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Kava: a DeFi platform for Crypto Assets

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Kava is a DeFi project in many ways similar to Maker DAO, but with a significant difference.

In fact Maker is totally based on the Ethereum blockchain, and in fact to create the stablecoin DAI uses exclusively token ERC-20. Kava instead was created to allow you to use any cryptocurrency, even on other blockchains, as collateral for the generation of your stablecoin, USDX.

The project started with an IEO on Binance, and was launched in the last quarter of 2019. The objective is to create a DeFi platform to offer guaranteed debt and stablecoin in all major cryptocurrencies, as an alternative to those already existing. Since it was built with Cosmos SDK, as Binance Chain, it is compatible with the other Cosmos blockchains, and in fact allows to open Collateral Debt Position (CDP) using both BNB (Binance Coin) and ATOM (the Cosmos native cryptocurrency), as well as Bitcoin and XRP (Ripple).

It is therefore an alternative to Maker DAO, and the other DeFi platforms based on Ethereum. Moreover, as well as Cosmos, it aims to connect a wide variety of different blockchains favouring communication between cryptocurrencies that are currently not spoken. Therefore by using Kava users will be able to create CDPs, initially using BTC, XRP, BNB and ATOMto borrow the native USDX stablecoin, which can then be used to leverage or be bound in exchange for a return.

The launch of Kava’s mainnet took place on 15 November 2019, while the USDX CDP testnet was launched on 5 February 2020. At this stage, therefore, the USDX stablecoin is not yet available on the market, although it is already possible to perform tests to open CDPs and generate tokens.

By the way, Kava’s stablecoin, USDX, should not be confused with three other tokens of the same name. The first one is USDx stablecoin, an ERC-20 token that replicates the value of the US dollar, the second one is USDX, which is not a stablecoin, and the third one is AnchorUSD. In addition to Binance and Cosmos, the Kava project already has several other important partners, such as RippleHuobi and OKEX, and although with a slight delay is respecting the roadmap as announced in the whitepaper.

The project also has its own governance token, also called KAVA, based on Binance Chain, and which in the months following the IEO has maintained its value, except during the collapse of the crypto markets on March 12. This token is not only used to vote on the governance of the blockchain, but also to close the CDPs. It can also be staked. At this moment the Kava ecosystem is still under construction, so much so that the USDX stablecoin is not yet available on the market, but some projects for the use of CDPs have already been started on the testnet.

Kava uses Interledger (ILP) protocol technology to allow users to exchange assets between various blockchains, and runs on its own decentralized blockchain with Proof-of-Stake, Switch, which supports interoperable payment channel networks. This blockchain uses Tendermint’s PoS protocol managed by known validators, among which the first 100 provide consensus based on stake size. The blocks are validated every 1–3 seconds.

Kava’s CDPs work through a five-step process, plus a sixth that is activated only if the value of the debt exceeds a specified threshold.

  1. The first step is to deposit the collateral asset on the Kava platform. This step is carried out through a special web portal where a user connects his wallet to the Kava platform so that the tokens can be deposited directly from the wallet.
  2. Once the deposit procedure is completed, the second step is started, i.e. the creation of the CDP that immobilizes the collateral in a smart contract.
  3. With the third step, the collateral becomes the guarantee to obtain a USDX loan based on the value of the CDP. The user then receives the USDX tokens and starts to count the interest he will have to pay when he wants to close the CDP and regain possession of the immobilized collateral.
  4. The fifth step is the closing of the CDP, which can be done at any time. By returning all of the borrowed tokens, plus accrued interest, you can close the position and recover the assets that you had tied up in the CDP as collateral.
  5. The sixth step only takes place if the total value of the collateral falls below a certain percentage of the total value of the loan and accrued interest.

In this case the smart contract will automatically liquidate the collateral as collateral until sufficient funds are raised to repay the debt and pay interest, plus a penalty. Being a decentralized platform, the user can operate in total autonomy, without limits or obstacles, and without having to request or obtain any permission: it is sufficient to provide adequate collateral, i.e. a collateral whose value covers abundantly the value of the loan.

The KAVA management token is similar to Maker DAO’s MKR token, and is issued with an offer limited to 100 million tokens. Owners of this token have the power to vote on proposals to change the blockchain and system parameters when necessary, including changes in the total USDX supply, types of collateral accepted, and collateral on debt ratios. In addition, the consensus mechanism used, Tendermint, also allows users to delegate their voting rights to validators, obtaining in return a portion of transaction fees or stability fees paid at the close of CDPs.

This can be achieved by staking KAVA tokens on validators, who have an interest in collecting as many KAVA tokens as possible to grow within the Proof-of-Stake-based ecosystem. Thanks to Kava, and Binance Chain, Cosmos is a candidate to become one of the protagonists of DeFi of the future. The fact of being cross-chain could also allow this ecosystem to reach a very large number of users, since to use DeFi tools on Ethereum you have to use only ETH or tokens compatible with Ethereum. Although these alternative tools to DeFi on Ethereum are only just beginning, they could have the potential to expand a lot, as long as they manage to close the gap quickly, especially in 2019.

In fact, DeFi on Ethereum has grown a lot in 2019, and has gained such momentum that the other alternative projects will now have to run for it. But the difficulty of bringing non-native assets on the Ethereum blockchain could slow down the spread of these tools, to the advantage instead of new cross-chain tools.

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