Kyber Network Review: The On-Chain Liquidity Protocol
The Kyber Network is quite an established project that is trying to change the way we think of decentralised cryptocurrency exchange.
They are developing a decentralised exchange protocol that will allow developers to build payment flows and financial apps. This is indeed quite a competitive market as a number of other such protocols have been launched.
So, with the increased competition, is Kyber Still worth it?
In this Kyber Network review, I will attempt to answer that. I will also analyse the long term adoption potential and use cases of the KNC tokens.
What is the Kyber Network?
Through the Kyber Network, users should be able to instantly convert or exchange any cryptocurrency – or so they claim. We’ll have to take a deeper look to see if they will be able to live up to these claims, what progress has been made so far, and how they differ from competitors such as the 0x Project or Bancor.
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 main net 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.
Although there was a modest decrease in August 2019 that can be attributed to the price of ETH dropping by 50%, impacting the overall total volumes being traded and processed globally.
Why Build the Kyber Network?
While 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.
It has also led to increased fees and costs, and the centralized exchanges often come with slow transfer times as well. In some cases wallets have been locked and users are unable to withdraw their coins.
Decentralized exchanges have popped up recently to address the flaws in the centralized exchanges, but 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, and uses 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, and costs will be kept at a minimum as well.
The Kyber Network has three guiding design philosophies since the start:
- 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 Kyber Network Works
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.
With the Kyber Network, once it is fully functional, 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 which contribute to its functionality:
The first of these 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
There Kyber Network functions through coordination between several different roles and functions as explained below:
- 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 a profit share from the reserve.
- The Reserve Manager - Maintains the reserve, calculates exchange rates and enters them into the network. The reserve manager profits from exchange spreads set by them on their reserves. They can also benefit from increasing volume by accessing the entire Kyber Network.
- The Kyber Network Operator – Currently the Kyber Network team is filling the role of the network operator, which has a function to adds/remove Reserve Entities as well as controlling the listing of tokens. Eventually, this role will revert to a proper decentralized governance.
Kyber Network Team
The Kyber team was founded by Loi Luu, Yaron Velner, and Victor Tran and has 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 as 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 is seeing in 2019. Much of that growth now comes from Decentralized Finance apps, or DeFi, which is interesting since the term didn’t even exist a year ago. According to Luu:
“We’re finding strong burgeoning growth for decentralized financial products and the implications of this on finance, banking, and trade are tremendously understated. With monolithic companies like Facebook investing into the industry, the Kyber team remains committed to providing a decentralized framework for all blockchain stakeholders to break up the monopoly of data, wealth and authority that lies ahead.”
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.
Kyber Network Community
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 their large social media followings.
On Twitter, the Kyber Network now has over 105,000 followers, while their Facebook page has over 7,500 followers. They are far more active on Twitter, and it is known as a larger platform when it comes to cryptocurrency projects, so the discrepancy isn’t surprising.
On Reddit, which is also known as a hotbed for blockchain enthusiasts, the Kyber Network sub-Reddit has garnered just over 7,300 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 7,600 members. That’s a pretty good number, and when I checked there were almost 600 online, which is also a fairly active group when compared with other blockchain projects.
The Telegram group has actually fallen somewhat in numbers recently as Kyber has moved their official announcements and discussions to Discord. That channel currently has over 1,600 members.
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 three distinct purposes. The first of these is to collect transaction fees, and 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.
Finally, 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.
And of course there will soon be a fourth and fifth uses for the KNC, which will be as a staking token used to generate passive income, as well as a governance token used to vote on key parameters of the network.
The Kyber Network Crystal (KNC) was released in a September 2017 ICO at a price around $1. There were 226,000,000 KNC minted for the ICO, with 61% 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 180 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 recently for Kyber, with July 2019 USD trading volumes on the Kyber Network nearly reaching $60 million. This volume has continued growing, and on march 13, 2020 the network experienced its highest daily trading activity of $33.7 million in a 24-hour period.
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, although it has suffered along with the broader market in 2018 and more recently during the summer of 2019.
It was unfortunate in 2020 that a beginning rally was cut short by the coronavirus pandemic, although the token has stabilized as of April 2020, and there are hopes the rally could resume in the summer of 2020.
KNC Price Performance
After the September 2017 ICO the price of KNC tokens more than doubled within a week. It quickly dropped back however and was back at $1 by the end of October. And while it tripled in December 2017, the gains weren’t nearly as impressive as many other cryptocurrencies.
On January 9, 2018, it hit its all-time high of $6.00. From there it declined steadily throughout 2018 and into 2019, hitting an all-time low of $0.113650 on February 6, 2019. While it has grown more than 300% from that low and trades at $0.474562 as of April 22, 2020 it is still down more than 50% from its ICO pricing.
On a more positive note, prior to crashing alongside the rest of the market in March 2020 due to the coronavirus, the KNC token was trading above $0.85 and there are hopes the rally will resume once the coronavirus pandemic recedes.
Buying & Storing KNC
Those interested in buying KNC tokens can do so at a number of exchanges. Perhaps your best bet between the complete list is the likes of Coinbase Pro and Binance. The former is based in the USA whereas the latter is an offshore exchange.
The trading volume is well spread out at these exchanges which means that the liquidity is not concentrated and dependent on any one exchange. You also have decent liquidity on each of the exchange books. For example, the Binance BTC / KNC books are wide and there is decent turnover. This means easier order execution.
KNC is an ERC20 token and can be stored in any wallet with ERC20 support, such as MyEtherWallet or MetaMask. One interesting alternative is the KyberSwap Android mobile app that was released in August 2019.
It allows for instant swapping of tokens and has support for over 70 different altcoins. It also allows users to set price alerts and limit orders and works as a full-featured Ethereum wallet.
It’s uncertain if the team plans on releasing its own native wallet to support staking and delegation once the Katalyst protocol is released.
Kyber Katalyst Upgrade
Kyber has announced their intention to become the de facto liquidity layer for the Decentralized Finance space, aiming to have Kyber as 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. They believe this is the path that will lead the majority of projects, developers, and users to choose Kyber for liquidity needs. With that in mind they have recently announced the launch of a protocol upgrade to Kyber which is being called Katalyst.
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 can expect to see benefits as highlighted below:
Reserve Managers will see two new benefits to providing liquidity for the network. The first of these benefits will be incentives for providing reserves. Once Katalyst is implemented 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 will also do 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 will now be able to set their own spread, which will give 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 will go away and developers will 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, will be able to 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.
The Katalyst protocol upgrade is expected to be deployed before the end of the second quarter of 2020.
With the implementation of the Katalyst protocol the KNC holders will be put right at the heart of Kyber. Holders of KNC tokens will now have a critical role to play in determining the future economic flow of the network, including its incentive systems.
The primary way this will be 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
One decision was made to give KNC holders the power to determine key parameters of the network, given that they are the main beneficiaries when the network grows.
This means KNC holders have been empowered to determine the network fee and how to allocate the fees to ensure maximum network growth. KNC holders will now 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 did 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. Initally 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 will be a new addition and both staking and voting will be done in fixed periods of times 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 voted in each campaign.
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.
Kyber Network Vs 0x
While Kyber Network and 0x have been compared as competitors they are actually somewhat different enough 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.
Previously 0x was different from Kyber Network in as much as token holders also had a say in governance. With the catalyst upgrade KNC holders will also have a say in governance. Another difference between the two will be the staking capabilities for KNC once Katalyst goes live.
Kyber remains deflationary by burning tokens on a regular basis, but 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.
Of the two 0x has taken a lead early on because it is a simple and functional system that was easy to put into use. Ultimately Kyber should overtake 0x as an exchange application thanks to its infinite liquidity, instant transactions and the eventual addition of cross-chain trading and advanced financial instruments such as options and futures.
The Kyber Network is positioning itself to become the leading decentralized exchange with its focus on immediate, trustless, inexpensive exchange of any cryptocurrency right on the blockchain. In fact, this might be exactly what’s needed for merchants to adopt the acceptance of cryptocurrencies in greater numbers.
Reviews of the network have been consistently positive, citing the ease of trading and immediate transfers. And usage of the network has been growing rapidly in 2019 and 2020 as more exchanges, dApps and wallet projects have turned to Kyber for liquidity. With the introduction of Katalyst and the focus on KNC holders in the governance of the KyberDAO the network should grow even more rapidly in the coming months.
The integration of the Kyber Network for token swaps in the Samsung S10 wallet and the HTC Exodus wallet will help push Kyber, and cryptocurrencies, in general, closer to mainstream adoption.
While it is disappointing to see the huge drop in the price of the KNC token since its ICO, the growth in usage of the network is encouraging, and a complete recovery in the token price is a possibility as the project moves forward and continues to grow its market share.
Certainly that seemed to be the direction the token was taking after the team announced the upcoming Katalyst protocol, and we would hope that the upward momentum for the token will soon resume.
Disclaimer: These are the writer's opinions and should not be considered investment advice. Readers should do their own research.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.