokens and 'DeFi' logo intermingling with each other – Photo: Shutterstock                                 
Among the clutter, what does Kava need to succeed? – Photo: Shutterstock
                                

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With new decentralised finance (DeFi) projects seemingly entering the market every week, newcomers need to bring something different to the table in order to stand out from the pack.

The Texas-based Kava, and its eponymous stablecoin, KAVA, is one such company trying to make its mark. With a permissionless blockchain built on Cosmos and Tendermint protocols, its own native USDX stablecoin product and collateral support for a multitude of cryptocurrencies, Kava’s decentralised lending and borrowing platform certainly has some notable features.

But what is Kava promising that DeFi competitors are not? How does Kava work and what is the KAVA coin used for? We unravel these questions and plenty more in our ultimate guide below.

Cutting through the coin jargon

KAVA, USDX, HARD, SWP… Why does Kava have so many native tokens and what on Earth is the point of them? Let’s have a brief overview first.

The KAVA coin is the main fuel that runs the Kava ecosystem. It is a governance token that allows token holders to vote on blockchain administration. It is also the currency used as rewards for Kava blockchain validation nodes. KAVA is the primary token of utility in the Kava network.

USDX is a stablecoin used for borrowing and lending on the Kava DeFi platform. Users must first convert their currency to USDX before taking advantage of lending and borrowing products. Any stablecoin must be pegged to something of value, and USDX does this in the form of collateralised debt positions (CDPs), which will be explained soon.

The Kava Swap (SWP) token is used for governance on the Kava Swap liquidity platform. It is also used to pay out APR rewards for those providing said liquidity.

HARD is another governance token, used for voting on the administration of Kava’s lending platform. It is also used to pay out APR rewards for those funding the borrowing pool.

So why so many different tokens? It seemingly allows for separate tokenomics on the various DeFi products rolled out by Kava, easing pressure on the main KAVA coin. If KAVA was used as rewards for each of these products, inflation could spin out of control.

While the multitude of native tokens might be confusing, Kava does a good job of allowing easy interoperability on the app. All of the above can be minted into USDX to get cracking with the DeFi products available.

What are collateralised debt positions (CDPs)?

CDPs are what make Kava a workable DeFi platform. They allow holders of crypto assets to issue their own debt positions. Here’s how it works: A user converts their held coins (Kava accepts any native Kava token, Ripple, Binance coins and Bitcoin’s Binance-pegged BEP2 coins) into UDSX (Kava’s very own stablecoin) via Kava Mint. When coins are converted into USDX, the original coins are locked.

From there, USDX can be deployed as collateral on Kava Lend, earning rewards in turn. Once you have deployed your USDX as collateral for others to borrow, you can then borrow a percentage of what you have collateralised. Ratios vary depending on the asset used to mint USDX. This is a way of further enhancing what you can earn from your initial held assets.

In short, CDPs provide lending and borrowing opportunities for crypto asset holders who want to earn APR rewards. Be careful: This always comes with risk. If your debt ratio is reached, your collateral will be liquidated.

Flowchart of how a CDP works – Photo: research.binance.com
There is a flow to how CDPs work. Photo: research.binance.com

Stablecoins have had some controversy of late. Tether (USDT) came under intense scrutiny after it was discovered that its fiat-backed reserves were greatly exaggerated. In short, its initial claim that each USDT was backed 1:1 by an actual US dollar was basically not true.

While Kava is by no means risk-free, CDPs are pegged to the dollar in a different way, since Kava is over-collateralised. This means that lending positions are opened with more collateral than what is deployed for lending. It is this debt that USDT is pegged to. Tether was scrutinised for pegging USDT to unsecured debt (in essence, there was nothing really there), whereas Kava’s debt-liquidation mechanism sounds, at face value at least, more secure.

Once a user’s wallet is connected to Kava (an easy process enabled through the homepage), users can start making use of Kava’s minting, lending and swapping features.

Kava Swap: the automated market maker

Because we are talking about DeFi here, Kava empowers users to establish decentralised liquidity pools, where previously a centralised exchange (such as Binance) would be used. This is called an automated market maker, and they are becoming very popular.

Users can create and add to liquidity pools using any supported asset type. Any DeFi platform requires healthy liquidity pools to run successfully. Below, you can see a rundown of the liquidity pool volumes as of 13 December. The Binance stablecoin (BUSD) has the largest total value locked (TVL), at $11.11m (£8.38m).

Table of liquidity pools available on Kava – Photo: kava.io
Kava's own KAVA currency has the second-highest locked value – Photo: kava.io

Note that annual percentage yields (APY) give an estimate of returns for those supplying liquidity. To encourage larger pools, Kava tends to provide higher yields to pools with lower TVL. Users can add and withdraw liquidity as they please.

All of Kava’s liquidity pools seem to have a healthy balance, meaning currencies should be easily interchangeable.

The implementation of Kava Swap necessitated the creation of another governance token – the Kava Swap Token (SWP). For all intents and purposes, SWP gives holders a voice on the maintenance and evolution of the protocol and is used to pay out APR rewards.

But why could not the KAVA cryptocurrency be used? Kava said: “If the KAVA token was used for incentives on Kava Swap, the KAVA token would need to be inflated upwards of 50% of the supply. Given that not all KAVA holders would be participants on Kava Swap, inflating KAVA would meaningfully dilute existing KAVA holders.”

Consensus on the Kava network

As it is built on Cosmos blockchain protocols, Kava achieves consensus through the Proof-of-Stake (PoS) method.

Users can stake their KAVA coins to available validators to earn staking rewards for helping to secure the system. The top 100 validators each receive KAVA staking rewards. Mintscan.io counts 171 active validators as of 13 December, achieving a block time of 6.64 seconds.

Currently, 58.98% of tokens are bonded to the network. Validators have voting power proportional to the amount delegated to them. The largest validator currently has 21.2% of voting power, followed by 11.06%, 9.67%, 7.93% and 7.79%, meaning the top five validators have 57.65% of voting power. 

In the graph below, you can see that the number of individual stakers helping to validate the network has grown over the 30-day period.

Graph of number of stakers on Kava network, growing over time – Photo: staking rewards.com
More stakers means a more secure network – Photo: stakingrewards.com

Stakingrewards.com calculates a 5.66% annualised staking reward, which adjusts according to the amount of bonded tokens.

All in all, the high percentage of bonded tokens and relatively decent split of voting power suggests that the Kava consensus network is quite secure.

A few quick tokenomics

Although there are in fact four different tokens, three for governance and one stablecoin, used on the Kava network, the native KAVA cryptocurrency is the main source of utility, providing the node validation rewards and voting mechanisms.

The KAVA token was first launched in 2019 through private sales and a public initial exchange offering (IEO) performed on Binance Launchpad. The public sale raised approximately $3m. You can see the ongoing release schedule below.

KAVA’s latest trading price was $3.35. The circulating supply of 143.752 million gives a total market capitalisation of $482.98m. KAVA is ranked number 138 on the market cap ranks. Binance is the primary exchange.

KAVA is an inflationary currency. Since tokens are minted as staking rewards, inflation is proportional to the percentage of bonded tokens. In addition, the ‘lender of last resort’ policy can mint KAVA if the system becomes under-collateralised. 

KAVA also uses deflationary techniques. When a CDP is closed, a stability fee must be paid in KAVA. All KAVA used to pay this fee is burned, thus reducing circulation.

For more on KAVA’s recent trading activity and forecasts, head on over to our predictor

Why not just use MakerDAO?

MakerDAO is the largest, most widely known DeFi project, offering many of the same features as Kava. Given its widespread adoption rates and much larger liquidity pools (Ether has the largest TVL at $149.42m, around 14 times more than Kava’s largest pool), it is a fair question to ask what the point of Kava is.

Well, one of Kava’s primary USPs is its cross-chain support. MakerDAO is built on Ethereum (ETH) and as such, can only facilitate swapping of tokens built on ETH protocols.

Kava, on the other hand, can theoretically support any crypto asset. With that said, Kava has yet to realise this potential. Outside of Kava’s four native token assets, only Binance coins, Ripple and Bitcoin’s Binance-pegged BEP2 coin are usable.

This also means that Kava is less reliant on the stability of the Ethereum blockchain. MarkerDAO encountered a crisis in March 2020 when plummeting ETH prices and skyrocketing gas fees drained its liquidity pools. Cross-chain support presumably would reduce this threat.

If Kava wants to genuinely compete, it seems a no-brainer that its USP of cross-chain support should be more fully realised.

Where Kava goes next is a topic of debate. The lack of a white paper is frustrating, and a clearer roadmap would be welcome. Can it compete in the increasingly competitive DeFi sector? We shall see.

How many KAVA coins are there?

The latest circulation figures for KAVA coin were 143.752 million, or 0.056% of the total market capitalisation of $482.98m. KAVA is an inflationary currency, so this number will gradually increase.

Is Kava legal/legit?

Kava Swap recently completed a CertiK audit, the fourth such audit completed for Kava Labs. Zero critical or major errors were found, although three minor and four informational issues came up.

Kava’s ownership structure is transparent and all APR returns are clearly outlined. The lack of a comprehensive white paper is one small concern.

Who owns Kava?

Kava is owned by Kava Labs, which is run by co-founder and CEO Brian Kerr, who is based in Austin, Texas.

Further reding

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