KAVA: Maker for Cosmos

Kava is a cryp­to lend­ing and sta­ble­coin plat­form with strong sim­i­lar­i­ties to Ethereum’s Mak­er DAO. Once launched, the plat­form will allow users to deposit cryp­to and mint sta­ble­coins in return. 

Like on Mak­er, the under­ly­ing finan­cial vehi­cle is called a CDP, a Col­lat­er­al­ized Debt Posi­tion. The user will deposit cryp­to assets worth more than the sta­ble­coins he mints, and can lat­er redeem those assets by pay­ing back the sta­ble­coins. Should the val­ue of the deposit­ed assets ever fall below a cer­tain thresh­old, the user will be asked to deposit addi­tion­al assets, or his CDP will be liq­ui­dat­ed. A process sim­i­lar to a mar­gin call on a mar­gin trad­ing account.

Very much unlike Mak­er, Kava is cross­chain com­pat­i­ble by design, due to it being built on top of the Cos­mos SDK. Kava will there­fore be able to accept oth­er cryp­tocur­ren­cies like Bit­coin, Atoms, Binance Coin or Rip­ple as deposits into CDPs, while Mak­er is lim­it­ed to ETH and ERC20 tokens. 

System Construction and Risks

Maker’s idea of peg­ging a coin to the US dol­lar via debt posi­tions and mech­a­nisms designed to guide the behav­ior of mar­ket par­tic­i­pants has been the tar­get of ridicule ear­ly on. How­ev­er, Maker’s USD sta­ble­coin, the DAI, has since weath­ered many storms, and while it some­times came close to being in dan­ger, it sur­vived, and most­ly stayed close to 1 US$ per DAI in value. 

Unfor­tu­nate­ly, Kava does not describe in detail how exact­ly they plan to imple­ment their sys­tem. Infor­ma­tion has to be gleaned from their dev updates and the open source code on GitHub. The fol­low­ing is par­tial­ly based on the assump­tion that Kava’s inner work­ings will be pret­ty sim­i­lar to those of Mak­er, a fact that Kava keeps emphasizing.

The feed­back mech­a­nism for price sta­bi­liza­tion and CDP man­age­ment demands accu­rate and time­ly mar­ket data. Kava brought Chain Link’s ora­cle sys­tem to Cos­mos for this rea­son — cer­tain­ly a good choice. Price ora­cle sys­tems, even well con­struct­ed ones, can be manip­u­lat­ed, or they can fail. We’ve observed var­i­ous such prob­lems dur­ing Maker’s life cycle. Ethereum blocks run­ning full and prices no longer get­ting through to Mak­er, source prices being manip­u­lat­ed, ora­cles being attacked. While this field is rel­a­tive­ly well explored by now, we can still expect new, poten­tial­ly port­fo­lio destroy­ing issues to pop up, as the cur­rent, naïve­ly designed crop of ora­cle pro­to­cols slow­ly becomes bat­tle hardened.

Cryp­to prices remain high­ly volatile. In a CDP sys­tem, this can lead to liq­ui­da­tion cas­cades. CDPs with low mar­gins get­ting liq­ui­dat­ed, liq­ui­da­tions in turn accel­er­at­ing price drops, those price drops tear­ing addi­tion­al CDPs into under­col­lat­er­al­iza­tion. Low liq­uid­i­ty of the under­ly­ing assets can increase the risk of such cas­cades hap­pen­ing, and cryp­to liq­uid­i­ty has a ten­den­cy to come and go, and to be manip­u­lat­ed to a large extent. Mis­man­age­ment of this sit­u­a­tion can put the entire sys­tem in dan­ger, as observed on Mak­er dur­ing the March 2020 flash crash. 

Buy-in from mar­ket par­tic­i­pants is required to keep a sta­ble­coin sta­ble. There must be enough belief in the system’s sta­bil­i­ty for arbi­trageurs to sell a sta­ble­coin once it goes above its peg, and to buy it once it goes below. With great volatiliy, cryp­to expe­ri­ences bank run-like sit­u­a­tions, where peo­ple want to exit cryp­to in pan­ic and are ready to over­pay for sta­ble­coins, as well as the inverse, where peo­ple want to enter cryp­to at all price and sell their sta­ble­coins, even at a discount.

Fur­ther­more, some of the para­me­ters of a Mak­er-like sys­tem need to be active­ly adjust­ed, and part of this respon­si­bil­i­ty will lie with the com­mu­ni­ty, on Kava like it does on Mak­er. Address­ing the com­mu­ni­ty, inform­ing peo­ple well enough to allow them to make the right deci­sions is anoth­er challenge.

How Kava han­dles the del­i­cate bal­ance of all the com­po­nents will be cru­cial for the project’s ini­tial roll­out and lat­er suc­cess. It is also not guar­an­teed that all the required com­po­nents for a thriv­ing CDP sys­tem will fall into place on Cos­mos. Liq­uid­i­ty could stay low (Kava will ini­tial­ly not have access to Ethereum’s liq­uid­i­ty pools), users could remain dis­in­ter­est­ed, required mar­ket actors like arbi­trageurs or CDP watch­ers and liq­uida­tors could stay away.

KAVA TOKEN

In Octo­ber 2019, Kava raised 3M US$ in a Binance IEO at the price of 46c per token. Those IEO tokens, con­sti­tut­ing 6.52% of the total sup­ply, plus a num­ber of ear­ly pri­vate sale tokens and trea­sury tokens are cur­rent­ly cir­cu­lat­ing. Cir­cu­lat­ing sup­ply will increase aggres­sive­ly, reach­ing 100% in Octo­ber 2022, with pri­vate sales par­tic­i­pants par­tial­ly sit­ting on more than a 10x rel­a­tive to their ini­tial pur­chase price. At the cur­rent price of ca. 81 US cents, this gives us a ful­ly dilut­ed mar­ket cap of 81M. The much more estab­lished MKR is cur­rent­ly worth more than 0.35B.

Kava’s price explored new lows in March 2020 and expe­ri­enced anoth­er dip to the IEO price in May, but has since gone on a bit of a run, like­ly due to the immi­nent launch of the plat­form slat­ed for June 2020.

$KAVA has a sim­i­lar­ly close rela­tion­ship to the project’s suc­cess as $MKR does. It will be a gov­er­nance token, allow­ing hold­ers to vote for new col­lat­er­al assets, as well as to adjust the CDP sta­bil­i­ty fee. Fur­ther­more, and unlike MKR, KAVA will be a stak­ing token on Cosmos.

Team AND PROJECT PROGRESS

Kava remained rel­a­tive­ly intrans­par­ent as a project for a long peri­od of time. The sit­u­a­tion improved recent­ly with more code becom­ing avail­able on GitHub, with the test­net release and the upcom­ing main­net. We’d still love to learn more about Kava’s inner work­ings and the project’s chal­lenges, or read one or the oth­er dev report free of rock­et emo­jis. Tout­ing “earn­ing mil­lions” and up to 118.5% APY fur­ther con­tributes to the shilly and super­fi­cial impres­sion of the project.

That said, Kava is run by a sol­id team and advised by respectable mem­bers of the Cos­mos and broad­er blockchain com­mu­ni­ty. With some delays, the project is also deliv­er­ing — on qual­i­ty it seems.

CONCLUSION

Like any young (and some­what intrans­par­ent) project, an invest­ment in Kava comes with increased risk. In this par­tic­u­lar case, this is matched by a high­er upside poten­tial too, the project tap­ping into the MKR/DeFi/CDP nar­ra­tive and into pos­si­ble “bored” ven­ture mon­ey in the thriv­ing Cos­mos ecosys­tem. Those fac­tors made Kava an ide­al “dark horse” bet at a per­fect price point when we added it to our strat­e­gy back in March 2020. So far, price action con­firmed our assess­ment, but we’ll keep a close watch on the token’s aggres­sive release sched­ule and on the qual­i­ty of the first main­net com­po­nents com­ing online.

SOURCES

• https://research.binance.com/projects/kava
• https://www.kava.io/

Cov­er image: Was­dale Head, Eng­land. Pho­to by Hen­ry Bur­rows.