This article is to provide a beginner’s guide to Kava, DeFi’s next-generation lending and Interest earning platform which brings new flexibility to the market with its unique strategies.
What Is Kava Protocal?
Kava Chain is a permissionless, censorship-resistant, decentralized blockchain built with Cosmos’s SDK. As such, it operates very similarly to other blockchains in the Cosmos ecosystem, and is designed to be interoperable.
Kava Protocol is a set of rules and behaviors integrated into the Kava Chain that enable advanced Decentralized Finance (DeFi) features such as permissionless borrowing and lending.
What Is Kava Token?
A KAVA token is an asset of the Kava Chain. KAVA is a token used across the whole chain as a transport and store of value. It is given as a reward for minting USDX on the Kava app.
What is Kava.io?
Kava.io is the first cross-chain DeFi hub providing applications and services to the worlds largest cryptocurrencies. Kava’s platform operates as a decentralized bank for digital assets connecting users with products like stablecoins, loans, and interest-bearing accounts so that they can do more and earn more with their digital assets.
Why Borrow On Kava.io?
Users can deposit their digital assets and use them as collateral to borrow Kava’s crypto-backed stablecoin, USDX. Borrowers profit in several ways:
- Synthetic leverage: borrowers can swap USDX for more collateral and use it to take out another loan. By repeating this process, users can create synthetic leverage any supported crypto asset, effectively creating a leveraged long position.
- Hedging with interest: traders can hold USDX as a stable asset when seeking to limit exposure to volatile crypto assets. Holders of USDX make 4.5% APY by receiving revenue generated from interest payments made by borrowers, meaning traders automatically earn while hedging.
- Incentive rewards: early adopters are incentivized to borrow USDX by Kava’s liquidity bootstrapping Incentive Program, with $90 million in KAVA in rewards available over 4 years.
- Stablecoin payments: the fast finality of the Kava blockchain enables USDX to be used for general payment purposes on many blockchain networks.
How to Use Kava.io
Kava’s Web App is the control center for cryptocurrency lending. It shows users their locked balance, borrowed balance, the current market price of their locked assets, and their borrow balance liquidation price.
Additionally, several wallets support Kava Protocol:
Kava.io users can borrow up to 67% of their locked balances’ value as USDX. Borrowers owe interest on their loans in the form of Borrow APYs which are repaid to the protocol. The repaid interest is distributed to USDX holders in the form of stability fees which net the holders 4.5% APY. Borrowers also earn rich rewards of up to 60% APY on their borrowed USDX through Kava’s Incentive Program which supports USDX liquidity by rewarding early USDX borrowers with KAVA. If the value of a user’s locked balance decreases and falls below the minimum borrow ratio, their locked balance is seized and incurs a 7.5% liquidation fee. The locked balances collected by liquidation are auctioned on the open market with the remaining balance returned to the original borrower.
KAVA holders govern the system by voting on protocol risk parameters and serve as the lender of last resort. If the total value of locked balances on the platform falls too quickly, KAVA is minted and sold at auction to raise funds and increase the systemwide locked balance.
Kava is built using the Cosmos SDK, a modular blockchain development framework. Kava Protocol operates with a Tendermint-based Proof-of-Stake (PoS) consensus mechanism which offers Byzantine Fault Tolerance, instant finality, and security. Kava Labs has implemented several Cosmos SDK modules that work together to provide lending services.
- The CDP module implements collateralized debt positions, the basic building block of loans.
- The Auction module contains several types of auctions triggered by different economic conditions to ensure system stability and maintain USDX’s 1:1 peg with the U.S. dollar.
- The Pricefeed module ingests market prices from Chainlink oracles.
- The BEP3 module implements the BEP3 Protocol, acting as a secure bridge for cross-chain asset transfers between Kava and Binance Chain.
- The Incentive module tracks CDP creation and issues weekly rewards to USDX borrowers.
There are several other modules that help the platform operate smoothly. You can read more about all of them in these docs.
Let’s dive into the core functionality supported by these modules.
CDP: Core Lending Services
The CDP module manages the creation and lifecycle of collateralized debt positions, which are essentially loan contracts.
The CDP module is the core of Kava Protocol and relies directly upon the Auction and Pricefeed module. It works together with the Incentive module to payout equitable incentive rewards to USDX borrowers.
Auction: A Closed Economic System
There are three types of auctions, all managed by the Auction module. Together, they form a closed economic system.
- Collateral auction: liquidated borrow balances are auctioned in collateral auctions, where the winning bidder’s USDX is used to cover the outstanding debt from the liquidated loan.
- Surplus auction: not all of the interest payments on debt go to USDX holders — 0.5% out of the 5% interest rate is returned to the protocol and stored. When the net debt surplus reaches a certain limit it’s auctioned off for KAVA in a surplus auction after which the KAVA profit is burnt. This decreases the total supply of KAVA, increasing its valuation.
- Debt auction: if systemwide collateral prices drop suddenly and nobody wants to purchase it at collateral auctions, then the available debt surplus is used to cover the difference. If there’s no debt surplus remaining, the protocol initiates a debt auction in which the bidder pays USDX to cover the outstanding debt and receives newly minted KAVA from the protocol. This increases the total supply of KAVA, decreasing its valuation.
Pricefeed: Chainlink Oracle Data
The Pricefeed module integrates Chainlink’s oracle technology into the protocol by enabling a decentralized network of oracles to post prices to the Kava blockchain. To prevent a sudden, brief price drop or a momentary price availability outage from causing mass system liquidations, there are two price feeds.
- A normal price feed with the asset’s current market value. This price is used for all regular calculations.
- A time-weighted price feed with the asset’s market value averaged over the past 30 minutes. This price is used exclusively for liquidations.
This security measure enables users to borrow on Kava.io safely, preventing underserved liquidations during a black swan event.
BEP3: Cross-Chain Transfers
The BEP3 module implements the BEP3 protocol to provide a cryptographically secure bridge between Kava and Binance Chain. The bridge enables users to lock coins on Binance Chain for pegged coins on Kava which can be used to take out loans.
Kava Labs is actively working on additional bridging solutions to onboard new asset classes to Kava.io. Future cross-chain solutions include internally developed bridges, Cosmos ecosystem bridges such as IBC, and third-party bridges.
Building on Kava.io
Kava Protocol’s core functionality can be used as the foundation for a variety of financial applications. Kava Labs has built a collection of tools developers can leverage to build the financial future of tomorrow.
- Sentinel (Go): a service that watches over a CDP on the Kava blockchain and prevents it from being liquidated by repaying (or withdrawing) debt.
Hopefully, this has given you an insight into the Kava ecosystem and how this can be a major contender in the Decentralized Finance sector.
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