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It's an exciting time to be in the decentralized finance (DeFi) space, especially given how nascent blockchain and cryptocurrency still are. Over the past few weeks, with the listing of MakerDAO's Maker coin on Coinbase, as well as Compound.finance's release of their COMP governance token, DeFi has been an increasingly popular part of the blockchain conversation. Decrypt even reported that a large portion of Bitcoin is now being moved into Ethereum for the purpose of DeFi. There's been such an increase, in fact, that everyone from Forbes to famed Bitcoin maximalist Anthony Pompliano have stepped into the conversation.

Previously, I've talked about MakerDAO, and its multi-collateral DAI coin, an ingenious stablecoin concept that, rather than being backed by unverifiable hard assets, uses code, crypto, and consensus voting to soft-peg DAI to the US Dollar. I believe DAI really is the premiere stablecoin in the space, currently, with its theoretical and practical foundations built on time-tested economic principles as well as being, of course, decentralized in nature.

That doesn't mean, though, that there can't be some improvements over the current system. And over the past few weeks, I've taken notice of a project that has flown quite under-the-radar so far which could give MakerDAO a run for its money.

Pun intended.

Problems with MakerDAO DAI

March 12, 2020 was probably one of the biggest wake-up calls to the entire blockchain space. Not only did the stock market itself have a decently large crash, but the cryptocurrency market followed in its footsteps almost “to a T”. As Bitcoin plunged, taking the rest of the crypto market with it, we got to witness our idea of crypto as “safe haven assets” be completely toppled in less than a day, and then some within the following week.

The Black Thursday Crash (read morehere).

MakerDAO's system was not spared from this tragedy. As the Ethereum and BAT held in CDP vaults plummeted in value, a vast majority of them became severely under-collateralized and, as per protocol, were liquidated. But, due to high-traffic congestion in the Ethereum network, many owners of those CDPs were unable to save their assets, and a single keeper was able to swipe almost all of them for the insanely stupid price of $0.

And thus we come to the first problem with MakerDAO's DAI system. That, because it is built on the Ethereum network, it is captive to whatever problems that network has. If Ethereum has massive network congestion, then so does DAI, and thus moving DAI around or using the CDP protocols are slowed down as well. Even recently, Ethereum apps still struggle with the demand required of the Ethereum network.

But even if the Ethereum network can solve this problem with subsequent versions, we still have another: namely, that being built on Ethereum still limits the collateral that can be accepted to coins or tokens that are built on the network. This means that coins like BAT or 0x or other future ERC20 tokens can be collateralized, but others such as XRP, Tezos, and even Bitcoin cannot be truly adapted into the system.

Pompliano acknowledged this problem in his interview, stating that to integrate Bitcoin with Ethereum would require something called WBTC, or wrapped Bitcoin. But these work arounds all tax the Ethereum system further, making an already difficult-to-scale blockchain even more bloated and slow.

Now, don't get me wrong, I still really like MakerDAO and DAI. But, like all things, it's important to assess both the strengths and weaknesses of a platform you're investing into, so as to know why you're investing into it, and whether it can achieve a certain purpose, or if something else can do it better.

And in this case, there may be a better solution.

Kava: CDP for the Rest of Blockchain?

Kava is a company that is, as far as I can tell, still pretty far under the radar for most of the DeFi space. This is, strangely, despite the fact that they were the first ones to have an Interledger solution in the crypto space, and have been heavily supported and sponsored by some pretty big names in the industry, including Binance, OKChain, Chainlink, Ripple, Arrington Capital, and even our own Coil. And while they've previously been involved with other projects, the one I'm going to focus on is their current creation of a platform that can leverage assets across all blockchains.

It is basically patterned around MakerDAO's system, but built on a different platform. They even admit this in their paper, highlighting the growth and strength of DAI, while pointing out its weaknesses. It then goes on to state the company's goals with the system, and the target market they are aiming for.

From Kava's '(white?) paper'.

In the Kava system, they use their Kava token for governance and staking, similar to MakerDAO's Maker coin. And just like one would put Ethereum or BAT tokens in a CDP vault to mint DAI, Kava plans to allow users to use a multitude of different cryptocurrencies, as pictured above.

And this is possible because Kava's CDP system is built on a number of different technologies, including the Interledger Protocol (ILP), Cosmos and its Tindermint core, and Kava's own proof-of-stake solutions, among others. Whereas MakerDAO is stuck with the network problems of Ethereum (e.g. only 20 transactions per second), Kava can take advantage of multiple different chains and tools, since it is built on cross-chain technologies. For example, Cosmo has a scalable system that can handle thousands of transactions per second. Furthermore, it has the ability to connect different blockchain networks together through its Inter Blockchain Communication, or IBC. Basically each different blockchain occupies a zone that functions within itself. But if they want to communicate and transact with each other, they use the Cosmos blockchain. This allows Kava, which functions as a zone connected to Cosmos, to transact with other chains and use their tokens. In this situation specifically, it would be to put them in a CDP vault and mint stablecoin with it.

Thus, Kava is poised to not only solve the weaknesses of the MakerDAO system quite handily, but be future-proof enough to allow it to function whether independent of whether other blockchains are doing well or not.

The Current Situation

As of now, while Kava's mainnet is alive and kicking, they are still working on ways to improve the system, and so minting USDX has been delayed until later in July. Probably due to their connection with the exchange, the first coin that can be collateralized in the system is Binance's BNB coin. However, as stated above, they have plans to include Bitcoin, XRP, Atmos, and other major crypto assets in the foreseeable future. Even Ethereum can potentially be used in Kava's system.

I've written before about how a stablecoin that collateralizes XRP would be a boon to its community. And really, any cryptocurrency that can be placed into a CDP will benefit. By creating a system that communicates and transacts cross-chain, the team behind Kava have created an opportunity for all current crypto users to not only be rewarded for their early adoption, but encourage the utility of a basic foundation of economics—namely, the ability to create wealth by using an asset in multiple ways.