Kava Labs is building a cross-chain multi-collateral debt protocol so you can bring assets from Ripple, or anywhere, and convert them to USDX. It works a bit like MakerDAO in some respects.
Why DeFi is so important: (1) it creates digital dollars and (2) coming from a trading background, number go up, and number go down is not really important, hedging your position and the interest rates are what create finance and pull carry from it. This is what has changed in crypto over the past two years.
If you go back to Crypto two years ago, there weren’t any great hedging options for Crypto. It is only recently we are getting great options for shorting, for hedging, for options and other nice derivative products. If you look at traditional markets in comparison, it is the liquidity for these derivative products in crypto that is very shallow.
In new exchanges, there are a lot of options for hedging and shaking up markets. It is quite scary in Crypto today, but at the same time, we need to be confident that liquidity will build up and that singular individuals or individuals will not have such power going forward to move the market. A number of projects including Kava, were all affected by this and a crash event that happened on Binance.
Derivatives need liquidity to be able to trade safely. This has been the biggest news across Crypto is: DeFi found Interest Rates. Thanks to DeFi, you don’t have to build fully hedged positions to take advantage of the funding rates. I think people highly discredit the DeFi landscape generally. US customers are flocking to these DeFi protocols because they can meet their needs with no KYC, lend and earn interest. One of my previous guests was telling a story about a billionaire friend who saw the interest rate on BitFinex, and he wanted to know how to get the money there. If you go the centralised route, you can lock 8.5% in for a year and a half. For a money manager, that is amazing and having it secured. Is there an insurance? And do you trust the institutional that is giving you that guarantee?
Kava’s creation of USDX: How the evolution of the rates grow and the amount of cross-chain liquidity you are able to onboard. If you look at MakerDAO and they have taken 3% of volume on Ethereum. Your first target is XRP because there is no liquidity for XRP. Also for Cardano and other blockchains that people are stuck owning the tokens or exchanging it for Bitcoin, it opens up trading channels for people to lend and use these. Why not bring the smart contract capability to other blockchain assets outside of Ethereum? This was our idea for Kava.
From a User perspective, USDX will live on the Kava blockchain. You can build bridges to other blockchains. Kava has sovereignty over anything that is bridged in. What about the security of Kava? How do you maintain the security of that? As assets flow into Kava, we believe that the assets under management (AUM) of the software will grow correspondingly due to the staking involved.
The way that you address that outside the protocol, the other way you make sure incentives are aligned, our initial validators are running across protocols and chains; they have higher risk across chains through reputational risk to losing their validator status across chains has high financial costs associated with it. We also have exchanges as validators.
How would you describe your relationship with MakerDAO? We are not focusing on Ethereum. We are focused on other blockchains. We see ourselves as being separate from MakerDAO; it makes sense for Compound to move into other ecosystems in the future, but right now there is not a strong base for a stable asset there in Cosmos.
What about the creation of all these bridge assets that are being created? Do you think you will be able to build an effective moat against these projects on Ethereum? Even though there may be liquidity in other silos and haven’t been bridged yet, why would you need EOS or go somewhere else? I think Liquidity in DeFi is quite nice in Ethereum today. The user experience hurdles that exist in Ethereum today should not be underestimated.
From a financial perspective, there is an unnecessary fee caused by having to use Ether for Gas. I think Cosmos will open the door to users that have not used crypto before. Maybe Cosmos and Ethereum are not in competition. You could have all these inputs into your CDPs (collateral debt platforms) but you are basically just bringing liquidity into Ethereum.
I would say there is moat of developers within Ethereum. But once bridges are built, assets will move into those CDPs because there are carrots to be had. There are a number of pegging solutions are going to come onboard. What can we build to get users to take these actions and come to Kava? The peg version should always be worse than USDX on Kava. The use case of Crypto today is that users want to be able to hedge their assets in Crypto. We haven’t seen a flight of assets from one chain to another YET. We have a strong hypothesis, and only time will tell.
When you create that one to one peg, you move to USDX – I don’t think it detracts from either chain. When you split liquidity, that second asset doesn’t have the same security assumption as it does when it is on one chain or when it exists on many chains, so because it has more risks, it should be worthless.
Maybe people want to move assets from one chain to another for functionality. On Bitcoin, you have a scripting language that does not enable for the things that can be done on Ethereum. The language that they have built with Solidity; it’s not really great. This year or next year is the first year we will get that cross-chain liquidity and can actually provide real value to people who want to build something like TokenSet or portfolios.
If you look at these assets like the base assets (M0) Bitcoin, Ethereum, etc…. everything that gets built on top of it. You are building a credit layer on top. Having the initial layer to build that credit layer, like Kava, on top of enables a fungible asset on the other side is a game-changer.
First theory was that payment layers were the first layer scaling solution. M0 locked up in Lightning network. What really happened was that people weren’t really using Crypto for payments but for speculation. Because they were wanting exposure to different assets, this different form of credit that we are doing with Kava and all these other lending platforms, what we are doing is creating a new monetary supply on top of the base layer that never existed before, and the nice part about it is, in theory, it should be much more efficient than that base layer. It should be the grease that makes everything move.
Kava allows the users to grow USDX natively without anything else involved. It turns out that Fiat onramps are proliferating this year which has surprised me. We have this natural credit being built up and new fiat money flowing in around the world.
Liquidity begets liquidity, and there is nothing more liquid than dollars. USDT has been so successful because it is US dollar-denominated and it is the most liquid thing in the space. The reason is that businesses receive dollars and mint USDT and can then lend it out to make money on that. USDT and the Bitfinex team have weathered so many storms to come out ahead. For a company like Kava, there has to be liquidity and we have to take actions to create liquidity. Until it grows to such a liquid size that the demand for a high savings rate decrease.
Does Crypto and Bitcoin break the chain of surveillance capitalism and these behavioural models? In Finance, it is more about tracking funds and front-run the Fed by tracking data. What type of privacy-preserving features are there in Kava? We started off as very pro-privacy. As things evolved and we became more customer-focused, we realise that very few people were very privacy-oriented. Bitcoin started out privacy orients and now it is pseudo-private as you can see everything on the ledger. With that said, there are some really nice things you can do as an individual if you so choose. I think Privacy should be the default but that is not the way the world works today. If you are a user on Kava, if you are trading and bringing assets in, you can use layer 2 options to preserve privacy like onion.
For example, the base of Chinese users move their funds to a centralised exchange (almost as a best practice) and then move their assets to a new address on-chain; which makes it almost impossible to tell what happens after that and do whatever they want.