Kava Labs, which Focuses on Democratizing Financial Services, Establishes Security of Assets Fund for Users

Brian Kerr, Co-founder of Kava, has published a blog post in which he revealed that his team is introducing the Kava SAFU Fund (Security of Assets Fund for Users).

Kerr noted in the update, dated Wednesday (April 28, 2021) that Kava SAFU Fund is an on-chain community pool that aims to enhance the overall safety of the Kava platform by “protecting against unforeseeable black swan events while giving users assurity that their funds are safe.”

Kerr added that the Kava SAFU community pool’s primary function is to “make users whole after events like unforeseen bugs, exploits, hacks, liquidation failures or other technical issues that result in lost user funds.” Kerr claims that these types of events have not happened on the Kava platform because of its architecture, “robust” testing, audits, and market monitor infrastructure.

He continued:

“Now Kava is introducing the latest component in its security and reliability infrastructure; the Kava SAFU Fund. Designed to counter the unique threat of black swan events. The Kava SAFU Fund will be created through a one-off inflationary event where 10% of Kava’s current token supply will be minted and held within the Kava SAFU Fund.”

Michael Ng, Co-founder of StakeWith.Us Motivations, added:

“Over the long run, the creation of the Kava SAFU fund is a net positive for the overall DeFi ecosystem. By giving assurance on compensation in the case of a black swan event helps instill further confidence for Kava’s DeFi platform.”

According to the update, the Kava platform has grown to “hundreds of thousands” of users and has “hundreds of millions of dollars” in collateral deposits.

Kerr also pointed out that Kava Labs “as a centralized entity cannot and should not take responsibility for unforeseen events for following reasons”:

  • As a US company, “we must collect KYC/AML and run OFAC checks before transferring funds to any users.” Even “if we wanted to, due to regulations we cannot send funds to many users around the world.” In the spirit of “creating an open and decentralized platform for anyone, anywhere in the world to use, the Kava platform needs to have an on-chain way to make users whole in the event of loss that is free of censorship and regulation.”
  • Collecting KYC/AML of all the users on the Kava platform “is the opposite of what DeFi is all about.” Kava Labs would “have to do exactly this if a global black swan event occurs that impacted funds across all users on the Kava platform.”
  • Now that the collateral deposits are “hundreds of millions of dollars in size, it’s simply not possible for Kava Labs to play a role in making users whole in black swan events.” The Kava platform network “needs a better solution that can scale with its increasing size.”

Kerr went on to share that the inspiration for the Kava SAFU Fund “comes from traditional finance where margin trading platforms have a rainy day fund to cover losses.”

In crypto, “we have several notable examples with BitMEX’s Insurance Fund that ensures liquidations of margin positions go smoothly and Binance’s all purpose SAFU Fund which has been used to make users whole after serious hacks and exploits have occurred,” Kerr noted.

He pointed out that recently, the Cosmos Hub has “adopted a community pool which has several purposes, including that of being a SAFU fund for users.” Similarly other Cosmos-SDK based blockchains like Akash and Terra “have adopted different forms of community pools,” Kerr confirmed.

Kerr further noted that many events may “impact user funds.” Events such as upgrade errors, defaults, and critical bugs that “result in lost funds will qualify to be reimbursed by the Kava SAFU Fund subject to governance approval.”

While sharing some examples of potential events that could affect users funds and might get covered by the Kava SAFU fund, Kerr clarified that it’s “critical to note that any and all actions taken on behalf of the Kava SAFU fund is made by the Kava governance community alone.”

Here are some possible events that may be covered, according to Kerr:

  • Network downtime resulting “in loss of users funds (e.g. via inability to re-supply)”
  • Critical network bugs “which result in loss of users funds (e.g. inaccurate accumulation of interest)”
  • Critical network exploits “which result in loss of users funds (e.g. exploited vulnerabilities in business logic)”
  • Critical cross-chain software bugs or exploits “which result in loss of user funds (e.g. cross-chain double spends or multi-sig wallet compromise)”
  • Critical bugs or exploits “in auxiliary network services (e.g. oracle software exploits)”
  • Market manipulation which “results in loss of user funds (e.g. driving massive liquidations by manipulating price feed or associated reference market price)”
  • Application service defaults in the event of massive liquidation events (e.g. under-collateralization of Kava of Hard application services “resulting from system debt not being met at auction)”
  • Network upgrade critical bugs “which may result in loss of users funds”
  • Network upgrade rollback procedures “which may result in loss of users funds”

Kerr also mentioned in his extensive blog post that there are “many ways to fund the pool, including a one-off inflationary event or a continuous inflation schedule which adds to the pool overtime.”

He added:

“For the purposes of providing an adequate SAFU Fund for the current levels of collateral and debt managed by the Kava platform, 10% of total Kava supply should be created in a one-off inflationary event and put towards the Kava SAFU Fund initially. This will be more than adequate for the foreseeable future.”

Kerr continued:

“Should the platform grow orders of magnitude larger or if Kava SAFU Funds are disbursed after an event, it will be up to the Kava governance community to decide how to ensure the Kava SAFU Fund is appropriately re-capitalized from that point forward. This can occur from a redirecting of various platform fees, another one-time inflationary event, or a continuous inflation contribution to the Kava SAFU Fund going forward.”

Kerr also claims that in a world affected by numerous online hacks, exploits, and “rug pulls,” Kava “by contrast is quickly becoming the most ‘trusted’ platform by exchanges, institutions, and crypto applications around the world thanks to its robust security and safety practices.”

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