Kava 15 Upgrade Focus How Zero Inflation Unlocks New Investment Opportunities in $KAVA

Unlocking New Investment Opportunities with Kava 15 Upgrade Zero Inflation Focus on $KAVA

Author: @auggest_crypto, @GryphsisAcademy

Investment Summary:

• Kava is the native USDt defi hub chain of Cosmos, with a significant position in stablecoin liquidity.

• As a Layer 1 bridging the gap between Cosmos and EVM, with a market value ranking in the top 10 Layer 1 chains (as of October), it holds a leading position in stablecoin market value and has optimistic ecological development.

• Kava has a clear roadmap with clear expectations for EVM asset types, cross-chain bridge integration, asset circulation, and more.

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• Kava’s ecological development has gained momentum, with well-known defi products like dydx entering Cosmos and bringing more financial circulation possibilities to chains like Kava.

• Kava has partnered with DWF market makers, which will significantly improve liquidity, increase market participation, and have a positive impact on Kava’s brand image.

1. Project Overview

1.1 Project Introduction

Kava was originally a CDP (Collateralized Debt Position) automated collateralized borrowing and lending platform similar to Maker DAO. Users can borrow collateralized stablecoin USDX by depositing various cross-chain assets such as BNB, BTC, XRP, BUSD, etc. It also launched the Harvest.io lending protocol (later renamed to Hard Protocol and then Kava Lend), both of which jointly build the Kava defi service.

Kava is built on Cosmos and can function as a standalone chain, thus aiming to become the first defi hub chain on Cosmos.

However, with the development of defi interoperability, version 10 of Kava launched in 2022 will officially shift its focus to becoming a Layer 1 chain developed using Cosmos SDK, with a POS mechanism and EVM compatibility, dedicated to connecting the Cosmos and EVM ecosystems for cross-chain interoperability and asset circulation.

1.2 Basic Information

2. Project Details

2.1 Team

Currently, there are 45 employees with an average tenure of 2.2 years. Core board members like Brian Kerr and Scott Stuart have maintained stability, with a tenure of up to 7 years.

• Brian Kerr: Co-founder and board member of Kava Labs. Previously, he was 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: Chief Developer and Co-founder

• Jack Zampolin: Investment Advisor

2.2 Financing Situation

Kava has disclosed financing close to $5M, with investors including Binance Labs, HashKey, Xpring, Framework Ventures, and others. On October 16, 2019, $KAVA was issued, and 40% of the initial supply was sold to investors through multiple private rounds. An additional 6.25% of the total supply was publicly sold on Binance LaunchLianGuaid at a price of $0.46, raising a cumulative total of $3M.

2.3 Technical Framework

Kava’s structure consists of the Cosmos Co-Chain and Ethereum Co-Chain, both built on the Cosmos Tendermint consensus engine. The Ethereum Co-Chain allows developers to deploy using Solidity or migrate applications directly to Kava. The Cosmos Co-Chain communicates with the entire Cosmos ecosystem through the IBC protocol. The Translator Module connects the two different execution environments, facilitating easier access for both sides.

Source: WhiteLianGuaiper

Internally, Kava is divided into Kava IBC (Cosmos environment) and Kava EVM (EVM environment), where:

1) Cosmos to EVM:

Native internal bridge launched on Kava14, as a Cosmos SDK module, which can be integrated into various applications and wallets. It allows users to transfer Cosmos assets to the EVM environment in ERC20 format, enabling asset transfer. For example, if $KAVA wants to be used in the EVM environment, it can be wrapped as $wKAVA (ERC20 attributes) for use in the EVM environment.

Unlike external bridges, the Kava internal bridge transfers assets within the same ledger, similar to the way the IBC protocol changes states between different ledgers, ensuring consistency and compatibility.

2) EVM to Cosmos:

Currently, Kava EVM allows cross-chain transfers to Kava IBC, with Osmosis on the Cosmos side, Injective, and Evmos on the EVM side for $USDt and $ATOM.

It can be seen that asset transfers to the Cosmos side are weaker in Kava’s EVM side. The only supported Evmos chain is not part of the Ethereum ecosystem; it is a Layer 1 that is compatible with both EVM and Cosmos, so full interaction with the Ethereum ecosystem has not yet been fully implemented. Currently, the support for transferring EVM assets to Cosmos is limited to bridges like Stargate or other cross-chain aggregators; the internal support in Kava is limited in scope.

2.4 Product System

Kava Labs primarily consists of the following DeFi services:

1. Kava Staking: Retail investors holding $KAVA can delegate their assets to nodes for staking and earn income.

2. Kava Lend: Originally known as Harvest, then renamed to Hard Protocol, it allows users to lend out various ecosystem assets such as BTC, XRP, BNB, BUSD, and earn interest. In addition to basic interest incentives for lending users, there are also mining incentives with $KAVA.

3. Kava Earn: As a yield strategy in DeFi, it incentivizes users to lock $bKAVA to earn high APY, thereby increasing Kava’s TVL.

4. Kava Mint: Derived from the Kava CDP protocol, it allows users to collateralize cross-chain assets to mint the collateralized stablecoin USDX.

5. Liquid Staking: Stake $KAVA and earn $bKAVA. The system transfers the staked $KAVA to the Earn mechanism to achieve higher returns.

6. Kava Swap: An AMM model swap mechanism that allows users to seamlessly trade various assets across different blockchains or earn additional income by providing liquidity.

2.5 Ecosystem

Currently, Kava’s total TVL is 340.67M, stablecoin market value is 129.06M, and daily trading volume is 1.44M. There are already more than 116 protocols deployed on it, with a high proportion in the DeFi category. However, according to protocol rankings, Kava’s native Defi services still dominate, with the top five mainly consisting of Kava Lend, Kava Mint, Kava Earn, etc. The ecosystem does not have standout native independent protocols like Blur on Arbitrum.

3. Development History

3.1 Significant Historical Events

First, let’s take a look at the significant events of Kava since its inception.

March 1, 2019: Kava raised $1.2M led by Venture Capital

February 5, 2020: Kava launched the first cross-chain lending platform CDP Testnet

February 27, 2020: Official integration announcement with Trust Wallet, supporting $KAVA storage, transfer, and collateralization

March 25, 2020: Announced long-term strategic partnership with Chainlink

April 16, 2020: Became one of the first cooperative partners in the OKChain open-source cross-chain ecosystem

April 30, 2020: Kava released the CDP pre-registration page and opened user testing

May 15, 2020: Established on-chain governance committee mechanism

June 11, 2020, Kava3 launched the first CDP, supporting the collateralization of BNB to borrow USDX

August 13, 2020, established a partnership with Injective Protocol

October 15, 2020, Kava4 supports Harvest.io V1 version

November 6, 2020, enabled cross-chain transfers with Binance Chain, supporting BTC, XRP, BNB, BUSD transactions

February 9, 2021, passed CertiK audit

April 9, 2021, Kava5 launched Harvest V2 version, allowing asset lending 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 launched AMM Swap mechanism

September 22, 2021, Kava Rise incentive program announced $185M funding to attract projects

January 20, 2022, Kava9 integrated IBC protocol, targeting a wider Cosmos ecosystem

March 3, 2022, launched $750M Kava Rise developer incentive program

April 7, 2022, Ethereum Co-Chain Alpha

April 27, 2022, CosmosEVM Era officially launched

May 25, 2022, Kava10 EVM launched, officially becoming the Cosmos&EVM interoperability hub chain

June 21, 2022, partnered with Celer cBridge for cross-chain asset transfer

September 9, 2022, Curve Finance launched on Kava

October 26, 2022, Kava11 launched $bKAVA to increase staking token liquidity

January 12, 2023, Kava12 launched DAO

March 15, 2023, Kava13 launched EVM 2.0

April 4, 2023, community proposal to create a dual-foundation structure

May 12, 2023, Kava EVM roadmap launched

June 22, 2023, Tether to launch stablecoin USDT on Kava

July 13, 2023, Kava14 successfully upgraded, deployed an internal cross-chain bridge to convert native Cosmos assets into Ethereum ERC20 standards

July 14, 2023, Kava 14 opened native Cosmos assets on Ethereum

September 2, 2023, Stargate launched Kava native USDt liquidity pool

November 15, 2023, Kava and DWF Lab enter into a strategic partnership

December 7, 2023, Kava 15 implements token zero inflation

3.2 Price trend

3.3 Kava 15

Kava 15 mainnet will officially launch on December 7th. In proposal 141, which is crucial to K15, the future roadmap lists three areas of AdoLianGuaition, Security, and Governance.

1) Adoption:

Kava aims to position itself as the stablecoin aggregator of the Cosmos ecosystem, allowing various stablecoins to integrate with Kava. This would make Kava the exclusive hub chain for stablecoins within Cosmos, enabling better interaction with other application chains such as DYDX, Osmosis, and more. For example, Injective already supports Kava’s BTC/USDC and ETH/USDT perpetual pools.

In terms of EVM native bridges, Kava will integrate with mainstream bridges such as Layerzero, Wormhole, Multicahin, Axelar, etc., to enable more efficient and faster interaction with EVM native assets. In terms of tokens, there are plans to integrate more wrapped tokens such as WBTC and WETH. Currently, Stargate already supports wETH on Kava.

By connecting the liquidity of the EVM, the native protocols of the ecosystem not only benefit but also attract more investment and liquidity from CEX.

2) Security:

Main focus is on node availability and software scalability, optimizing nodes to improve reception, processing, and interaction with validators, ultimately providing decentralized services; optimizing software scalability to support higher transaction volumes and requests.

3) Governance:

Following the principle of maintaining Cosmos’ sovereignty and autonomy, Kava extends community governance to the Kava EVM level to maintain consistency between the Cosmos and EVM frameworks. Additionally, two independent foundations will be established in the future to jointly maintain the sustainable development of Kava, where the remaining net profits, excluding staking rewards in the ecosystem, will be governed by these two foundations.

4. Economic Model

4.1 Model & Allocation

4.1.1 Token Model

1) Dual Token Economic Model

Kava adopts a Dual Token Economic Model, consisting of the equity and governance token $KAVA and the stablecoin $USDX.

• $KAVA: This token has various use cases within the ecosystem, such as staking for proof-of-stake (POS), inflationary rewards, transaction fees, voting, and governance.

• $bKAVA: This is a derivative token that allows liquidity staking of $KAVA.

• $wKAVA: It is an ERC20 wrapped version of $KAVA.

• $USDX: This is the native stablecoin of the system, primarily used in the CDP protocol. Users can obtain USDX by pledging assets, thereby gaining increased liquidity, similar to DAI in MakerDAO.

2) Uses of $KAVA:

1. Transaction Fees: Various ecosystem costs require payment in $KAVA, including asset transfers, opening/closing CDPs, and regular transactions. In CDPs, transaction fees are distributed proportionally between validators and delegators.

2. Staking Rewards: Staking $KAVA tokens can earn an APR of 3%-20% based on the overall staking rate on the network.

3. Validator Commissions: Node validators can earn a certain percentage of commissions from the profits made by their delegators.

4. Community Governance: Users have the right to propose and vote on modifications to platform rules.

3) Deflationary Mechanism:

For every new block produced in the network, new $KAVA tokens are emitted as rewards for node validators, resulting in an expected annual inflation rate of 7%. However, each CDP has an associated stability fee, and when $KAVA is used to pay this fee, it is burned, thus maintaining a balance of token supply.

4.1.2 $KAVA Distribution Mechanism:

The token has no maximum supply limit, but there were initially 100 million tokens at genesis.

Source: CoinMarketCap

Source: CoinMarketCap

4.1.3 $USDX Pegging Mechanism

USDX is a stablecoin collateralized by CDPs and pegged to the US dollar at a 1:1 ratio. Its supply is adjusted algorithmically to maintain price stability.

When users borrow USDX by collateralizing their assets, a certain collateralization ratio is maintained. For example, if $150 worth of assets is deposited, $100 worth of USDX can be borrowed, with the price tethered to the collateralized assets.

When the price of collateral assets drops too fast, the system will initiate a liquidation mechanism or debt auction to sell off the collateral assets at a price below the market price, while increasing the supply of USDX, thereby causing the price of USDX to also decrease and maintain stability with the anchored assets. Additionally, if market fluctuations have exceeded the system’s automatic adjustment range, the $KAVA token will act as the “lender of last resort” and inflate and auction off $KAVA tokens as collateral to compensate for the USDX price.

In addition, Kava has made some optimizations to the price mechanism of USDX, such as:

1. Publishing market ratios through Chainlink’s Oracle Feed to obtain high-quality market data and achieve accurate anchoring between collateral and USDX.

2. Offering multiple collateral assets to distribute the risk of a single asset. When the system is forced to sell collateral at a low price, the recovered assets may not be enough to cover the system’s bad debts, so the profits from other collateral assets can be used to make up for it and improve risk resistance.

However, the USDX price is still heavily linked in the short term. On April 11, 23, the USDX price plummeted to $0.1, then quickly rebounded to $0.8. Founder Scott Stuart pointed out that price stability for USDX is not a necessary condition; on the contrary, he believes that USDX is most suitable to be linked to market fluctuations.

4.2 2.0 Update

In the upcoming K15, it is clearly stated that inflation rates will be discarded, and the circulating token supply on the market will be the maximum supply. No new $KAVA can be created, and the inflation rate is planned to be permanently reduced to 0 as of December 31.

The surplus of $KAVA mainly comes from native project emissions, transaction fees, and foundations. That is, this portion of $KAVA as ecosystem fees will return to the community rather than going directly to node validators. The community will decide how to use this fund (burn or reinvest), thereby further decentralizing the network.

As a result, the total supply of $KAVA only decreases and does not increase, and with $KAVA as ecosystem fees and governance rights, the demand will gradually increase in subsequent ecological growth, evident in the increased demand side.

5. Track Analysis

5.1 Track Overview

Kava belongs to the Layer 1 track, expanding a series of Layer 1 underlying networks such as BSC, Sui, Aptos, Solana, etc., based on Ethereum and Bitcoin as pioneering networks, making the overall ecosystem prosperous. (At the time of writing) Its market capitalization is 1125 billion, occupying the TOP2 spot in the overall blockchain market category. Among them, Ethereum takes the lead in the track, and other public chains such as Tron, BSC, TON, Solana have performed well.

Source: Coingecko

Source: Defillama

The underlying protocols of Layer 1 blockchains, such as module architecture, consensus mechanisms, and block mechanisms, have a significant impact on the performance and scalability of the entire blockchain. Different Layer 1 designs result in different characteristics, with some focusing on transaction processing speed and others on privacy and security.

Classifying according to characteristics, for example, Ethereum and EVM-compatible chains are one category, while non-EVM-compatible chains are another, and chains focused on creating their own ecosystems like Cosmos & Polkadot are yet another…

Among them, Kava is a subdivision within Cosmos, focusing on connecting the Cosmos and EVM ecosystems and providing cross-chain interoperability as a Layer 1 public chain. In Cosmos, Kava ranks third in terms of Total Value Locked (TVL).

5.2 Competing Projects

Let’s take a look at Kava’s competitors in the Cosmos & EVM-compatible Layer 1 public chain.

1.EVMOS

Source: Website

EVMOS originated from Ethermint, an EVM chain built using Cosmos SDK, with the aim of linking the Ethereum and Cosmos ecosystems through the Tendermint consensus protocol.

Later, the team realized the need for Cosmos and Ethereum to share prosperity and benefit each other, which led to the establishment of EVMOS. It aims to build an EVM stack solution on Cosmos, allowing the existing EVM community to quickly deploy on Cosmos while providing interoperability between the two.

Therefore, in 2022, Ethermint successfully rebranded as EVMOS, bringing the EVM chain, applications, assets, and users into the Cosmos ecosystem. As of the time of writing, EVMOS has a TVL of 4.52M, stablecoin market cap of 130K, and 24-hour trading volume of 160K.

2. Cronos

Source: Website

Cronos is also built on Cosmos SDK and provided by the open-source project Ethermint (formerly EVMOS), aiming to quickly connect Ethereum and other EVM ecosystems through the IBC protocol and other Cosmos chains. It focuses on Layer 1 solutions for Defi, NFT, Games, and Metaverse. It released its mainnet in November 2021 and quickly gained millions of users and 500+ applications.

It has launched a dedicated NFT marketplace, allowing users to create and trade NFTs, while also implementing cross-chain bridging capabilities for users to transfer assets from other blockchains to Cronos. However, its EVM-based public chain is still under development. As of the time of writing, Cronos has a TVL of 453.34M, stablecoin market cap of 5.9K, and 24-hour trading volume of 4.2M.

5.3 Kava Competitive Advantages

1) Ecological status

Kava, as the native USDt Defi Hub chain of Cosmos, has significant stablecoin liquidity. As a Layer 1 chain, it ranks in the top 10 in terms of market capitalization (as of October 2023) and is the second largest within the Cosmos ecosystem. The stablecoin market has a leading position, and the ecosystem’s development is optimistic.

Source: Defillama

Furthermore, it has a clear roadmap for EVM asset compatibility development, including the type of assets, the integration of asset cross-chain bridges, and the circulation of assets with other Cosmos application chains in the future. These expectations are well-defined.

With the entry of well-known Defi products like DYDX into Cosmos, the overall ecosystem has gained momentum, providing more financial circulation possibilities for Defi Hub chains like Kava.

2) DWF Market Maker Collaboration

Kava established a partnership with DWF Market Makers on November 15th. In their announcement, it was stated that DWF would not only provide basic risk management, liquidation mechanisms, fee structures, but also strategic guidance. DWF will begin self-trading on the Kava chain’s DEX and aims to reach 7.5% of the total trading volume of all DEXs within the ecosystem.

This collaboration will significantly enhance Kava’s liquidity by providing more trading pairs and depth, thereby increasing market participation. Additionally, this strategic collaboration has a positive impact on Kava’s brand image. Therefore, overall, the collaboration with DWF has brought positive effects on the market and product for Kava.

3) Strong Community Expectations (Mainnet and Economic Model)

After Kava officially announced on November 11th that the K15 mainnet would launch on December 7th, the token price rose by 13.7% on the same day, indicating a strong community expectation for the mainnet update. Furthermore, the changes in the token’s economic model after the mainnet launch will limit the circulation of $KAVA and potentially trigger a new round of explosive growth.

Source: Coingecko

5.4 Cosmos Beta

In addition to Kava, the Cosmos ecosystem has experienced significant development recently. We have collected the following excellent protocols as Beta recommendations:

5.4.1 Neutron ($NTRN)

Neutron is the first chain launched on Cosmos’ Replicated Security, allowing project teams to deploy smart contracts quickly on the Cosmos Hub.

Good news narrative:

1. Cooperative profit model integration. The Mars Protocol V2 version will be deployed on Neutron and will give a certain percentage of tokens to Neutron; The LSDfi protocol on Apollo and Cosmos has also successfully launched on Neutron.

2. Acquisition of 25% equity in programming environment CosmWasm developer Conflio.

3. The existence of Neutron increases the demand for $ATOM by project parties and is more endorsed by Cosmos officials. Because they need to pay $ATOM as a service fee while sharing validators with the Hub chain. If the project develops its own ecosystem and uses its own tokens to maintain the ecosystem, the application scenarios for $ATOM will be weakened.

5.4.2 THORchain ($RUNE）

THORChain is a cross-chain liquidity protocol that supports native DEX cross-chain transactions (focused on native asset swaps across chains), lending, and other Defi features related to earning. Its unique AMM mechanism protects against impermanent losses and has dynamic slippage fees.

Good news narrative:

1. LiFi is about to integrate THORchain to expand the swap functionality.

2. Native asset swaps support native BTC trading, and the hot BTC ecosystem drives up trading demand. This indirectly increases LP incentives, thereby promoting the purchase of $RUNE.

3. THORchain’s forks will be driven by $RUNE to support the asset liquidity of various protocols, but it also stimulates the demand for holding $RUNE.

5.4.3 Celestia ($TIA)

Celestia is a POS blockchain based on CometBFT and Cosmos SDK, focusing on modularity for data availability.

Good news narrative:

1. Introduced Ethereum fallback feature to ensure that user funds are not stuck in Layer 2 contracts.

2. Integration with Manta public chain.

3. Cooperation and integration with OP Stack technology, using Celestia as the DA layer.

5.4.4 Injective ($INJ)

Injective is a Layer 1 blockchain dedicated to building interoperable Defi applications. It supports cross-chain interoperability between chains such as Ethereum, IBC-compatible blockchains (like the Cosmos ecosystem), and non-EVM-compatible chains (like Solana).

Good news narrative:

1. Volan mainnet update is coming soon.

2. $INJ burning mechanism.

6. Risks & Challenges

1. The ecological protocols are monopolized by local services, with Kava Lend accounting for 1/3 of the total TVL. Other supported Defi protocols such as Curve, Sushi, etc., are not native protocols of Kava, which leads to an overly single ecosystem. It still seems to be in the stage of Defi service and needs time to move towards the public chain ecosystem.

2. Cross-chain asset exchange maturity is not high. The internal native bridge has higher support for transferring Cosmos assets to EVM, but services for transferring EVM assets to Cosmos are not extensive. Currently, only Stargate or other DEX aggregators support transferring EVM assets to Kava. Ethereum’s strong financial attributes amplify this flaw.

3. Kava’s development is also limited by Cosmos itself and the development of its ecosystem. If the development of the ecosystem is surpassed or replaced by other underlying cross-chain protocols, the DeFi dependent on the Cosmos ecosystem will also be affected.

7. Conclusion

As a Cosmos and EVM interoperable chain, Kava has relatively weak internal support for EVM assets on the Cosmos side, but still holds an advantage compared to other competitors. Particularly, it has $72.5M in USDT (EVM) stablecoin assets in its treasury, providing a foundation for future interoperability with the Cosmos ecosystem.

Furthermore, in the current narrative of “application chains,” whether it’s Layer 2 Stack or Layer 1 platforms like Cosmos & Polkadot, ecosystem development will always rely on interoperability. As an interoperable chain, Kava will serve as a middleman for DeFi services between major EVM application chains and Cosmos application chains in the future.

It is worth noting that $KAVA, as the token for ecosystem and governance fees, will achieve zero inflation on December 7th. Stopping supply-side production against the backdrop of expanding application scenarios will undoubtedly trigger an explosion in demand. Additionally, with its formal collaboration with DWF, we believe that $KAVA can bring more surprises in the future.

References:

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://medium.com/kavachinese/kava%E5%A5%96%E5%8A%B1%E6%9B%B4%E6%96%B0-%E6%8F%90%E9%AB%98usdx%E4%BB%B7%E6%A0%BC%E7%A8%B3%E5%AE%9A%E7%9A%84%E6%B2%BB%E7%90%86%E8%AE%A1%E5%88%92-c5423d7d34bb

https://medium.com/kavachinese/%E5%85%B3%E4%BA%8E%E6%8F%90%E9%AB%98usdx%E7%A8%B3%E5%AE%9A%E6%80%A7%E7%9A%84%E6%B2%BB%E7%90%86%E6%80%BB%E7%BB%93-a3cc6104dbfe

https://wallet.keplr.app/chains/kava/proposals/168

https://medium.com/kavachinese/usdx%E7%A8%B3%E5%AE%9A%E6%9C%BA%E5%88%B6%E4%BB%8B%E7%BB%8D-8c1a1b9730de

https://medium.com/kavachinese/%E6%96%87%E6%9C%AB%E6%9C%89%E5%BD%A9%E8%9B%8B-%E5%9B%9E%E9%A1%BEkava-2020-%E6%9C%9F%E5%BE%852021%E6%9B%B4%E5%A4%9A%E5%8F%AF%E8%83%BD-7c2d7398cd16

https://medium.com/kavachinese/usdx%E7%A8%B3%E5%AE%9A%E6%9C%BA%E5%88%B6%E4%BB%8B%E7%BB%8D-8c1a1b9730de

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