As of July 2022 Kava crypto ranks #17 by total value locked. By the end of 2022 it aims to rank in the top 5. That is a lofty ambition.
What is Kava crypto and why do its founders believe they can climb that rank so fast?
When I first started doing research on Kava I couldn’t get my head around it. I’ve spent the last 11 days consuming developer documents, Medium articles and 6:55 hours of podcasts and YouTube videos to bring it all together.
If you’ve been studying DeFi on this site, Kava is the best way to rehearse your knowledge.
1 / 7. What is Kava crypto?
Kava is a Layer 1 blockchain that has a bunch of DeFi protocols built on top of it.
Patience young Skywalker, what is special about Kava seek first and wise you will become.
What is special about Kava crypto?
What is distinctive about Kava is that it connects the Cosmos ecosystem to Ethereum.
This means that the 260 or so dapps on Cosmos are able speak to the >1000 dapps on Ethereum.
The future is multi-chain y’all and, today, many people agree on this. But Kava started working on this concept all the way back in 2018.
That is a long time in crypto years.
Kava uses the Cosmos SDK and Tendermint protocol. If you don’t know what that is then you ought to read my explanation of Cosmos first.
Actually, depending on your knowledge, there may be a bunch things you need to understand first.
Kava is DeFi in a bottle
It has all the major components of a DeFi ecosystem
- A stablecoin mint similar to MakerDAO
- A lending protocol similar to Compound
- A DEX similar to Uniswap v2
- A native token that you use to vote with, stake and will soon be able to perform liquid staking
Now, if those bullet points are incomprehensible to you then you have some homework to do.
Understanding crypto is like a journey young padawan. To understand Kava, understand other coins first you must.
Over the rough sea of layer 1s you must travel making sure you understand Ethereum and smart contracts. Past the mighty tornados of the Cosmos ecosystem you must navigate next.
Once you own Cosmos, meander you must, through the sandy dunes of collateralized stablecoins like DAI.
Next on your path your will encounter the murky swamp of lending protocols such as Compound.
Gather up strength because you need to climb the cold mountain peaks of decentralized exchanges such as Uniswap before you can arrive and sit comfortably in Casa de la Kava.
You can study all of the above topics on this site.
If you are ready let us proceed, shall we?
2 / 7. Kava crypto described in detail
The main narrative: cross-chain and safe
Kava Labs is the entity behind the Kava blockchain.
Apart from emphasizing Kava’s cross-chain nature, Kava Labs’s narrative emphasizes security and reliability.
Other L1s focus on speed and scale. In contrast, Kava focuses on security. They believe that this will deliver DeFi to the broader community.
Their CEO, Scott Stuart, draws a parallel to iOS vs. Android.
He says, Layer 1 blockchains are like financial operating systems. And Kava is more like iOS rather than Android.
Apple curates apps on the App store and enforces a high bar for UX and reliability.
Contrast this to the Android Play store where uploading an app is less restrictive.
On Kava no app can deploy without it being reviewed first. This results in a slower process but is safer and more reliable.
Kava Labs pride themselves in having 0 hacks so far.
Ouh ouh tell me more about the Kava crypto cross-chain stuff
Yeah so at the end of May 2022, Kava announced they had successfully deployed the Kava 10 mainnet. Whoo hoo!
Ermm what is the Kava 10 mainnet ?
It means that Kava now has an EVM (Ethereum Virtual Machine) that can support Ethereum smart contracts.
This means that you can wrap your Kava token on Metamask and use it as an ERC-20 token on the Ethereum network.
Whoa whoa whoa! Say that again in comprehensible language
OK let’s try it this way. Say you have 100 KAVA and want to use it on SushiSwap, a decentralized exchange on the Ethereum network.
For example, let’s say you want to provide your KAVA to a liquidity pool on Sushiswap and earn fees.
The problem is that your KAVA sits on the Kava (Cosmos) ecosystem whereas SushiSwap is on Ethereum. KAVA is not an ERC-20 coin. So how do you solve this?
Here is very crude explanation: you give your KAVA to Metamask.
Metamask keeps it and mints an ERC-20 token called wrapped KAVA: wKAVA. 1 wKAVA=1 KAVA. Now you can use your wKAVA on Sushi.
Below is a more complicated version that is closer to the truth.
To understand the truth, the whole truth and nothing but the truth you need to become a Jedi in computer science. (Sorry I’ve had Covid and have been watching a lot of Star Wars these days).
Ethereum Bridge launch
Today, 15 July 2022, you can only wrap KAVA and you can only do it using Metamask.
Kava will launch an Ethereum bridge in Q3 that will allow users to transact in multiple ERC-20 tokens.
This is the core reason they believe they deserve a spot in the top 5.
With the ethereum bridge, all the ERC-20 tokens will be able to move to the Cosmos ecosystem and vice versa.
That is a lot of value people.
Kava 10 is a big deal.
It means that loads of developers and protocols that use Solidity can now connect to Cosmos via Kava.
Kava Labs aims to integrate 100 protocols by the end of 2022.
3 / 7. What is Kava’s main vision?
Kava’s main aim is to become the Coinbase of DeFi.
They wish to strip away all complexity and make it easy for anyone to participate in DeFi.
Currently, DeFi is still an emerging technology.
It needs to traverse the chasm from early adopters who love getting their hands wet in tech to the majority.
Kava Labs believes the prerequisites for this are stability, security and a streamlined user experience.
4 / 7. Let’s dive into the Kava crypto blockchain and protocols
The Kava crypto blockchain
Kava uses Tendermint as its blockchain.
Most people agree that Tendermint is a robust blockchain so Kava scores a cookie point there.
They then use the Cosmos SDK to build all the dapps and protocols that any decent DeFi ecosystem requires.
For those who don’t recall, the Cosmos SDK is a modular build-your-own-protocol toolkit that is widely popular with crypto developers.
Let’s check out the 3 core protocols built on top of Kava
i. Kava Mint
Similar to MakerDAO and its DAI token, Kava Mint allows you to deposit your crypto assets in exchange for Kava’s stablecoin, USDX.
Depending on the asset you deposit as collateral you can take out a certain proportion of that out as a loan in USDX.
When you take out a loan in USDX you are rewarded with KAVA tokens. In a way it is like a subsidy on your loan.
This is part of Kava’s incentive program to attract new users.
Also USDX holders get rewarded with an APY from the interest paid by borrowers.
Mind you that is tricky language because if you are earning an APY you are not really holding; you are lending.
As of today you can only deposit 8 assets. As you can see below most of these are just tokenized assets from Binance Chain. This is because the first bridge that Kava focused on was to the Binance Chain.
This ties up with the narrative of Kava taking things one step at a time.
Yet, with the advent of Kava 10 we are likely on the cusp of a big change and I expect more assets will appear soon.
The rest of the assets that you see (KAVA, SWP, HARD, USDX) are all native assets of the Kava blockchain. Explanations of these are coming up so stay alert.
Wait, Is Kava crypto like THORChain?
While Kava is cross-chain it uses wrapped tokens.
Unlike THORChain that allows you to transact across chains in actual BTC, Kava uses wrapped BTC.
For example, in the table above you see that the third asset that you can borrow against is BTCB.
This is wrapped BTC on the Binance Chain.
Remember, this simply means that there is a BTC on the Binance Chain and you can redeem your BTCB against it.
ii. Kava Lend
Kava Lend is like Compound. You can supply your asset to earn a reward while it is lent out to borrowers.
Here again there are currently only 9 assets with more expected soon.
To make matters confusing this protocol has its own token called HARD.
HARD tokens are a way to reward borrowers and suppliers.
Suppliers are sometimes further rewarded in KAVA tokens depending on the tokens that the platform wants to drive funds to.
Why doesn’t Kava Lend just use the KAVA token instead of HARD to reward users?
There are a bunch of reasons but the main one is that it would inflate KAVA.
Since not all KAVA holders are going to be on Kava Lend it makes sense to keep things separate.
iii. Kava Swap
Similarly to Uniswap v2, Kava Swap follows a constant function AMM.
Here, again, there are only 10 coins you can swap today.
Like with Uniswap, you can also choose a liquidity pair to earn fees. The token used on Kava Swap is SWP.
Both traders and liquidity providers receive rewards in it.
5 / 7. Uses for KAVA token
The main uses of KAVA are
- Voting on governance decisions
- Transaction fees after which KAVA gets burnt exerting deflationary pressure
- Staking rewards to validators and delegators
- Lender of last resort. If the value of the collateral suddenly drops on Kava Mint then KAVA is minted and sold for USDX. Hmmmm not sure what to feel about this given recent events with Luna.
6 / 7. Kava crypto’s early steps in implementing their streamlined UX
Remember those tweets that would say something like:
Most normal people ended up scratching their heads with these types of tweets.
By the way this is what elementalcrypto.com is hoping to solve. Follow @lementalcrypto on Twitter to learn about a new alt coin about once a week.
Here is Kava’s first attempt to streamline things. I expect more is to come
The user is enticed to deposit their BUSD and earn an excellent APY.
In the background your BUSD goes into Kava Mint as collateral against a loan in USDX.
The USDX is then provided to Kava Lend where it earns interest in the form of more USDX as well as Kava and HARD tokens.
As you can see what is driving the high APY are the native tokens.
This cuts out extra steps I would need to take on my own own.
Yet, it still requires some basic understanding of DeFi if I want to know what is happening to my savings.
7 / 7. Can Kava cross the chasm?
If Kava want to move into the mainstream and get normies to take part they should do one of the following:
i. Wait for people to educate themselves
I am not sure that my mother would comprehend AMMs, LPs, native token rewards and the rest.
But to be honest it’s not my mother who will ever cross the chasm. It’s the readers of this site who are building their knowledge of DeFi.
They want one place where they can do everything without having to move funds across wallets and platforms.
The internet grew as people adapted their behavior to a new technology.
They learnt to use a mouse, email , a browser and search engines.
Crypto too will become easier to navigate.
At the click of a button users will be able to take part in all that DeFi has to offer.
What is more challenging is the crypto-financial literacy that is necessary to understand the risks.
ii. Build a product that is Robin Hood for crypto
Coinbase is a centralized example of this. Kava wants to be the decentralized example.
Coinbase has ~98Mn verified users and about 13Mn active users. Binance has another 13Mn.
Compare this against the 5Mn unique addresses worldwide that traded a DeFi asset in July.
You can see where Kava Labs is coming from.
Yet, to compete against Coinbase shouldn’t Kava Labs build an app for the Play store and App store? Is that compatible with the spirit of DeFi? I’m not sure.
iii. Build a mass market UX for normies
This would mean departing from the crypto look and feel and adapting the UX to resemble popular fintech apps like Revolut, Monzo, N26 etc.
All the crypto components would be hidden under the hood.
This would require addressing primary consumer needs such as payments and transfers.
iv. Bank the unbanked
A core mission that excites people about DeFi is that it makes no discrimination.
There are 1.7Bn people in the world today who don’t have a bank account.
Is it possible for DeFi to bridge the gap? It’s going to be tough.
I used to work in micro-finance.
70% of loans lent out were for people to buy a cow worth $100-200.
This person might have a phone. In the best case they have a feature phone.
It is a big leap to say they will be able to pledge collateral to take out loans in USDX.
Their only collateral is that cow.
Summarizing: What is Kava crypto
A few years ago if you wanted to buy a bitcoin the user experience was terrible.
The choices were to get hacked on Mt Gox or get hacked in the other sense of the word in a dark alley somewhere while exchanging bitcoin mano a mano.
Fast forward to today and you get exchanges like Coinbase and Binance that integrate products seamlessly and provide a safe UX.
Project to 2027 and it could be Kava that is doing the same for DeFi.
Today DeFi has a fragmented set of offerings with varying degrees of reliability and safety.
Kava aspires to be the place where you can deposit funds in a safe and easy way and get access to DeFi across chains.
Kava is building new financial rails that will open up crypto to broader adoption.
This way the next generation of wealth will be able to access financial services in a meaningful and different way.
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