The Tie Research
Growing Up with Kujira
- Kujira was initially launched as ORCA, a Terra-native liquidation platform focusing on liquidations on Anchor Protocol, and was rebuilt as a semi-permissioned Cosmos SDK blockchain in July 2022, six weeks after Terra’s collapse.
- Kujira leverages the Cosmos SDK modular architecture, along with a suite of synergetic protocols, as the foundation for creating sustainable, long-lasting financial systems. Existing governance-approved protocols include a native overcollateralized stablecoin, a P2P platform, liquidation queues, and a decentralized order book exchange, with a launchpad and a native wallet currently pending.
- While performance metrics are low relative to other blockchains, momentum is visible, as Kujira’s monthly growth trajectory continues to trend upwards despite adverse market conditions.
Kujira is a sovereign Cosmos SDK blockchain initially launched in November 2021 as a liquidation protocol on Terra. Using their flagship product, ORCA, Kujira introduced a novel liquidation mechanism that facilitated healthy operation of the Terra ecosystem. The platform was popular, processing $250m of LUNA and bETH liquidations over six months. As the collapse of UST began, Kujira’s team found itself in a position where a decision had to be made for their future.
Given the state of the market, the team decided that the only viable option was to rise from the ashes and immediately take action to complete what Terra promised to deliver: A decentralized blockchain network that empowers the masses through the use of sustainable, censor-resistant, financial infrastructures.
Thus, Kujira blockchain was born.
Kujira’s firsthand experience of the dangers that unreliable systems bring has clearly shaped their design thesis.
There are traditionally two design types for distributed ledger builds:
- A monolithic design(wrapping transaction execution, network consensus, proof settlement, and data availability on one mainchain), or
- A modular design that aims to outsource some of these functions to a separate layer.
For their instantiation, Kujira has taken a hybrid approach. The blockchain’s application layer is primarily driven by a set of natively built, synergistic decentralized applications, while the protocol layer relies on Cosmos’ modular software suite as the architecture’s foundation. With that in mind, the best way to evaluate Kujra is through an understanding of how it leverages its app chain ecosystem in tandem with the Cosmos SDK to differentiate itself from other blockchains.
Cosmos SDK High-level Overview
Kujira is built on top of Cosmos SDK architecture and utilizes Cosmwasm for contract deployment. Cosmos SDK is a Layer-0 protocol that aims to create a framework for facilitating the process of creating custom Tendermint Proof-of-Stake(PoS) blockchains that can natively interoperate with other blockchains.
Cosmos SDK focuses on horizontal scaling, as its modular design allows for the fragmentation of tasks/responsibilities, ultimately enabling blockchains like Kujira to scale without compromising security or decentralization.
Cosmos SDK blockchains are validated through a Proof-of-Stake (PoS) consensus mechanism. PoSis generally viewed as more decentralized than other consensus mechanisms, such as Proof-of-Work, as the barrier to entry for validators is significantly lower. However, PoS blockchains are not immune to centralization risk either.
As a popular method of measuring decentralization, the Nakamoto coefficient depicts the minimum number of nodes required to be compromised before a blockchain’s network is susceptible to disruption. The more decentralized a blockchain is the higher its coefficient.
Kujira’s decentralization factor has been steadily increasing since launch, and, by this measure, the platform is already one of the most decentralized blockchains.
Developer & User-Experience
While Kujira is technically a public blockchain, it adopts some aspects of private blockchains in that it is semi-permissioned. Users can freely interact with the blockchain, but developers that want to launch their applications on Kujira first need to go through governance for approval. This strategy falls in line with the general thesis, ensuring the network's quality, sustainability, and reliability are maintained.
Kujira’s on-chain scheduler is a mechanism that mitigates existing protocol issues around smart-contract activation. Smart contracts require a ‘push’ to be activated - usually accomplished through a user manually sending a transaction, or through a bot. The scheduler removes this need, reducing wasted transactions and consequently improving network efficiency. Fees previously required to incentivize bot usage (e.g. FRAX paying a fee for AMO activation) will now be returned to network participants.
Native Token Generation
In traditional CosmWasm-based blockchains, protocols are required to have two entry points to support both the underlying blockchains native-token and non-native tokens(CW20). Kujira’s architecture enables developers to build smart contracts without the need to deal with two separate entry points. By designing contracts for a single native denomination, every token on the network is a native Cosmos token- resulting in a more fluid and interpoerable token ecosystem as native tokens are generally more supported across Cosmos chains(e.g., NFT marketplaces). Additionally, the trading revenue and liquidation fees for every token on the network accrue value to KUJI stakeholders.
- KUJI is used to pay for gas fees required to execute and store operations on the Kujira network(similar to other native blockchain tokens).
- A percentage of all revenue streams (e.g., gas fees, dApp fees, liquidation fees) are used to reward participants in the proof-of-stake mechanism, and to prevent spam and denial-of-service attacks.
- KUJI will also be used for governance for on-chain voting on critical matters, such as protocol upgrades and dApp proposals.
- KUJI can be used as a liquid asset for various smart contract and monetary policy applications.
Kuji has a total supply of 122.4M. It was reduced from 150 million tokens after a governance proposal to burn liquidity pool rewards was passed on Jan. 18, 2022. The token distribution is illustrated in the image above.
The release schedule will conclude at 12 pm UTC, 9 November 2023 when all team tokens will be fully vested. From available data, emissions appear to trail off after 18 months (~80% emitted), decrease meaningfully at 24, and conclude after 36. Note: All vesting from other participants apart from the Kujira team will conclude after November 2022.
There are still 8.43 million tokens that are yet to be migrated from the Terra Classic chain, and are not considered part of the circulating supply. Therefore, the current circulating supply is 113.97 million. 47 million tokens, or 38%, of KUJI’s supply is staked inside the platform, earning an APR of 1.36%.
The foundation of Kujira’s thesis revolves around creating an ecosystem that works in synergy to deliver sustainable decentralized financial structures. While it’s only been three months since launch, developer activity has increased exponentially due to Kujira’s use of Rust’s expressive type system and Cosmwasm’s architecture. At the time of this writing, seven governance-approved protocols are launched on the blockchain.
Calc Finance is a decentralized execution optimization protocol that utilizes algorithms to facilitate Dollor Cost Averaging (DCA) on decentralized exchanges. While their initial product will be focused on DCA, they intend to ultimately scale into other execution strategies to facilitate long-term investing, dictated by user demand.
Local is a peer-to-peer marketplace, similar to existing platforms such as Binance P2P, LocalBitcoin, and Paxful. Local leverages smart contracts to create a decentralized, trustless P2P exchange, while simultaneously serving as a fiat on-ramp for investors.
Kujira FIN is Cosmos’ first decentralized, permissionless, 100% on-chain order book.FIN enables a fully decentralized trading experience that mitigates the need for inflationary incentives,bots,risk of impermanent loss.
Blackwhale utilizes FIN’s decentralized order book to enable a decentralized market-making platform. Users can passively earn fees by depositing funds into a vault, which is then managed by BlackWhale’s MM algorithm on their behalf.
Kujira Orca enables users to bid on liquidated collateral at a discount, while simultaneously earning yield. Orca has been market-tested as it successfully ran on Anchor Protocol for about a year and is currently live on Kujira.
At the heart of Kujira’s ecosystem is Kujira Blue, a multi-function decentralized application that serves as a hub, enabling KUJI holders to stake their tokens, vote on governance proposals, and mint Kujira’s native Stablecoin (USK).
Additionally, Blue is used as a bridge to onboard assets from seventeen blockchains across the Cosmos’ ecosystem through an IBC integration.
Kujira’s Native Stablecoin (USK)
On August 8th 2022, Kujira officially announced the creation of their native stablecoin, USK. Inspired by MakerDAO’s Collateralized Debt Protocols (CDP) system, USK was created to be a censor-resistant native Cosmos overcollateralized stablecoin, soft-pegged to the U.S. dollar. USK will be initially backed by ATOM, due to its deep liquidity and expansive use-case throughout the Cosmos ecosystem. Furthermore, USK was built to be integrated with Kujira’s existing app chain ecosystem as it utilizes:
- ORCA for democratized liquidation queues
- FIN as their clob dex
- Local for P2P transactions
- CALC for DCA strategies into USK
CDP models work similarly to lending markets like Aave, as users lend out one asset in order to borrow another. For Kujira, users lock up ATOM and subsequently mint USK.
Once funds are deposited into Kujira’s smart contract and a position is opened, the protocol monitors the borrower's loan-to-value ratio (LTV). An LTV ratio represents solvency by comparing the principal value of the borrowed assets against the value of deposited assets. The closer a borrower is to the maximum LTV, the closer they are to defaulting on the loan. In this case, ATOM lenders are simultaneously USK borrowers, and are consequently susceptible to liquidation risk if the price of ATOM drops below the allowable LTV ratio.
As of the time of writing, USK is implemented with the following preset parameters:
- 0.5% mint fee
- 5% borrow APR
- 1% liquidation fee
- 0.5% ORCA withdrawal fee
- 60% max $ATOM LTV (i.e., 67% overcollateralized)
To put the above parameters into context; If a default were to occur, the protocol seizes and liquidates the locked collateral (ATOM) to cover the underlying debt(USK). Additionally, before paying out the remaining collateral to the borrower, a penalty fee of 1% is charged against the debt along with a 0.5% withdrawal fee, distributed proportionally amongst $KUJI stakers. Furthermore, the underlying $USK minted from the initial collateral is then burned.
For an in-depth read on USK, refer to their blog post here.
Risks & Considerations
Due to the lack of shared security amongst chains built on Cosmos, Kujira is responsible for securing its own chain with a native token and a diverse validator set. The issue with this design becomes apparent when different Cosmos chains decide to interact with one another.
If chain (A) decided to connect to chain (B) through IBC, then chain (A) is effectively trusting the security assumptions of chain (B). If chain (A) is corrupted, then the synthetic representation of its native assets becomes worthless on chain (B), ultimately affecting any shared liquidity pools paired with the now worthless asset on chain (B). The concerns with these trust assumptions were highlighted during the collapse of Terra, whose native token crashed, dragging down the price of OSMO and other assets with high amounts of shared liquidity in pools with UST or LUNA.
Additionally, Kujira is semi-permissioned; Protocols have to be approved via governance voting to launch on the network. The primary concern with this design is the potential centralization vectors it opens up such as the centralization of stake across validators. While it isn't feasible from a liquidity standpoint for an individual to hold enough voting power to have majority say over governance, as liquidity grows it may pose a threat if a group of well-funded validators decide to collaborate on control over which protocols are approved. That being said, this scenario is hypothetical and can be resolved through governance changes on voting limitations.
- Circulating Market Cap: $118mn
- TVL: $68.37mn
- FDV: $168mn
Since its launch in July 2022, Kujira was quick to capture the attention of the broader crypto market, primarily due to the significant growth the blockchain has seen within a relatively short period.
While transaction volumes started to taper down in September, Kujira’s Total Value Locked (TVL) and Market Cap continue to create new highs. That said, a surge in TVL/MC is expected with newer blockchains, as the introduction of fresh markets entice arbitrageurs, airdrop farmers, and other opportunity-seeking participants.
Given the significant increase in TVL/Market Cap and the upward trajectory of KUJI staking rate, both user and validator sentiment appear positive, despite adverse market conditions.
This report is for informational purposes only and is not investment or trading advice. The views and opinions expressed in this report are exclusively those of the author, and do not necessarily reflect the views or positions of The TIE Inc. The Author may be holding the cryptocurrencies or using the strategies mentioned in this report. You are fully responsible for any decisions you make; the TIE Inc. is not liable for any loss or damage caused by reliance on information provided. For investment advice, please consult a registered investment advisor.
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