Altcoin Explorer: Kyber Network, the On-Chain Liquidity Protocol Leading the DeFi Sector

Altcoin Explorer: Kyber Network, the On-Chain Liquidity Protocol Leading the DeFi Sector

Kyber Network is an on-chain liquidity protocol that powers decentralized applications, from exchanges and funds to lending protocols and payments wallets. In recent months Kyber has experienced tremendous growth due to the development of decentralized finance and has managed to establish itself as one of the reference protocols for this new sector. 

A Kind of DEX

Kyber Network is one of the popular ICOs launched in the second half of 2017 that aims to become the most popular way to exchange crypto token assets on Ethereum. Although it has gained notoriety as a decentralized exchange, Kyber Network does not fall exactly into this category as its operation is completely different from that of a DEX. Kyber is a liquidity ecosystem, where platforms, individuals, exchanges, or dApps can plug into and immediately have liquidity. It is not a DEX in the traditional sense.

Kyber’s innovation is to have completely removed the exchange’s order book and replaced it with liquid reserves which house a certain amount of digital assets for the purposes of maintaining exchange liquidity. The project was launched with the aim to solve all the problems related to centralized exchanges including hacks, ownership of the asset, and expensive trading fees. 

How It Works

Being a decentralized protocol, it can be easily integrated with any application and can be used to create decentralized applications such as instant token swap services, ERC-20 payment gateways, exchanges, trading integrations, decentralized finance (DeFi) dApps, and more. Exchanges that take place via the Kyber Network protocol are performed on-chain via Ethereum’s smart contract technology.

The peculiarity consists in the elimination of the order books in favor of highly liquid reserves. Kyber Network supports several wallet import methods including the popular hardware wallets Ledger and Trezor, the Metamask browser or its own private key. Once the wallet is connected users can choose a token they wish to exchange and, as there is no order book, they will also know the conversion rate before sending the transaction and receiving the corresponding amount. After confirming the operation, the transaction is broadcasted and all details are verifiable through a blockchain explorer. When the transaction is completed, users will see the updated balance.  

This process is possible thanks to the following components:

  1. Users – Users in Kyber Network include individual users, smart contract accounts, and merchants who send and receive tokens to and from the network.
  2. Reserve Entities – This role is used to add liquidity to the platform through the dynamic reserve pool. This can be Kyber’s own reserve or a third party’s, that are registered by other market makers. Reserve entities can be public or private, depending on whether the reserve amount is publicly funded or not. The fact of adding third parties as reserve entities allow Kyber Network to prevent monopolization and guarantee the best exchange rates. Third parties can also introduce less popular coins with lower volumes.
  3. Reserve Contributors – The entity that provides capital to public reserve entities. The incentive to do this is a profit share from the reserve.
  4. Reserve Manager – Reserves are operated by reserve managers. These managers are responsible for maintaining liquidity in the trading pairs offered and updating bid and ask spreads. For their services, managers are compensated through the spread in each transaction. Further, anyone with additional capital can contribute to reserve pools and receive a return.
  5. The Kyber Network Operator – The network operator role is currently fulfilled by the Kyber Network team which is responsible to add and remove reserve entities and list/de-list pairs of tokens in the network. Although this represents a centralization point, this decision was necessary to start the project. The team is already considering moving towards a more decentralized governance model through the establishment of a DAO.

KNC Tokenomics

KNC is the native token of the Kyber Network Protocol and stands for Kyber Network Crystal. It is an ERC20 token and it is used to fuel the activity within the network. Its main function is to be used by reserve managers to pay a commission for each transaction they perform (the fee is equivalent to 0.25%). The tokens are also used as a reward for third parties that generate trading volume.

Furthermore, reserve pools wishing to participate in the exchange market are required to stake an amount of KNC tokens in a smart contract and meet specific liquidity requirements defined by the network. In each trade a small amount of KNC will be transferred from the staked amount, acting as a fee for reserves that use the network. Subsequently, the tokens collected by Kyber will be redistributed to reward all those who offer services within the network. If more tokens than needed are collected, the excess tokens will be burned.

A coin burn is when you take cryptocurrency, coins, or tokens and destroy them which is very similar to a buy-back operation in the traditional stock market. The main difference is that in the crypto market a burning operation it’s a function that can be programmed right into the smart contract making it a recurring event. This mechanism is designed to reduce the total KNC supply over time and possibly increase its price.

As we can see from the image the burning process is steadily increasing and has reached about 4 million units so far. This figure is in line with the market sentiment that is increasingly moving towards decentralized alternatives.

Achievements and Future Goals

Kyber Network is one of the few projects that have met and achieved the milestones announced within the communicated timeframes. The development of the project, therefore, continues steadily and can be seen from the metrics indicated on the Kyber Network Tracker.

The year 2018 was the year in which Kyber Network prepared the basis for the construction of its liquidity protocol. In particular, the major milestone reached during the bear market was the launch of KyberSwap, a fast, simple, and secure token swap platform developed by Kyber’s team and at the moment one of the most popular Ethereum DApps to swap ERC20 tokens such as WBTC (Wrapped Bitcoin), ETH, DAI, TUSD, etc. Together with this, it’s important to remember the launch of Wrapped Bitcoin (WBTC), a fully backed Bitcoin ERC20 token on Ethereum. The initiative aims to bridge Bitcoin liquidity and the decentralized ecosystem on Ethereum, enhancing all decentralized applications.

2019 was the year in which the project had the opportunity to expand to become one of the most solid ecosystems in the world of decentralized exchanges and decentralized finance.

Among the 2019 milestones to remember we find a volume of over 400 million dollars generated through Kyber Network and over 500 thousand trades executed.

In addition, Kyber was the decentralized protocol with multiple integrations of the year 2019. Kyber protocol has been integrated into more than 85 applications, including Trust Wallet, MyEtherWallet, Fulcrum, 1Inch, Enjin Wallet, DeFi Saver, Nuo and many more. Kyber has also devoted a big part of its energies to creating a very large community in a short period of time. It is interesting to see how Kyber developed a developer portal to facilitate the creation of decentralized applications that leverage its liquidity protocol, something that is quite unique in the blockchain space.

This devotion to the technical part can also be seen by the various hackathons that Kyber organized during the course of 2019 also allocating huge cash prizes for the participants. In particular, one of the most engaging events was the #KyberDeFi Virtual Hackathon that offered $ 42,500 in bounty prizes and attracted over 300 participants, with 78 submissions, 41 finalists, and 18 Bounty Winners.

Kyber is also investing in educating student developers from Cambridge, Oxford, Imperial, LSE, UCL, and KCL. In addition, Kyber Network has been able to build a strong and supportive non-technical community, which is evidenced by its large social media followings (more than 135 thousand!). 

This year instead, Kyber will focus on improving its components including the protocol as well as expanding value creation options for KNC holders, and putting them at the heart of Kyber’s governance through the KyberDAO. The launch of the latter would mean a very important step for Kyber Network which would then turn into a completely decentralized structure.

The Katalyst update will be one of the main objectives of the year that has just begun and will have consequences for KNC holders, reserve managers, and dApp integrators. For the first category, Kyber will introduce a new staking mechanism to the token model which allows KNC holders to receive part of the network fees by staking KNC and participating in the KyberDAO. Reserve managers will instead receive a reward based on how much trades and volume they facilitate for the network.

In addition, the fee system will be simplified thus reducing the barrier to creating and running a reserve. The fees will be automatically collected in every trade and burnt or used for rewards and incentives, removing the need to always maintain a KNC balance for reserves that want to integrate with Kyber. Lastly, dApp integrators will have the possibility to decide their own business model set up their own spread. All these changes have the objective of encouraging the participation of the actors of the network thus making it truly decentralized.