What is Kava? (KAVA)
The Beginner’s Guide
Kava is a software protocol that uses multiple cryptocurrencies to allow its users to borrow and lend assets without the need for a traditional financial intermediary.
In this way, Kava is considered one of a number of emerging decentralized finance (DeFi) projects. However, whereas most DeFi projects run on Ethereum, Kava is instead built on Cosmos, a design decision its team argues adds additional functionality.
Users of its platform lock cryptocurrencies into smart contracts on Cosmos so that they can borrow loans denominated in USDX, a cryptocurrency pegged to the value of the U.S. dollar.
Kava leverages a feature in Cosmos called zones to manage the crypto assets it accepts, which then run in programs on independent networks. This allows the project to broaden the number of crypto assets borrowers can use to include XRP, BNB and BTC, among others.
By collateralizing cryptocurrencies to mint USDX, users receive weekly rewards in the form of KAVA, Kava’s cryptocurrency.
The total amount of KAVA users receive is dependent on the type of collateral used and how much USDX a user mints. As an example, minters using BNB as collateral receive a share of the 74,000 KAVA that the platform issues weekly.
If you wish to receive regular updates from the Kava team, including announcements on newly listed assets, you can bookmark the Kava blog.
Kava was co-founded by Brian Kerr, Ruaridh O’Donnell and Scott Stuart in 2018.
That’s when the founders established Kava Labs, a for-profit company whose goal is to develop and drive the creation of the Kava platform.
The Kava team next held a token sale on the cryptocurrency exchange Binance in 2019, at the time raising $3 million through the sale of 6.5% of the total KAVA supply.
Kava’s decentralized lending platform officially went live in June 2020 at which time BNB could be used as collateral for borrowing USDX. As of August 2020, $24 million worth of BNB were locked into contracts, with 8 million USDX borrowed.
How Does Kava Work?
Kava allows users to lock assets in special smart contracts and borrow USDX.
On the back-end, this creates what is called a collateralized debt position (CDP), a contract designed to ensure the value of USDX remains pegged to the U.S. dollar.
To set up a CDP, users:
- Deposit crypto – Users can connect their wallets to deposit cryptocurrencies.
- Create a CDP – Kava locks the deposited cryptocurrency in a smart contract.
- Create USDX – Users are issued USDX loans based on the value of the CDP.
- Close a CDP - Users repay the debt plus a fee to unlock their collateralized crypto.
- Withdraw crypto - Once the crypto is returned to the user, Kava burns the USDX.
You can think of the collateralization ratio as the mechanism that helps protect the protocol from volatility that would reduce the value of the collateral.
On Kava, USDX is often over-collateralized, meaning that borrowers must deposit an amount that is typically higher than the value of USDX minted by the protocol.
The ratio of debt-to-collateral is then used to calculate the liquidation price.
For example, a collateralization ratio of 200% would mean that a user will get liquidated if the value of the cryptocurrency locked in the protocol falls below 2x the USDX they have borrowed.
If the debt-to-collateral value drops below a specified threshold, the collateral held in smart contracts will automatically be liquidated and burned.
Why Does KAVA Have Value?
The KAVA cryptocurrency is used to reward users who mint USDX, and it plays a key role in the governance of the Kava network.
More specifically, KAVA distributes the management of operations on the network, enabling anyone who holds and stakes the cryptocurrency to vote on its software policies and rules.
This means that by owning and staking KAVA, users can vote to change certain parameters of the software. These include, but are not limited to, the assets the protocol accepts as collateral, the collateralization ratio required and the fees paid by borrowers.
Kava users can also delegate KAVA to the validators who manage its blockchain and compete for newly minted KAVA, allocating votes to them to earn a portion of the stability fees paid by users closing their CDPs.
Like many other cryptocurrencies, the supply of KAVA tokens is also limited, meaning that according to the software’s rules, there will only ever be 100 million KAVA.
Kraken's Crypto Guides
- What is Bitcoin? (BTC)
- What is Ethereum? (ETH)
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- What is Bitcoin Cash? (BCH)
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- What is EOSIO? (EOS)
- What is Stellar? (XLM)
- What is Cardano? (ADA)
- What is Monero? (XMR)
- What is Tron? (TRX)
- What is Dash? (DASH)
- What is Ethereum Classic? (ETC)
- What is Zcash? (ZEC)
- What is Basic Attention Token? (BAT)
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- What is Nano? (NANO)
- What is Dogecoin? (DOGE)
- What is Tether? (USDT)
- What is Dai? (DAI)
- What is Siacoin? (SC)
- What is Lisk? (LSK)
- What is Tezos? (XTZ)
- What is Cosmos? (ATOM)
- What is Augur? (REP)
Kava may be appealing based on its ability to provide cryptocurrency owners with access to decentralized lending services.
Borrowing against one’s cryptocurrency allows users to retain ownership of these assets while receiving other collateral that can be used to purchase goods and services.
Investors may also seek to buy KAVA should they believe in the promise of DeFi and the ability of these protocols to disrupt traditional financial services.
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