Kava 15 Upgrade: Zero Inflation Unlocks $KAVA Investment Opportunities
Investment Overview:
- Kava is the native USDt Defi Hub chain of Cosmos, holding a significant position in stablecoin liquidity.
- As a Layer 1 bridging Cosmos and EVM with cross-chain interoperability, it ranked in the top 10 of Layer 1 by market value (as of October), dominating the stablecoin market within the Cosmos ecosystem, and its ecological development looks optimistic.
- Kava has a clear roadmap, with specific expectations regarding the variety of EVM assets, cross-chain bridge integration, asset circulation, and more.
- The ecosystem of Kava is growing rapidly. With the entry of renowned Defi products like dydx into Cosmos, it brings more financial circulation possibilities to Defi Hub chains like Kava.
- Kava’s collaboration with DWF market makers significantly enhances liquidity, increases market participation, and positively impacts Kava’s brand image.
1. Protocol Summary
1.1 Protocol Introduction
Originally, Kava was an automated collateralized debt position (CDP) lending platform similar to Maker DAO, where users could borrow the stablecoin USDX by depositing diversified cross-chain assets like BNB, BTC, XRP, BUSD, etc. It also launched the Harvest.io lending protocol (later renamed Hard Protocol, and then to Kava Lend), jointly shaping Kava’s Defi services.
Kava is built on Cosmos, functioning independently, thus also regarded as aspiring to be the first Defi Hub chain on Cosmos.
However, with the evolution of Defi interoperability, Kava version 10 launched in 2022. It transitioned into a Cosmos SDK-developed chain, utilizing the POS mechanism and EVM compatibility, dedicated to linking Cosmos and EVM ecosystems through cross-chain interoperability and asset circulation.
1.2 Basic Information
2. Protocol Details
2.1 Team
The team currently consists of 45 members with an average tenure of 2.2 years. Key members of the core board, such as Brian Kerr and Scott Stuart, have maintained stable positions for up to 7 years.
- Brian Kerr: Co-founder and board member of Kava Labs, previously the founder and CEO of Fnatic Gear.
- Scott Stuart: Co-founder and CEO of Kava.
- Kevin Davis: Chief Engineer.
- Aaron Choi: Vice President.
- Ruaridh O’Donnell: Lead Developer and Co-founder.
- Jack Zampolin: Investment Advisor.
2.2 Funding
Kava has disclosed nearly $5M in financing, with investors including Binance Labs, HashKey, Xpring, Framework Ventures, and others. On October 16, 2019, Kava issued $KAVA, selling 40% of the initial supply to investors through multiple private rounds. Additionally, 6.25% of the total supply was publicly sold on Binance Launchpad at a price of $0.46, raising a cumulative $3M.
2.3 Technical Framework
Kava’s structure is divided into the Cosmos Co-Chain and the Ethereum Co-Chain, both of which are built on the Cosmos Tendermint consensus engine.
The Ethereum Co-Chain allows developers to deploy using Solidity or directly migrate applications to Kava, while the Cosmos Co-Chain communicates with the entire Cosmos ecosystem through the IBC protocol. The two co-chains are connected by the Translator Module, facilitating easier access to both execution environments.
Kava internally consists of Kava IBC (Cosmos environment) and Kava EVM (EVM environment), where:
1) Cosmos to EVM:
The native internal bridge launched with Kava14, a Cosmos SDK module, can be integrated into various applications and wallets. It allows users to transfer Cosmos assets to the EVM environment in the form of ERC20, thus enabling asset transfer. For instance, $KAVA can be wrapped as $wKAVA (with ERC20 properties) for use in the EVM environment.
Unlike external bridges, Kava’s internal bridge transfers assets within the same ledger, similar to how the IBC protocol changes state between different ledgers, ensuring consistency and compatibility.
2) EVM to Cosmos:
Currently, Kava EVM assets can cross to Kava IBC, with the Cosmos side including Osmosis, Injective, and the EVM side’s Evmos facilitating the transfer of $USDt and $ATOM.
It is evident that Kava’s asset transfer capability on the EVM side is weaker. The only supported chain, Evmos, is not part of the Ethereum ecosystem; it is a Layer 1 chain compatible with both EVM and Cosmos. Thus, the true interaction with the Ethereum ecosystem is not fully realized at present. Support for EVM assets into Cosmos is limited within Kava and is mainly facilitated by bridges like Stargate or other cross-chain aggregators.
2.4 Protocol Ecosystem
Kava Labs mainly consists of the following Defi services:
- Kava Staking: Retail holders of $KAVA can delegate their assets to validator nodes for staking and earning rewards.
- Kava Lend: Evolved from the initial Harvest to Hard Protocol, and finally renamed to Kava Lend. It allows users to deposit various ecosystem assets such as BTC, XRP, BNB, BUSD as suppliers and borrow other assets. The ecosystem not only provides basic interest rate incentives for borrowers and lenders but also offers mining incentives in $KAVA.
- Kava Earn: As a Defi yield strategy, it encourages users to lock $bKAVA to earn high APY, thereby increasing Kava’s Total Value Locked (TVL).
- Kava Mint: Renamed from the Kava CDP protocol, it enables users to mint the collateralized stablecoin USDX by staking cross-chain assets.
Liquid Staking: Stake $KAVA to receive $bKAVA, with the system transferring deposited $KAVA into the Earn mechanism for higher returns. - Kava Swap: An AMM-model swap mechanism that allows users to seamlessly trade various assets across different blockchains or earn extra income by providing liquidity.
2.5 Ecosystem
Currently, Kava’s total TVL is 340.67M, with a stablecoin market cap of 129.06M and a daily trading volume of 1.44M. Over 116 protocols have been deployed on it, with a high proportion in the Defi category. However, according to protocol rankings, Kava’s native Defi services, such as Kava Lend, Kava Mint, and Kava Earn, predominantly dominate the ecosystem. Unlike Arbitrum’s Blur, there aren’t notably standout native independent protocols in the ecosystem.
3. Development Timeline
3.1 Major Historical Events
Let’s review the major events in Kava’s history:
- March 1, 2019: Kava raises $1.2M in a round led by Venture Capital.
- February 5, 2020: Kava launches its first cross-chain lending platform CDP testnet.
- February 27, 2020: Official integration with Trust Wallet announced, supporting $KAVA storage, transfer, and staking.
- March 25, 2020: Announces long-term strategic partnership with Chainlink.
- April 16, 2020: Becomes one of the first partners in the OKChain open-source cross-chain ecosystem.
- April 30, 2020: Kava releases CDP pre-registration page for user testing.
- May 15, 2020: Establishes an on-chain governance committee mechanism.
- June 11, 2020: Kava3 launches its first CDP, supporting BNB collateral for USDX loans.
- August 13, 2020: Forms a partnership with Injective Protocol.
- October 15, 2020: Kava4 supports Harvest.io V1 version.
- November 6, 2020: Inter-chain transfer function with Binance enabled, supporting cross-chain transactions and transfers of BTC, XPR, BNB, BUSD.
- February 9, 2021: Passes CertiK audit.
- April 9, 2021: Kava5 launches Harvest V2, allowing asset borrowing and providing $HARD mining incentives.
- July 26, 2021: Kava5 mainnet rollback.
- July 27, 2021: Centre plans to issue USDC on Kava.
- August 31, 2021: Kava 8 launches AMM Swap mechanism.
- September 22, 2021: Kava Rise incentive program releases $185M to attract projects.
- January 20, 2022: Kava9 integrates IBC protocol, expanding to the broader Cosmos ecosystem.
- March 3, 2022: Launches $750M Kava Rise developer incentive program.
- April 7, 2022: Ethereum Co-Chain Alpha release.
- April 27, 2022: Official start of the CosmosEVM Era.
- May 25, 2022: Kava10 EVM goes live, officially becoming a Cosmos &EVM interoperable Hub chain.
- June 21, 2022: Partnership with Celer cBridge to enable cross-chain asset transfer.
- September 9, 2022: Curve Finance launches on Kava.
- October 26, 2022: Kava11 launches $bKAVA to improve liquidity of staked tokens.
- January 12, 2023: Kava12 launches DAO.
- March 15, 2023: Kava13 launches EVM 2.0.
- April 4, 2023: Community proposal for a dual foundation structure.
- May 12, 2023: Kava EVM roadmap release.
- June 22, 2023: Tether to launch stablecoin USDT on Kava.
- July 13, 2023: Successful Kava14 upgrade, deploying an internal cross-chain bridge to convert native Cosmos assets into Ethereum ERC20 standard.
- July 14, 2023: Kava 14 opens native Cosmos assets to Ethereum.
- September 2, 2023: Stargate launches native USDt liquidity pool on Kava.
- November 15, 2023: Kava forms strategic partnership with DWF Lab.
- December 7, 2023: Kava 15 achieves zero token inflation.
3.2 Price and Candlestick Trend
3.3 Kava 15
Kava 15 mainnet is scheduled to officially launch on December 7th. Proposal 141, which plays a key role in K15, outlines the future roadmap in three areas: Adoption, Security, and Governance.
- Adoption:
Kava aims to position itself as the stablecoin carrier of the Cosmos ecosystem, integrating various stablecoins onto Kava. This will establish Kava as the dedicated stablecoin Hub chain for Cosmos, facilitating better interaction with other application chains such as DYDX, Osmosis, etc. For example, Injective already supports Kava’s BTC/USDC and ETH/USDT perpetual pools.
On the EVM native bridge level, Kava plans to integrate with mainstream bridges like Layerzero, Wormhole, Multichain, Axelar, etc., for more efficient and swift interactions with EVM native assets. In terms of tokens, it considers integrating more wrapped tokens such as WBTC, WETH, etc. Currently, Stargate already supports wETH on Kava.
Thus, by connecting to EVM liquidity, native protocols in the ecosystem can not only benefit but also attract more investment and liquidity from CEXs.
2. Security:
Focuses mainly on node availability and software scalability. By optimizing nodes, the efficiency in receiving, processing, and interacting with validators is enhanced, as well as the distribution of services. Enhancing software scalability supports a higher volume of transactions and requests.
3. Governance:
While maintaining the principle of Cosmos’ sovereign autonomy, Kava extends community governance to the Kava EVM layer, ensuring consistency in governance between the Cosmos and EVM frameworks.
Additionally, two independent foundations will be established in the future to jointly maintain the sustainable development of Kava. Net earnings in the ecosystem, excluding staking rewards, will be managed by these two foundations.
4. Tokenomics
4.1 Model & Distribution
4.1.1 Token Model
1)Dual Token Model
Kava employs a dual token economic model with the equity and governance token $KAVA and the stablecoin $USDX.
$KAVA: Used broadly in the ecosystem, such as for POS staking, inflationary rewards, transaction fees, voting, and governance.
- $bKAVA: A liquid staking derivative token, allowing staked $KAVA to maintain liquidity.
- $wKAVA: A wrapped token of $KAVA, with ERC20 properties.
$USDX: The system’s native stablecoin, mainly used in the CDP protocol. Users can obtain USDX by staking tokens, enhancing liquidity, similar to DAI in MakerDAO.
2) Uses of $KAVA:
- Transaction Fees: Ecosystem fees are paid with $KAVA, including asset transfers, opening/closing CDPs, and transfer transactions. A portion of the CDP transaction fees is distributed to validators and delegators.
- Staking Rewards: Staking $KAVA can yield an APR of 3%-20%, depending on the network’s total staking rate.
- Validator Commissions: Node validators can earn a percentage of the rewards earned by their delegators.
- Community Governance: Rights to initiate proposals and vote to modify platform rules.
3) Deflation Mechanism:
The network releases new $KAVA with each new block as rewards for node validators, anticipating an annual inflation rate of 7%. However, $KAVA used to pay the stability fees for CDPs is burned, maintaining a balance in token supply.
4.1.2 $KAVA Distribution Mechanism:
The token has no supply cap, but there were 100 million tokens at Genesis.
4.1.3 $USDX Peg Mechanism
USDX is a CDP collateralized stablecoin, pegged 1:1 to the US dollar, maintaining price stability through an elastic supply mechanism based on algorithms.
Users borrowing USDX against collateral must maintain a certain collateralization ratio. For example, borrowing 100U worth of USDX against 150U worth of collateral. The price of USDX is linked to the collateral’s value.
If the collateral’s price drops sharply, the system activates a liquidation mechanism or debt auction, selling the collateral below market price, increasing USDX supply to lower its price, and maintaining stability with the pegged asset.
If market fluctuations exceed the system’s automatic adjustment range, $KAVA acts as the “lender of last resort,” inflating and auctioning $KAVA for collateral to compensate for USDX price disparities.
Moreover, Kava has optimized the USDX pricing mechanism:
- Using Chainlink’s Oracle Feed for high-quality market data, ensuring precise pegging of collateral and USDX.
- Diversifying collateral assets to spread risk. If the system must sell collateral at a loss, profits from other collateral can compensate, enhancing risk resistance.
However, USDX price can still experience severe short-term deviations. On April 11, 2023, USDX plummeted to $0.1, then rapidly rebounded to $0.8. Founder Scott Stuart noted that USDX price stability isn’t necessary; instead, its ideal state should be market-responsive.
4.2 2.0 Update
In the upcoming K15, it’s explicitly stated to abandon the inflation rate, meaning the circulating token supply will be the maximum supply. New $KAVA creation will stop, and the inflation rate is set to permanently reduce to 0 by December 31st.
$KAVA’s revenue mainly comes from native project emissions, transaction fees, and the foundation. The part of $KAVA serving as ecosystem fees will return to the community rather than validators. The community will decide the allocation of these funds (destruction or reinvestment), further enhancing network decentralization.
As a result, $KAVA’s total supply will only decrease, and with its role in ecosystem fees and governance rights, its demand in the ecosystem is expected to grow, significantly increasing the demand side.
5. Market Analysis
5.1 Market Overview
Kava belongs to the Layer 1 category, which includes a series of foundational networks like Ethereum and Bitcoin, and emerging public chains like BSC, Sui, Aptos, Solana, etc., contributing to the current flourishing ecosystem. As of the time of writing, its market capitalization is 1125 billion, ranking second in the overall blockchain market value category. Ethereum dominates this segment, followed by Tron, BSC, TON, Solana, and other public chains performing well.
The underlying protocols, modular architecture, consensus mechanisms, and block mechanisms of Layer 1 blockchains significantly impact performance and scalability. Different Layer 1s, due to their distinct underlying designs, have unique characteristics; some focus on transaction processing speed, while others prioritize privacy and security.
Based on characteristics, they can be categorized, for example, Ethereum and EVM-compatible chains in one group, non-EVM-compatible in another, and chains focusing on their individual ecosystem like Cosmos & Polkadot in another…
Kava, specifically, falls under the Cosmos category, focusing on connecting Cosmos and EVM ecosystems, providing cross-chain interoperability as a Layer 1 public chain. In the Cosmos ecosystem, Kava ranks third in TVL.
5.2 Competitors
In the Cosmos&EVM Compatible Layer 1 public chain segment, Kava’s competitors include:
- EVMOS
Originating from Ethermint, a Cosmos SDK-built EVM chain, EVMOS was developed to link Ethereum and Cosmos ecosystems through the Tendermint consensus protocol.
Realizing the mutual benefit and shared prosperity between Cosmos and Ethereum, the team established EVMOS to create an EVM Stack solution on Cosmos. This allows the existing EVM community to rapidly deploy on Cosmos, offering interoperability between both.
In 2022, Ethermint rebranded to EVMOS, introducing EVM chains, applications, assets, and users to the Cosmos ecosystem. As of writing, EVMOS’s TVL is 4.52M, with a stablecoin market value of 130K, and a 24-hour trading volume of 160K.
2. Cronos
Built on Cosmos SDK, Cronos, powered by the open-source project Ethermint (formerly EVMOS), provides fast connectivity to Ethereum and other EVM ecosystems. It interacts with other Cosmos chains through the IBC protocol, focusing on Defi, NFTs, Games, and the Metaverse. Its mainnet was launched in November 2021, rapidly accumulating millions of users and over 500 applications.
It has launched a dedicated NFT marketplace, enabling users to create and trade NFTs, and implemented cross-chain bridging functionality. As of writing, Cronos’s TVL is 453.34M, with a stablecoin market value of 5.9K, and a 24-hour trading volume of 4.2M.
5.3 Kava’s Competitive Advantages
1)Ecological Status
As Cosmos’s native USDt Defi Hub chain, Kava holds a significant position in stablecoin liquidity. As a Layer 1, it ranks in the top 10 in market value as of October 2023. In the Cosmos ecosystem, it ranks second, dominating the stablecoin market, and its ecological development looks optimistic.
Moreover, Kava has a clear roadmap for EVM asset compatibility, focusing on asset types, cross-chain bridge integration, and subsequent asset circulation with other Cosmos application chains.
Additionally, with renowned Defi products like DYDX entering Cosmos, the overall ecosystem is rapidly developing, bringing more financial circulation possibilities to Defi Hub chains like Kava.
2) Collaboration with DWF Market Makers
On November 15, Kava announced a partnership with DWF market makers. As stated in the announcement, DWF will not only provide basic risk management and liquidation mechanisms but also strategic guidance. They will start proprietary trading in the DEXs on Kava, reaching 7.5% of the total trading volume of all DEXs in the ecosystem.
This partnership significantly enhances Kava’s liquidity by providing more trading pairs and depth, thus increasing market participation. This strategic collaboration positively impacts Kava’s brand image, bringing positive effects in both market and product aspects.
3) Strong Community Expectations (Mainnet and Economic Model)
Following the announcement on November 11 that the K15 mainnet will launch on December 7, the coin price surged by 13.7% on the same day, indicating strong community expectations for the mainnet update. Furthermore, the changes in the token economic model after the launch, limiting the circulation of $KAVA, could potentially trigger a new surge in $KAVA’s value.
5.4 Cosmos Beta
Besides Kava, other promising protocols in the rapidly developing Cosmos ecosystem are recommended as Beta picks:
5.4.1 Neutron ($NTRN)
Neutron is the first chain launched on Cosmos’s Replicated Security, enabling projects to quickly deploy smart contracts on Cosmos Hub.
Positive Narratives:
- Profit-sharing model: Mars Protocol V2 will be deployed on Neutron, offering a percentage of tokens to Neutron; Apollo, a LSDfi protocol on Cosmos, has successfully launched on Neutron.
- Acquisition of a 25% stake in CosmWasm developer Confio.
- Neutron increases demand for $ATOM, supported by Cosmos officials. Projects share validators with the Hub chain and pay $ATOM as service fees. If projects maintain their ecosystem with their tokens, $ATOM’s utility weakens.
5.4.2 THORchain ($RUNE)
THORChain is a cross-chain liquidity protocol supporting native DEX cross-chain transactions (focused on full-chain native asset swaps), lending, and other Defi functions; its AMM mechanism DEX features unique impermanent loss protection and dynamic slippage fees.
Positive Narratives:
- LiFi integration to expand swap functionality.
- Native asset swap supports native BTC transactions. The thriving BTC ecosystem boosts transaction demand, indirectly enhancing LP incentives and stimulating $RUNE purchases.
- THORchain’s Forks, driven by $RUNE, support asset liquidity for various protocols, also fueling $RUNE demand.
5.4.3 Celestia ($TIA)
Celestia, a POS blockchain based on CometBFT and Cosmos SDK, focuses on data availability and modularity.
Positive Narratives:
- Launch of Ethereum Fallback feature to secure user funds in Layer 2 contracts.
- Integration with Manta blockchain.
- Collaboration with OP Stack technology, using Celestia as the DA layer.
5.4.4 Injective ($INJ)
Injective is a Layer 1 blockchain committed to building Defi applications, offering interoperability among chains like Ethereum, IBC-compatible blockchains (e.g., Cosmos ecosystem), and non-EVM compatible chains (e.g., Solana).
Positive Narratives:
- Upcoming Volan mainnet update.
- $INJ burning mechanism.
6. Risks & Challenges
The ecosystem is dominated by native services, with Kava Lend accounting for a third of the total TVL. Other supported Defi protocols like Curve, Sushi are not native to Kava, leading to a somewhat singular ecosystem still in the Defi service stage, with progression to a public chain ecosystem taking time.
The maturity of cross-chain asset exchange is limited; the native bridge within Kava supports Cosmos assets transfer to EVM well, but services for EVM assets into Cosmos are less developed, currently supported only by Stargate or other DEX Aggregators. Ethereum’s strong financial characteristics amplify this deficiency.
Kava’s development is also limited by the growth of Cosmos itself and its ecosystem. If the development is overtaken or replaced by other foundational cross-chain protocols, the attached Cosmos DeFi will also be affected.
7. Conclusion
As a Cosmos and EVM interoperability chain, Kava’s internal support for EVM assets on the Cosmos side is relatively weak compared to competitors. However, it still holds advantages, especially with $72.5M in USDT (EVM) stablecoin assets in the treasury, laying a foundation for future intercommunication with the Cosmos ecosystem.
In the current narrative of “application chains,” whether in Layer 2 Stack or Layer 1 ecosystems like Cosmos&Polkadot, development always hinges on interoperability. As an interoperability chain, Kava is positioned to act as a Defi service intermediary between major EVM and Cosmos application chains in the future.
It’s noteworthy that $KAVA, as an ecosystem and governance fee token, will achieve zero inflation on December 7th. Stopping supply-side output against an expanding application scenario backdrop will undoubtedly trigger a demand-side explosion. Combined with its formal collaboration with DWF, $KAVA is expected to bring more surprises in the future.
Reference:
https://www.mintscan.io/kava/proposals/141
https://medium.com/@Kava-Network/kava-evm-road-ahead-96b115031db4
https://medium.com/evmos/the-evmos-manifesto-7fe5d1ab0d67
https://www.odaily.news/post/5176258
https://zhuanlan.zhihu.com/p/534940418
https://wallet.keplr.app/chains/kava/proposals/168
Declaration
The present report is an original work of @auggest_crypto, a contributor of @GryphsisAcademy, with revision suggestions provided by Gryphsis Academy mentors @CryptoScott_ETH and @Zou_Block. The author(s) alone bear the responsibility for all content, which does not essentially mirror Gryphsis Academy’s views or that of the organization commissioning the report. The editorial content and decisions remain uninfluenced by the readers. Be informed that the author(s) may own the cryptocurrencies mentioned in this report.
This document is exclusively informational and should not be used as a basis for investment decisions. It is highly recommended that you undertake your own research and consult a neutral financial, tax, or legal advisor before making investment decisions. Keep in mind, the past performance of any asset does not guarantee future returns.
