Kyber Network is an on-chain liquidity protocol for aggregating liquidity across diverses sources, powering seamless token swaps within any decentralized application. All DeFi applications need access to a reliable source of liquidity to successfully provide digital financial services to its users. While centralized exchanges currently comprise the majority of crypto asset liquidity, DeFi applications struggle to leverage that liquidity given the nature of centralized exchanges and the break-down of the trust model along the way.
Decentralized, trustless liquidity sources are vital to the long-term success of DeFi. As such, Kyber designed a fully on-chain liquidity protocol with a high degree of composability. The design allows for any party to contribute to the liquidity pools, including decentralized exchanges and essentially any other decentralized protocol. On the flip side, Kyber allows takers such as end-users, crypto wallets, and even smart contracts to seamlessly perform instant and trustless token exchanges with minimal slippage.
Kyber’s long-term goal is to support the diverse amount of emerging digital ecosystems by facilitating liquidity between different stakeholders in each ecosystem. By standardizing the design, Kyber hopes to achieve a fully connect liquidity network across multiple different blockchains to provide frictionless cross-chain token swaps.
Kyber raised approximately $50 million (200,000 ETH) through a two day sale of the KNC token in an ICO back in September 2017. The sale was a massive success and resulted in the minting of 226 million KNC tokens. The high-level distribution of the token can be seen as follows:
Private Sale (08/14/2017 – 08/15/2017)
- Token Price: ~$0.357
- Amount Raised: $27,000,000
Public Sale (09/14/2017 – 09/15/2017)
- Token Price: ~$0.440
- Amount Raised: $25,000,000
The team is led by CEO and Co-Founder Loi Luu, CTO Yaron Velmer, and Lead Engineer Victor Tran. The team has a deep academic and research background as Velmer holds a PhD in computer science from Tel Aviv University with a strong focus in game theory incentives in blockchain protocols and formal verification of smart contracts.
Notable advisors to Kyber Network include Vitalik Buterin (Co-Founder of Ethereum), Simon Seojoon Kim (CEO and Partner at Hashed) and Seng Hoe Long (Strategic Advisor at DigixDAO).
The project boasts a handful of high profile investment funds including zk Capital, Cipher Ventures, Amino Capital, and WolfEdge Capital.
How it works
The protocol is implemented as a set of smart contracts where various actors can join and interact with the network. Kyber Core smart contract provides a mechanism for listing and delisting liquidity reserves and trading pairs.
- Takers refer to anyone who calls the smart contract functions to trade tokens. This can be traders, application users, wallets, or other protocols.
- Reserves are any individual or entity that wishes to provide liquidity. Reserves must register through the reserve interface to have their token pairs listed.
- Registered Reserves refer to those who will be cycled for matching taker requests.
- Maintainers are those who have permission to add and remove reserves and token pairs, largely referring to the Kyber DAO and/or the team behind the protocol implementation.
Simple Token Swaps
As an example, let’s say that Bob wants to exchange ETH for MKR tokens. With Kyber, the trade can occur in a single blockchain transaction. The flow for how this trade occurs is as follows:
- The Taker sends ETH to the protocol contract where he would like to receive MKR in return
- Kyber’s protocol contract queries ETH to MKR exchange rate across all existing
- Reserve 1 offers an exchange rate of 1 ETH = 0.285 MKR
- Reserve 2 offers an exchange rate of 1 ETH = 0.287 MKR
- Reserve 3 offers an exchange rate of 1 ETH = 0.284 MKR
- This process continues until all ETH/MKR reserves have been queried
- The protocol confirms that Reserve 3 offers the best exchange rate
- Protocol contract sends ETH to reserve 3
- Reserve 3 sends MKR to the taker and the respective exchange rate
Token to Token Swaps
A token to token swap is one where the quoted token is neither the source nor the destination of the token of the trade. As an example, let’s assume there’s a taker looking to exchange DAI for SNX. Similar to simple token swaps, with Kyber, the transaction is able to occur in a single blockchain transaction.
- Taker sends DAI to the protocol control with the goal of receiving SNX in return
- The protocol contract sends DAI to the reserve offering the best DAI/ETH exchange rate
- Protocol contract receives ETH in return
- Once this happens, the protocol contract then sends ETH to the reserve offering the best exchange rate for ETH/SNX
- Protocol contract receives ETH in return
- Lastly, the protocol contract sends SNX back to the user
KNC Token Overview
Kyber’s protocol leverages a native token, Kyber Network Crystals (KNC) to align incentives between key stakeholders. Initially, the token economics relied heavily on burning KNC tokens in which fees collected in the network were used to burn KNC, ultimately increasing scarcity in the underlying token. However, despite the surge in volume throughout 2019, the KNC token failed to see any price appreciation.
In December 2019, Kyber Network announced a rework to Kyber Network Crystals (KNC) token economics, called Katalyst. The new token economics is currently set to launch in early Q2 of 2020 and more detailed specifics surrounding some of the new utility mechanisms will be released at a later date. In summary, changes to KNC can be broken down into the following ways:
- Staking Rewards: KNC holders receive network fees relative to the amount of tokens staked
- DAO Governance: KNC tokens will be used to govern the KyberDAO, a new mechanism for token holders to vote on major protocol upgrades and changes including network fees, burning ratios, as well as reserve listings and delistings and other incentives.
- Reserve Rebates: Reserve managers will be rewarded based on the amount of liquidity they provide to the network
- Custom Fees: Developers can now set their own fees rather than being subject to Kyber’s pre-existing fee-sharing rates (30% of the 0.25% fee)
- Lowering Barriers-to-Entry: Reserve managers will no longer be required to hold KNC in order to provide liquidity to the protocol
Kyber has gradually established itself as one of the leading Decentralized Exchanges (DEXs) within the DeFi space. The protocol allows for seamless integrations into other protocols, creating a frictionless mechanism for other DeFi protocols, applications, and wallets to integrate instant token trading and token swaps into their application logic. Kyber’s design emphasizes composability and as a result, the network effects are beginning to take place.
Ultimately, DeFi will continue to rely on liquidity in order to provide the best possible services for the industry. As such, Kyber has found itself a perfect niche as exchange usage and volume will increase in parallel with the proliferation of DeFi.
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