Decentralized Finance has been exploding, despite the recent market crash. New blockchain ecosystems on Polygon, Huobi, Terra, and others have allowed developers to move into them and construct new Dapps. Every day you hear of a new DEX, high yield farm Dapp, a derivative platform being launch.
With all of these Dapps, especially decentralized exchanges or DEXs comes a unique issue; providing liquidity. After all, no DEX will be able to work if there is no liquidity to supply the platform with funds in order for token swaps to take place. Users can certainly individually provide liquidity, but it is often insufficient if the platform begins to experience significant growth. This is where the Kyber Network comes in to take advantage.
This Kyber Network review article will examine the details that make up the Kyber Network, what it is all about, and why it is a big deal.
What is the Kyber Network?
The Kyber Network is a project based on the Ethereum protocol that seeks to completely decentralize the exchange of cryptocurrencies and make exchange trustless by keeping everything on the blockchain. This means that Kyber Network provides on-chain liquidity and transactions as opposed to off-chain.
But at its most basic level, it is a protocol that enables automated, decentralized, instant, and low-fee exchanges of Ethereum-based assets. These assets include Ethereum (ETH) itself and ERC20 tokens.
The Kyber Network has seen very rapid development. After being announced in May 2017, the testnet for the Kyber Network went live in August 2017. An ICO followed in September 2017, with the company raising 200,000 ETH valued at $60 million in just one day.
The live mainnet was released in February 2018 to whitelisted participants, and on March 19, 2018, the Kyber Network opened the main net as a public beta. Since then, the network has seen increasing growth, with network volumes growing more than 500% in the first half of 2019.
Why Kyber Network?
While many cryptocurrencies were built to be decentralized, many of the exchanges for trading cryptocurrencies have become centralized affairs. This has led to security vulnerabilities, with many exchanges becoming the victims of hacking and theft. This is also not mentioning that these centralized exchanges retain complete control over the cryptocurrencies you buy on them. Not your keys, not your crypto.
It has also led to increased fees and costs, with many of them suffering from slow transfer times as well. In some cases, wallets have been locked, and users are unable to withdraw their coins.
To counter this, decentralized exchanges have been popping up like mad to address the flaws in the centralized exchanges. However, they have their own flaws, most notably a lack of liquidity and oftentimes high costs to modify trades in their on-chain order books.
The Kyber Network was formed to provide users with a decentralized exchange that keeps everything right on the blockchain by using a reserve system rather than an order book to provide high liquidity at all times. This will allow for the exchange and transfer of any cryptocurrency, even cross-exchanges, whilst keeping costs at a minimum.
Since its inception, the Kyber Network has had three guiding design philosophies:
- To be most useful, the network needs to be platform-agnostic, which allows any protocol or application the ability to take advantage of the liquidity provided by the Kyber Network without any impact on innovation.
- The network was designed to make real-world commerce and decentralized financial products not only possible but also feasible. It does this by allowing for instant token exchange across a wide range of tokens and without any settlement risk.
- The Kyber Network was created with ease of integration as a priority, which is why everything runs fully on-chain and fully transparent. Kyber is not only developer-friendly but is also compatible with a wide variety of systems.
How Does The Kyber Network Work?
In addition to being an exchange, the Kyber Network is also being built as a transfer mechanism for cryptocurrencies. The great thing about the Kyber Network’s transfer capabilities and something that differentiates it from existing exchanges, is that the tokens sent don’t have to match the tokens received.
Let me explain. With the Kyber Network, users will be able to send any token and have it converted on-chain to any other token before it ends up in the receiver’s wallet.
While this is great for individuals, it also has great potential for businesses because it means a merchant could accept ANY cryptocurrency, and by using the Kyber Network, they would be receiving only the currency of their choice, whether that be Bitcoin, Ethereum, or some other coin.
The Kyber Network includes three components that contribute to its functionality:
The first is Kyber Swap, which allows for the instant exchange of many different tokens without wrapping, or any order books or deposits. This instant transfer network is ideal for merchants who need to know transactions are complete before goods can be delivered.
Next is the Kyber Reserve, which functions to provide liquidity to the network as third parties contribute tokens to the pool that can be used across any platform. Security in the reserve fund is maintained through the use of a transparent fund management model, where all trades completed by reserve managers are recorded.
Kyber Developer has been instrumental in bringing new dApps, exchanges, wallets, and other projects to Kyber as it gives developers all the documentation and tools they need to integrate any decentralized project into Kybers liquidity pool.
Kyber Network Roles
The Kyber Network functions through coordination between several different roles and functions:
- Users – This entity uses the Kyber Network to send and receive tokens. A user can be an individual, a merchant, and even a smart contract account.
- Reserve Entities – This role is used to add liquidity to the platform through the dynamic reserve pool. Some reserve entities are internal to the Kyber Network, but others may be registered third parties. Reserve entities may be public if the public contributes to the reserves they hold, otherwise, they are considered private. By allowing third parties as reserve entities, the network adds diversity, which prevents monopolization and keeps exchange rates competitive. Allowing third-party reserve entities also allows for the listing of less popular coins with lower volumes.
- Reserve Contributors – Where reserve entities are classified as public, the reserve contributor is the entity providing reserve funds. Their incentive for doing so is obtaining a profit share from the reserve.
- The Reserve Manager – They maintain the reserve, calculate exchange rates and enter them into the network. The Reserve Manager profits from exchange spread set by them on their reserves. They can also benefit from increasing volume by accessing the entire Kyber Network.
Kyber Network Team
The Kyber team was founded by Loi Luu, Yaron Velner, and Victor Tran and had its headquarters in Singapore. Luu was previously the co-founder of the decentralized mining pool project SmartPool, as well as the creator of Oyente, the first open-source security analyzer for Ethereum contracts.
Additionally, the team has attracted Ethereum founder Vitalik Buterin is one of their advisors, as well as having an advisory team that is both experienced and knowledgeable.
Loi Luu remains the CEO of Kyber Networks, overseeing the rapid growth that the platform has been experiencing since 2019.
Yaron Velner has stepped aside from his role as CTO at Kyber Networks, and Victor Tran has assumed the role. He is experienced in building high-performance multi-platform applications. Victor has been involved in blockchain and cryptocurrency development since early 2016 and is a lead engineer at the SmartPool project.
Even though it doesn’t have a long history, the Kyber Network has been able to build a strong and supportive community, which is evidenced by its large social media followings.
On Twitter, the Kyber Network now has over 176,000 followers, while their Facebook page has over 8,760 followers.
On Reddit, which is also known as a hotbed for blockchain enthusiasts, the Kyber Network sub-Reddit has garnered just over 11,000 followers. While that isn’t the largest sub-Reddit by far, it’s still a pretty active group, with multiple posts each day and a good number of responses and replies.
Finally, there’s the Kyber Telegram group, which is just shy of 9,000 members. The Telegram group has actually fallen somewhat in numbers recently as Kyber has moved their official announcements and discussions to Discord.
All combined, the community behind the Kyber Network is quite supportive and active, which is a good sign for any blockchain project.
Kyber Network Crystal (KNC) Token
The KyberNetwork Crystal (KNC) is the backbone of the Kyber Network. It works to connect liquidity providers and those who need liquidity and serves five distinct purposes. The first is to collect transaction fees, in which a portion of every fee collected is burned, which keeps KNC deflationary.
The KNC also ensures the smooth operation of the reserve system in the Kyber liquidity since entities must use third-party tokens to buy the KNC that pays for their operations in the network.
Thirdly, the KNC token is the connection between the Kyber Network and the exchanges, wallets, and dApps that leverage the liquidity network. This is a virtuous system since entities are rewarded with referral fees for directing more users to the Kyber Network, which helps increase adoption for Kyber and for the entities using the Network.
Then you have KNC as a governance token. KNC holders can stake their KNC on the KyberDAO in order to both votes on proposals, which in return, receive ETH rewards from network fees from trading activities. This is, of course in proportion to who many KNC you have staked.
The Kyber Network Crystal (KNC) was released in a September 2017 ICO at a price of around $1. There were 226,000,000 KNC minted for the ICO, with 61% were sold to the public. The remaining 39% are controlled 50/50 by the company and the founders/advisors, with a 1 year lockup period and 2 year vesting period.
Currently, just over 205 million coins are in circulation, and the total supply has been reduced to 210.94 million after the company burned 1 millionth KNC token in May 2019 and then its second millionth KNC token just three months later.
That means that while it took 15 months to burn the first million KNC, it took just 10 weeks to burn the second million KNC. That shows how rapidly adoption has been growing for Kyber, with July 2019 USD trading volumes on the Kyber Network nearly reaching $60 million.
Currently, KNC is required by Reserve Managers to operate on the network, which ensures a minimum amount of demand for the token. Combined with future plans for burning coins, price is expected to maintain an upward bias.
With the implementation of the Katalyst protocol, the KNC holders will be put right at the heart of Kyber. Holders of KNC tokens play a critical role in determining the future economic flow of the network, including its incentive systems.
The primary way this is being achieved is through KyberDAO, a way in which on-chain and off-chain governance will align to streamline cooperation between the Kyber team, KNC holders, and market participants.
The Kyber Network team has identified 3 key areas of consideration for the KyberDAO:
- Broad representation, transparent governance, and network stability
- Strong incentives for KNC holders to maintain their stake and be highly involved in governance
- Maximizing participation with a wide range of options for voting delegation
This means KNC holders are empowered to determine the network fee and how to allocate the fees to ensure maximum network growth. KNC holders have three fee allocation options to vote on:
- Voting Rewards: Immediate value creation. Holders who stake and participate in the KyberDAO get their share of the fees designated for rewards.
- Burning: Long-term value accrual. The decreasing supply of KNC will improve the token appreciation over time and benefit those who do not participate.
- Reserve Incentives:Value creation via network growth. By rewarding Kyber reserve managers based on their performance, it helps to drive greater volume, value, and network fees.
Transparency and Stability
The design of the KyberDAO is meant to allow for the greatest network stability, as well as maximum transparency and the ability to quickly recover in emergency situations. Initially, the Kyber team will remain as maintainers of the KyberDAO. The system is being developed to be as verifiable as possible while still maintaining maximum transparency regarding the role of the maintainer in the DAO.
Part of this transparency means that all data and processes are stored on-chain if feasible. Voting regarding network fees and allocations will be done on-chain and will be immutable. In situations where on-chain storage or execution is not feasible, there will be a set of off-chain governance processes developed to ensure all decisions are followed through on.
KNC Staking and Delegation
Staking and voting will be done in fixed periods of time called “epochs.” These epochs will be measured in Ethereum block times, and each KyberDAO epoch will last roughly 2 weeks.
This is a relatively rapid epoch, and it is beneficial in that it gives more rapid DAO conclusion and decision-making while also conferring faster reward distribution. On the downside, it means there needs to be a new voting campaign every two weeks, which requires more frequent participation from KNC stakeholders, as well as more work from the Kyber team.
It is important to note that each epoch is meant to have multiple campaigns and that voters must participate in each campaign to receive maximum rewards. This is because rewards are only distributed to those who vote in each campaign.
The delegation will be part of the protocol, allowing stakers to delegate their voting rights to third-party pools or other entities. The pools receiving the delegation rights will be free to determine their own fee structure and voting decisions. Because the pools will share in rewards, and because their voting decisions will be clearly visible on-chain, it is expected that they will continue to work to the benefit of the network.
In 2020, the Kyber Network team announced a major protocol upgrade called Katalyst. In order to become the de facto liquidity layer for the Decentralized Finance space, Kyber Network needs to be the single on-chain endpoint used by the majority of liquidity providers and dApp developers.
In order to achieve this goal, the Kyber Network team is looking to create an open ecosystem that garners trust from the decentralized finance space.
The Katalyst upgrade will create a stronger ecosystem by creating strong alignments towards a common goal while also strengthening the incentives for stakeholders to participate in the ecosystem.
The primary beneficiaries of the Katalyst upgrade will be the three major Kyber stakeholders:
- Reserve Managers who provide network liquidity;
- dApps that connect takers to Kyber;
- KNC holders.
These stakeholders have been receiving benefits as highlighted below:
Reserve Managers have seen two new benefits to providing liquidity for the network. The first benefit is incentives for providing reserves. Part of the fees collected will go to the reserve managers as an incentive for providing liquidity.
This mechanism is similar to rebates in traditional finance and is expected to drive the creation of additional reserves and market-making, which in turn will lead to greater liquidity and platform reach.
Katalyst has also done away with the need for reserve managers to maintain a KNC balance for use as network fees. Instead, fees will be automatically collected and used as incentives or burned as appropriate. This should remove a great deal of friction for reserves to connect with Kyber without affecting the competitive exchange rates that takers in the system enjoy.
Dapp Integrators are now be able to set their own spread, which gave them full control over their own business model. This means the current fee-sharing program that shares 30% of the 0.25% fee with Dapp developers was eliminated, allowing developers to determine their own spread. It’s believed this will increase Dapp development within Kyber as developers will now be in control of fees.
KNC Holders, often thought of as the core of the Kyber Network, can now take advantage of a new staking mechanism that will allow them to receive a portion of network fees by staking their KNC and participating in the KyberDAO.
Kyber is currently undergoing its Kyber 3.0 upgrade. The purpose of this upgrade is to transition Kyber from a single protocol into a liquidity hub of purpose-driven protocols that are catered to different DeFi use cases. This is the biggest change to Kyber’s architecture and token model since its inception and will be implemented over 2 phases — Katana and Kaizen.
As the first major addition to the new network, the team launched a brand new liquidity protocol called the Kyber DMM — DeFi’s first automated Dynamic Market Maker.
Kyber DMM is a next-generation AMM designed to maximize the use of capital by enabling extremely high capital efficiency and reacting to market conditions to optimize returns for liquidity providers.
Unlike the static nature of typical AMMs and other liquidity platforms in the space, the Kyber DMM protocol is designed to react to token pairs and market conditions to optimize fees for liquidity providers and rates for takers. This is achieved via two simple mechanisms: Amplified Liquidity Pools (via Programmable Price Curves) based on the nature of the token pairs and Dynamic Fees based on market conditions.
Fewer tokens will be required for high liquidity. Kyber DMM’s Programmable Price Curve enables liquidity pool creators to set a suitable price curve and create amplified pools in advance, achieving much higher capital efficiency for providers and better slippage for users compared to AMMs.
has higher earnings potential, which reduces the impact of impermanent loss. Trading fees are adjusted dynamically according to on-chain market conditions. In a volatile market, fees automatically increase to an optimal level, reducing the impact of impermanent loss. In periods of low volatility, fees decrease to encourage more trading and total fees collected.
Kyber DMM allows fully permissionless liquidity contribution from anyone and access to this liquidity by any taker (e.g., Dapp, aggregators, end-users).
Kyber Network does sound cool, even necessary protocol to have. But with the rapid expansion of DeFi, it is not without competition.
Kyber Network and 0x have often been compared as competitors. However, they are actually somewhat different, so much so that they aren’t really directly competing. For one thing, Kyber Network is a pure decentralized exchange that works entirely on-chain. By contrast, 0x is a platform that allows others to build their own decentralized trading applications. It is also a hybrid solution that does order matching off-chain, with the order then brought on-chain to actually carry out the transaction. 0x uses the traditional order book method, but anyone can act as a market maker by maintaining an open order book. In the Kyber Network, there is no order book, and all of the orders are routed and fulfilled through smart contracts.
Additionally, Kyber’s token is deflationary, while the supply of 0x tokens is inflationary and will double over the next four years. There is no token burning, and any fees are simply recycled back into the ecosystem.
A more direct competitor is Bancor. The Bancor Network is an on-chain liquidity protocol and is, in fact, the first decentralized exchange ever made. It was thus responsible for the creation of automated market makers (AMMs), which every single DEX, as well as other DeFi protocols such as lending and borrowing platforms, rely on.
As such, Bancor consists of a series of smart contracts that manage the on-chain conversion of tokens. The protocol makes it effortless and quick to convert tokens without having to go through an exchange. The protocol’s smart contracts manage the liquidity pools that connect various tokens available in the network.
Tutorial/How to use Videos
Below are a series of Videos that further outline what Kyber Network is and how to use it:
Kyber Network Review – Conclusion
In conclusion, Kyber Network seems to be a solid project. It has billions of dollars in locked tokens, is widely used by many other protocols such as Aave and Uniswap, it is constantly upgrading with a community-governed focus.
And yet, the price of KNC has seen better days. It is nowhere near its all-time high of $6.00, trading at barely $1.29 at the time of writing this article. You would think that with such a great protocol, users would keep their KNC in order to govern and earn some passive income. Why is that? Well, it could be that with the expansion of other DeFi projects in both Ethereum and in other blockchains, users are selling their KNC in order to make better fortunes elsewhere. It could also be KNC’s lack of max supply. Even if it is deflationary, the price will dump if more people are selling their KNC than what the protocol is able to buy back and burn.
Despite the price action, this could be a great buying opportunity to govern and earn some of those rewards. Kyber Network is definitely far from finished, and so long as its deep liquidity pools are being utilized throughout the ecosystem, the Network has seemed to have a bright future ahead of it.
Kyber Network Review
- Ease of Use
- Robut tokenomics
- Widely used by other exchanges and protocols
- Community governed
- One of the earliest decentralized protocols to have emerged on Ethereum
- Constantly upgrading
- Hard to navigate your way around