Karura
Last updated: May 24th, 2021 11:45 PM CDT
The Technology
Karura brands itself as the official defi (decentralized finance) hub of Kusama and its sister network, Acala, is the same but for Polkadot. Their intention is to test experimental ideas in defi while providing liquidity and staking solutions to Kusama. Karura will undermine all central staking services because their testnet app appears as if it will allow people to hand select the validators they want to nominate and stake KSM on them while minting “L-KSM” for liquidity. This means you get access to uncut staking rewards while staying liquid, plus you even get to choose your stake’s unbonding time. On top of that, the application runs on smart contracts so it is totally trustless and fees are extremely small and can be paid in any token. Additionally, price feeds come to the platform from Chainlink’s oracle network ensuring a reliable bridge between real world data and Karura. Altogether, these technologies have created an ecosystem which has poised Karura to be Kusama’s first and likely most popular defi solution.
Karura’s liquidity solution is the “L-token” and their stable coin solution is the kUSD. The KAR token helps regulate the stable coin and power the ecosystem where L-tokens are traded, loaned, and borrowed. In the beginning the platform will support a limited number of tokens but might incorporate more as the application gets more popular. L-KSM is minted when you stake KSM using the Karura’s app which allows you to trade it for other tokens, use it as collateral, or place it in a liquidity pool to earn rewards.
Let’s look at an example of someone who does not participate in the crowdloan yet would like to use Karura’s defi app. Luckily enough the app will be open to the entire public on day one of winning the slot so there would be no waiting around. Let’s say this person puts 10 KSM into staking through Karura’s app. This might mint something like 100 L-KSM for them to use while their 10 KSM earns staking rewards. They might trade half of that for kUSD to hedge against price and trade the other half for BTC, ETH, DOT, and other tokens for diversification. This is just one way someone could diversify their KSM with Karura.
The KAR Token
Karura plans on minting a permanent total of 100,000,000 KAR tokens. There are many uses for the KAR token within Karura’s ecosystem but most people will probably only use it to pay for gas fees for transactions on the defi app. Still, passive income opportunities will exist with KAR.
Karura will have a network of validators who will write the blocks and provide them to Kusama validators. The KAR token will be used to nominate these Karura validators to ensure a secure process in generating the Karura blocks. This means that you will be able to nominate validators with your KAR and earn rewards; you could even operate a validator node on the Karura network to earn rewards as well.
Almost every proof-of-stake ecosystem has some sort of governance powered by token holders. KAR will be no different and you will have voting power with your KAR tokens. In fact, since 11% of KAR’s total supply is going to crowdloaners, the people who support Karura at this stage will have a one-tenth say in the direction of the project.
KAR tokens will also keep kUSD stable. I’m not sure if this will be something like a liquidity pool or if it will be controlled by reserve funds but regardless the KAR token will help with algorithmic adjustments needed to provide a stable coin. I imagine there will be a lot of under-the-hood workings of KAR to keep collateral ratios and interest rates in check.
Since Karura is a stand-alone blockchain in its own right, other projects will be able to build off of it. In order to build on Karura, teams will be required to stake their KAR. This ensures that teams who wish to build on Karura will follow through with their goals since their KAR will be at stake if they don’t deliver.
The Crowdloan Reward
- 11% of max supply (11,000,000 KAR)
- KAR:KSM ratio (TBD)
- 48 week long lease
- 30% of KAR reward liquid on launch, 70% vested over 48 weeks
Notice that Karura has defined a lump sum payment to be the reward which means that we will not know the KAR:KSM ratio until we know how much KSM wins Karura the bid. For example, if Karura wins the auction with a bid of 110,000 KSM, then we can expect 100 KAR for every 1 KSM. If Karura wins the auction with 55,000 KSM, then it would be 200:1.
Let’s look at some potential outcomes of KAR and KSM:
As you can see the trade-off from staking depends on three variables: the winning bid, the price of KAR and the price of KSM. Please keep in mind that this table is not indicative to what will happen to KAR and all of these outcomes might not even come close to what actually happens. This table only serves to illustrate the interdependent workings of the relevant variables.
Overall Evaluation
Risk: Medium
Reward: Medium
Novelty: Low
Utility: High
We cannot predict the value of the KAR token and we really don’t know how the public will value the project once it goes live. Nonetheless, the fact that the reward is 11% of the total supply is reassuring which is why I put the risk and reward in the middle of the road.
Defi is not a new solution in crypto and many of the things Karura is doing is expected from any defi hub. In fact, many of the competing projects are defi platforms which doesn’t make this project very unique. If Karura doesn’t get a slot, some other defi platform will.
There is a huge demand for finance in KSM. It is without a doubt that this technology would be used by many which is why I have given this project a high utility.
