Kava Wants to Challenge MakerDAO, but Will it Work?

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Kava, an aspiring lending protocol, wants to rival Maker Protocol as a CDP platform that accepts a variety of assets as collateral. In a bid to bring liquidity to the protocol’s native stablecoin, USDX, Framework Ventures is proposing incentives to onboard more users.

But will this be enough to tackle DeFi behemoth MakerDAO?

Enhancing Kava’s Native Liquidity 

Kava functions like a hybrid of Maker and what would be Ethereum 2.0. 

The protocol’s native token, KAVA, is staked by entities that become validators for the network. These validators earn 3-20% annually for validating transactions.

Assets like BTC, BNB, XRP, and ATOM are used as collateral to mint a loan in USDX, similar to Maker’s use of ETH and ERC-20 assets. The borrower pays a stability fee when they close their loan.

In accepting so many different kinds of collateral and leveraging Cosmos’ interoperability features, Kava is hoping to expand DeFi beyond Ethereum.

A significant challenge lies ahead for Kava, however.

To financially scale and rival Maker, Kava needs to attract just as much usage. This traction is necessary to improve the low liquidity that the USDX stablecoin is currently experiencing.

Framework Ventures, a DeFi-friendly venture firm, recently proposed a new incentive for borrowers that may help resolve Kava’s liquidity woes. The proposal suggests a diminishing inflation schedule on top of the inflation rewards directed to validators for staking.

To be clear, staking validators are not the same as users who open CDPs on Kava. 

The new inflation proposal will encourage more borrowers to open CDPs and create a liquid, robust USDX market. Framework’s suggestion also includes a mechanism to curb exploitation.

Whales could hypothetically buy KAVA, mint USDX, claim their KAVA rewards, then burn the USDX (their debt), and sell their initial KAVA along with their reward for minting. This doesn’t help liquidity; the USDX is burnt, and the reward adds to market supply, creating downward pressure on price.

To curb this, Framework proposes a 52-week lock-in of earned KAVA tokens so minters have a reason to stick around and continue providing liquidity. Moreover, minters can’t immediately sell the rewards.

A community vote is scheduled for today to accept or reject the proposal.

The Opportunity: Cross-Chain DeFi

Ethereum’s DeFi stack had over $1.3 billion worth of tokens locked in during February 2020. It is by far the most liquid and comprehensive iteration of DeFi. 

But a lack of interoperability between Ethereum and other blockchains proved hazardous during the latest market downturn. CEO of Kava Labs, Brian Kerr, said that:

“The turbulent market conditions exposed frailties in the design and ecosystem of specific DeFi applications like MakerDao and capability limitations of the Ethereum platform. While the situation presents valuable learning, it should be seen as specific failures in design and not attributed as problems the greater DeFi landscape will face.” 

Inefficiencies in the Maker network have been subject to considerable attention in light of mass liquidations. Maker holders have also voted to hold an auction to help restore the protocol’s current deficit. Kerr added that the auction may be bearish in the near term, but “it’s necessary to return stability and balance to [Maker’s] system.” 

Critically, Maker runs on Ethereum and can only integrate Ethereum-based assets. Although Maker recently added USDC as collateral, the project has been criticized for integrating a centralized asset issued by Circle.

Kava faces similar criticism, integrating fairly centralized assets like XRP and BNB that rely on a closed set of company selected validators. 

However, the opportunity in cross-chain DeFi to help non-Ethereum chains join in on the DeFi narrative is compelling, and Kava could be vital to this. 

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