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

Author: @auggest_crypto, @GryphsisAcademy

Investment Overview:

• Kava is the Defi Hub chain of native USDt in Cosmos, holding a significant position in stablecoin liquidity.

• As a Layer 1 chain that bridges cross-chain interoperability between Cosmos and EVM, it ranks among the top 10 in market capitalization (as of October), with stablecoin market cap leading the Cosmos ecosystem, showing optimistic ecological development.

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

• Kava's ecological development momentum is strong, especially with well-known Defi products like dydx entering Cosmos, bringing more financial circulation possibilities to Kava as a Defi Hub chain.

• Kava has partnered with DWF market makers, which will significantly enhance liquidity, increase market participation, and positively impact Kava's brand image.

1. Project Summary

1.1 Project Introduction

Kava originally functioned as an automated collateralized lending platform similar to Maker DAO, allowing users to deposit diverse cross-chain assets such as BNB, BTC, XRP, BUSD, etc., to borrow the collateralized stablecoin USDX. It also launched the Harvest.io lending protocol (later renamed Hard Protocol, and then Kava Lend), both of which contribute to Kava's Defi services.

Kava is built on Cosmos and can operate as an independent chain, thus aiming to become the first Defi Hub chain on Cosmos.

However, with the development of Defi interoperability, Kava version 10 was launched in 2022, officially transitioning it into a Layer 1 chain developed with Cosmos SDK, utilizing a POS mechanism and EVM compatibility, dedicated to connecting 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 tenures of 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: Chief Developer and Co-founder

• Jack Zampolin: Investment Advisor

2.2 Financing Situation

Kava has disclosed nearly $5M in financing, with investors including Binance Labs, HashKey, Xpring, Framework Ventures, etc. On October 16, 2019, it issued $KAVA, selling 40% of the initial supply to investors through multiple rounds of private placements, while 6.25% of the total supply was publicly sold on Binance Launchpad at a price of $0.46, raising a total of $3M.

2.3 Technical Framework

Kava's structure consists of 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 directly migrate applications to Kava, while the Cosmos Co-Chain communicates with the entire Cosmos ecosystem through the IBC protocol. The two are connected via a Translator Module to facilitate easier access between the two different execution environments.

Source: Whitepaper

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

1) From Cosmos to EVM:

The native internal bridge launched in Kava14 serves as a Cosmos SDK module that can be integrated into various applications and wallets. It allows users to transfer Cosmos assets in ERC20 form to the EVM environment for asset transfer. For example, if $KAVA wants to be used in the EVM environment, it can be wrapped into $wKAVA (ERC20 attributes) 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 states between different ledgers, ensuring consistency and compatibility.

2) From EVM to Cosmos:

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

It can be seen that Kava's asset transfer capabilities on the EVM side are relatively weak, with the only supported Evmos chain not being part of the Ethereum ecosystem; it is a Layer 1 chain that is compatible with both EVM and Cosmos. Therefore, the interaction with the Ethereum ecosystem has not been fully realized. Currently, the only support for transferring EVM assets to Cosmos comes from Stargate and other cross-chain aggregators, with limited internal support from Kava.

2.4 Product System

Kava Labs mainly consists of the following Defi services:

1. Kava Staking: Retail holders of $KAVA can delegate their assets to nodes for staking and earn rewards.

2. Kava Lend: Initially known as Harvest, then Hard Protocol, and finally renamed. It allows users to deposit various ecosystem assets such as BTC, XRP, BNB, BUSD, etc., to borrow other assets. The ecosystem not only provides basic interest rate incentives for borrowers but also $KAVA mining incentives.

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

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

5. Liquid Staking: Users can stake their $KAVA to receive $bKAVA, with the system depositing the staked $KAVA into the Earn mechanism for higher returns.

6. Kava Swap: An AMM model swap mechanism that allows users to seamlessly trade various assets across different blockchains or earn additional rewards 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, based on protocol rankings, Kava's native Defi services still dominate, with the top five primarily covered by Kava Lend, Kava Mint, Kava Earn, etc., and there are no standout independent native protocols like Blur on Arbitrum.

3. Development History

3.1 Major Historical Events

First, let's take a look at the significant events in Kava's history since its establishment.

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

On February 5, 2020, Kava launched the first cross-chain lending platform CDP testnet.

On February 27, 2020, it officially announced integration with Trust Wallet, supporting $KAVA storage, transfers, and collateralization.

On March 25, 2020, it announced a long-term strategic partnership with Chainlink.

On April 16, 2020, it became one of the first partners of the OKChain open-source cross-chain ecosystem.

On April 30, 2020, Kava released the CDP pre-registration page, opening user testing.

On May 15, 2020, it established an on-chain governance committee mechanism.

On June 11, 2020, Kava3 launched the first CDP, supporting BNB collateral to borrow USDX.

On August 13, 2020, it established a partnership with Injective Protocol.

On October 15, 2020, Kava4 supported Harvest.io V1 version.

On November 6, 2020, it opened cross-chain transfer functions with Binance Chain, supporting BTC, XPR, BNB, BUSD cross-chain transactions.

On February 9, 2021, it passed the CertiK audit.

On April 9, 2021, Kava5 launched Harvest V2 version, allowing asset borrowing and providing $HARD mining incentives.

On July 26, 2021, Kava5 mainnet rollback occurred.

On July 27, 2021, Centre planned to issue USDC on Kava.

On August 31, 2021, Kava 8 launched the AMM Swap mechanism.

On September 22, 2021, the Kava Rise incentive program was announced with $185M funding to attract projects.

On January 20, 2022, Kava9 integrated the IBC protocol, targeting a broader Cosmos ecosystem.

On March 3, 2022, it launched a $750M Kava Rise developer incentive program.

On April 7, 2022, Ethereum Co-Chain Alpha was launched.

On April 27, 2022, the CosmosEVM Era officially started.

On May 25, 2022, Kava10 EVM launched, officially becoming a Cosmos & EVM interoperability Hub chain.

On June 21, 2022, it partnered with Celer cBridge for cross-chain asset transfers.

On September 9, 2022, Curve Finance launched on Kava.

On October 26, 2022, Kava11 launched $bKAVA to enhance the liquidity of staking tokens.

On January 12, 2023, Kava12 launched DAO.

On March 15, 2023, Kava13 launched EVM 2.0.

On April 4, 2023, a community proposal was created to establish a dual foundation structure.

On May 12, 2023, the Kava EVM roadmap was launched.

On June 22, 2023, Tether will launch the stablecoin USDT on Kava.

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

On July 14, 2023, Kava 14 opened native Cosmos assets to Ethereum.

On September 2, 2023, Stargate launched Kava's native USDt liquidity pool.

On November 15, 2023, Kava and DWF Lab reached a strategic partnership.

On December 7, 2023, Kava 15 achieved zero inflation for the native token.

3.2 Price Trend

3.3 Kava 15

The Kava 15 mainnet will officially launch on December 7. In proposal number 141, which plays a key role in K15, the future roadmap outlines three areas: Adoption, Security, and Governance.

1) Adoption:

Kava aims to position itself as the stablecoin hub for the Cosmos ecosystem, integrating various stablecoins into Kava, thus becoming the exclusive stablecoin Hub chain for Cosmos, facilitating better interaction with other application chains like DYDX, Osmosis, etc. For instance, Injective already supports Kava's BTC/USDC and ETH/USDT perpetual pools.

On the EVM native bridge front, Kava will subsequently integrate with mainstream bridges like Layerzero, Wormhole, Multichain, Axelar, etc., for more efficient and rapid interaction with EVM native assets. In terms of tokens, it will consider integrating more wrapped tokens like WBTC, WETH, etc. Currently, Stargate has already supported wETH on Kava.

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

2) Security:

This mainly focuses on node availability and software scalability, optimizing nodes to improve reception, processing, and interaction with validators, ultimately decentralizing services; optimizing software scalability to support higher transaction volumes and requests.

3) Governance:

Kava will extend community governance to the Kava EVM level while maintaining the principle of sovereign autonomy in Cosmos, ensuring governance consistency between the Cosmos and EVM frameworks. In the future, two independent foundations will be established to jointly maintain Kava's ongoing development, with the net surplus from handling staking rewards managed by the two foundations.

4. Economic Model

4.1 Model & Distribution

4.1.1 Token Model

1) Dual Token Economic Model

Kava adopts a dual token economic model, with the governance and staking token $KAVA and the stablecoin $USDX.

• $KAVA: A versatile ecosystem token used for various purposes, such as a POS staking token, inflation rewards, transaction fees, voting, and governance.

• $bKAVA: A liquid staking derivative token that allows staked $KAVA to retain liquidity.

• $wKAVA: A wrapped token of $KAVA with ERC20 attributes.

• $USDX: The system's native stablecoin, primarily used in the CDP protocol, allowing users to obtain USDX by staking tokens for higher liquidity, similar to DAI in MakerDAO.

2) Uses of $KAVA:

1. Transaction Fees: Ecosystem fees must be paid using $KAVA tokens, including asset transfers, opening/closing CDPs, transfer transactions, etc. The transaction fees for CDPs will be distributed to validators and delegators in a certain proportion.

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

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

4. Community Governance: Holders have the right to propose and vote on changes to platform rules.

3) Deflation Mechanism:

Every time a new block is generated in the network, new $KAVA is issued as rewards for node validators, with an expected annual inflation rate of 7%. However, each CDP will have a corresponding stable fee rate, and when $KAVA is used to pay the stable fee for the CDP collateral, it will be burned to maintain the token's balance.

4.1.2 $KAVA Distribution Mechanism:

There is no upper limit on token issuance, but there were 100 million tokens at the genesis.

Source: CoinMarketCap

Source: CoinMarketCap

4.1.3 $USDX Pegging Mechanism

USDX is a CDP collateralized stablecoin, soft-pegged to the US dollar at a 1:1 ratio, using an elastic supply mechanism to adjust supply algorithmically to maintain price stability.

When users collateralize assets to borrow USDX, there is a certain collateralization ratio. For example, if assets worth $150 are deposited, $100 worth of USDX can be borrowed, with its price linked to the collateralized assets.

If the price of the collateralized assets drops too quickly, the system will initiate a liquidation mechanism or debt auction, selling the collateralized assets at a price below the market price while increasing the supply of USDX, causing its price to drop and maintain stability with the pegged assets. Additionally, if market fluctuations exceed the system's automatic adjustment range, the $KAVA token will act as a "lender of last resort," undergoing inflation and auctioning to collateralize and stabilize the price of USDX.

Furthermore, 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 for accurate anchoring of collateral and USDX.

2. Opening multiple collateral assets to share the risk of a single asset. When the system is forced to sell collateral at a low price, the recovered assets may not cover the system's bad debts, so profits from other collateral assets can be used to compensate, enhancing risk resistance.

However, the USDX price still experiences severe short-term pegging issues. On April 11, 2023, 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; rather, he believes that USDX should ideally be linked to market fluctuations.

4.2 2.0 Update

In the upcoming K15, it is explicitly stated that the inflation rate will be abandoned, meaning the circulating supply of tokens will be the maximum supply. No new $KAVA can be created, and the plan is to permanently reduce the inflation rate to 0 by December 31.

The surplus of $KAVA mainly comes from native project emissions, transaction fees, and the foundation. This portion of $KAVA as ecosystem fees will return to the community rather than directly to node validators. The community will decide how to use these funds (burning or reinvesting), further enhancing the network's decentralization.

Thus, the total supply of $KAVA will only decrease, and as $KAVA serves as ecosystem fees and governance rights, demand is expected to increase with the growth of the ecosystem.

5. Track Analysis

5.1 Track Overview

Kava belongs to the Layer 1 track, expanding from Ethereum and Bitcoin as pioneering networks to a series of Layer 1 underlying networks like BSC, Sui, Aptos, Solana, etc., resulting in a prosperous overall ecosystem (as of the time of writing), with a market cap of $1125 Billion, ranking TOP2 in the overall blockchain market cap category. Ethereum leads the track, with Tron, BSC, TON, Solana, and other public chains performing well.

Source: Coingecko

Source: Defillama

The underlying protocols of Layer 1 blockchains, including their modular architecture, consensus mechanisms, block mechanisms, etc., significantly impact the overall performance and scalability of the blockchain. Different Layer 1 designs lead to different characteristics; some public chains focus on transaction processing speed, while others emphasize privacy and security.

Based on characteristics, they can be categorized, such as Ethereum and EVM-compatible chains as one category, non-EVM-compatible chains as another, and chains focused on their ecosystems like Cosmos & Polkadot as another…

Kava is specifically segmented within Cosmos, focusing on connecting the Cosmos and EVM ecosystems, providing cross-chain interoperability as a Layer 1 public chain, ranking third in TVL within Cosmos.

5.2 Competitive Projects

In the Cosmos & EVM Compatible Layer 1 public chains, let's take a look at Kava's competitors.

1. EVMOS

Source: Website

EVMOS originated from Ethermint, an EVM chain built with Cosmos SDK, aiming to link the Ethereum and Cosmos ecosystems through the Tendermint consensus protocol.

Later, the team recognized the need for Cosmos and Ethereum to share prosperity and benefit from each other, thus founding EVMOS, aiming to build an EVM Stack solution on Cosmos, allowing the existing EVM community to quickly deploy on Cosmos while providing interoperability between the two.

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

2. Cronos

Source: Website

Cronos is also built on Cosmos SDK, leveraging the open-source project Ethermint (formerly EVMOS) to provide rapid connections between Ethereum and other EVM ecosystems, facilitating interoperability through IBC with other Cosmos chains, focusing on Defi, NFT, Games, and Metaverse as a Layer 1. It launched its mainnet in November 2021, quickly accumulating millions of users and over 500 applications.

It has launched a dedicated NFT marketplace, allowing users to create and trade NFTs; it also implements cross-chain bridging functionality, enabling users to transfer assets from other blockchains to Cronos, although its EVM layer public chain is still under support. As of the time of writing, Cronos has a TVL of $453.34M, a stablecoin market cap of $5.9K, and a 24-hour trading volume of $4.2M.

5.3 Kava's Competitive Advantages

1) Ecological Position

Kava, as the Defi Hub chain of native USDt in Cosmos, holds a significant position in stablecoin liquidity. As a Layer 1, it ranks among the top 10 in overall market capitalization (as of October 2023); within the Cosmos ecosystem, it ranks second, with stablecoin market cap leading the way, showing optimistic ecological development.

Source: Defillama

Moreover, it has a clear roadmap for the development of EVM asset compatibility, with specific expectations regarding asset types, cross-chain bridge integration, and future asset circulation with other application chains in Cosmos.

With well-known Defi products like DYDX entering Cosmos, the overall ecological development momentum is strong, bringing more financial circulation possibilities to Kava as a Defi Hub chain.

2) DWF Market Maker Partnership

On November 15, Kava reached a partnership with DWF market makers. In their announcement, it was clearly stated that DWF would provide not only basic risk management, liquidation mechanisms, and fee structures but also strategic guidance, starting proprietary trading in Kava's DEX, aiming to achieve 7.5% of the total trading volume across all DEXs in the current ecosystem.

This will significantly help Kava enhance liquidity by providing more trading pairs and depth, thereby increasing market participation. Additionally, such a strategic partnership will have a positive impact on Kava's brand image. Overall, the collaboration with DWF brings positive effects on both the market and product fronts.

3) Strong Community Expectations (Mainnet and Economic Model)

After Kava officially announced on November 11 that the K15 mainnet would launch on December 7, the token price rose by 13.7% on the same day, indicating strong community expectations for the mainnet update. Coupled with changes in the token economic model post-launch, the limited circulation of $KAVA may trigger a new round of growth.

Source: Coingecko

5.4 Cosmos Beta

In addition to Kava, the recent rapid development of the Cosmos ecosystem has led us to collect the following promising protocols as Beta recommendations:

5.4.1 Neutron ($NTRN)

Neutron is the first chain launched on Cosmos's Replicated Security, enabling project parties to quickly deploy by deploying smart contracts on Cosmos Hub.

Positive Narrative:

1. Cooperative revenue models are interconnected. The Mars Protocol V2 version will be deployed on Neutron and provide a certain proportion of tokens to Neutron; Apollo, the LSDfi protocol on Cosmos, has also successfully launched on Neutron.

2. Acquired 25% of the shares of the programming environment CosmWasm developer Conflio.

3. Neutron's existence increases the demand for $ATOM from project parties, making it more favored by Cosmos officials. Since it shares validators with the Hub chain, it requires payment in $ATOM as a service fee. If projects maintain their ecosystems using their tokens, the application scenario for $ATOM will be weakened.

5.4.2 THORchain ($RUNE)

THORChain is a cross-chain liquidity protocol that supports native DEX cross-chain trading (focusing on swapping native assets across chains), lending, and other Earn-related Defi functions; its AMM mechanism's DEX features a unique impermanent loss protection mechanism and dynamic slippage fees.

Positive Narrative:

1. LiFi is about to integrate THORchain to expand Swap functionality.

2. Native asset swaps support native BTC trading, with the booming BTC ecosystem driving increased trading demand. This indirectly enhances LP incentives, promoting $RUNE purchases.

3. THORchain's forks will be driven by $RUNE to support asset liquidity across various protocols, simultaneously stimulating the demand for $RUNE holdings.

5.4.3 Celestia ($TIA)

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

Positive Narrative:

1. Launching Ethereum Fallback functionality to ensure user funds do not get stuck in Layer 2 contracts.

2. Integration with the Manta public chain.

3. Collaboration with OP Stack technology to use Celestia as the DA layer.

5.4.4 Injective ($INJ)

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

Positive Narrative:

1. The Volan mainnet is about to be updated.

2. $INJ burning mechanism.

6. Risks & Challenges

1. Ecological protocols are monopolized by local services, with Kava Lend accounting for 1/3 of the total TVL. Other supported Defi protocols like Curve, Sushi, etc., are not native to Kava, leading to a situation where the ecosystem is overly singular, still appearing to be in the Defi service stage, and requiring more time to evolve into a public chain ecosystem.

2. The maturity of cross-chain asset exchanges is low; the internal native bridge supports asset transfers from Cosmos to EVM well, but the service for EVM assets entering Cosmos is not deep, currently only supported by Stargate or other DEX Aggregators for transferring EVM assets to Kava, while Ethereum's strong financial attributes amplify this flaw.

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

7. Conclusion

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

Moreover, in the current context of the "application chain" narrative being prevalent, whether in Layer 2 Stack or Cosmos & Polkadot Layer 1, ecological development will always rely on interoperability. As an interoperability chain, Kava will serve as a Defi service intermediary between major EVM application chains and Cosmos application chains in the future.

It is worth noting that $KAVA, as an ecosystem & governance fee token, will achieve zero inflation on December 7. In the context of expanding application scenarios and halting supply-side output, this will undoubtedly trigger a demand-side explosion, and combined with its formal cooperation with DWF, it is believed that $KAVA can bring more surprises in the future.