What Is Kava Crypto and Is It Worth Investing?
Bitcoin (BTC) and Ethereum (ETH) are the largest cryptocurrencies in terms of market capitalization. They also contribute more than half of the entire cryptocurrency market share. It is hardly surprising that they are by far the most popular cryptocurrencies. However, these prominent tokens have some major limitations due to their consensus mechanisms: the proof-of-work consensus, a method of validating transactions on the blockchain by solving a complex computational code. Solving these ‘puzzles’ is called mining, and it requires an enormous supply of power, thus driving costs and emission of carbon dioxide.
Aside from the mining demands of proof-of-work coins, transactions on the POW network are not quite scalable and fast. Fortunately, the cryptocurrency landscape is rapidly changing and innovative cryptocurrencies like Kava.io are proving to be faster and more scalable.
What is Kava.io?
Kava.io is a DeFi service created by Kava labs in 2018 to function as a lending and borrowing platform. The protocol offers loans in USDX only, but users can loan different cryptocurrencies. USDX is Kava’s USD native token, while KAVA is Kava.io’s utility token.
Kava is used as a reserve pool to ensure there is always sufficient collateral. Kava also functions as a governance token that community members use for decision-making on the platform, such as in governance activities like voting for desired changes. It works on a network built using a unique design that combines two different blockchain functionalities to emerge as a co-chain with improved capacity. These blockchains are the Ethereum and Cosmos blockchains.
Kava utilizes the Ethereum Virtual Machine to deploy Kava’s smart contract. It works with the Inter-Blockchain Communication protocol (IBC) and functions with an Ignite-based Proof-of-Stake (PoS) consensus mechanism, formerly Tendermint PoS.
The Kava project provides other DeFi services, such as borrowing synthetics or derivatives. The protocol uses a collateralized debt position system to ensure that the loans remain collateralized. Asides from borrowing and lending on Kava, users can also stake multiple tokens to earn a yield.
Kava.io in a Nutshell
Users that collateralized their crypto assets to mint USDX get a weekly reward which the network distributes in the form of KAVA. The size of the reward users gets is based on the amount of USDX they mint and the cryptocurrency they choose to use as collateral. In essence, Kava.io provided many digital assets in their borrowing & lending platform like BTC, ETH, and ADA.
Kava labs launched the blockchain’s mainnet 19th of January, 2022. The upgrade brought the integration of the Inter-Blockchain Communication protocol (IBC) from Cosmos SDK, which facilitates the transfer of KAVA to other chains. Kava.io plans to launch a Ripple-backed stable coin to support its collateralized debt system.
How Does Kava.io Work?
Kava is a borrowing and lending protocol that allows its users to borrow USDX after locking up an amount of crypto as collateral. The network simultaneously creates a collateralized debt position, making the locked crypto collateral for the borrowed loan.
Members of the Kava ecosystem have access to several loans, enabling them to create synthetic leverages for any cryptocurrency that the system supports. For example, if users lock up Bitcoin or Binance coin (BNB), they will receive a corresponding amount of their asset in USDX. They can use the newly received USDX to buy more Bitcoin or BNB and gain leveraged position in the cryptocurrency market.
The process of borrowing on the Kava.io platform includes the following:
Users connect their wallets to kava.io and deposit some amount of cryptocurrency.
The network locks the deposited crypto in a smart contract creating a collateralized debt position.
The users receive a portion of USDX as loans equivalent to their CDP value.
To access the locked asset, users need to refund the loan, which comes with an added transaction fee.
After repaying the loans, the Kava network releases the locked assets and simultaneously burns the USDX.
Kava network users can earn profits from lending, borrowing against their collateral, and staking with the added benefit of participating in the networks’ governance activities.