Deep Dive on Kyber Network (KNC): A Leading Decentralized Exchange
This post will dive into KyberNetwork, an exciting Singapore-based project that is working to facilitate instantaneous exchange of cryptotokens without reliance on a traditional centralized exchange.
Current Project Status: The project’s mainnet pilot is officially live on the Ethereum blockchain as of February 11th, 2018 and will run until April 2018.
- During the pilot phase, only Kyber Network’s whitelisted ICO contributors will be granted access to the platform. They are starting with 10 tokens at the outset, with more to be added in the near future.
***If you’re new to cryptocurrencies, scroll to the bottom of this page where I include educational resources, podcasts, and other useful tools to help you learn about the space.***
What is Kyber Network?
Kyber Network is an ambitious project aiming to offer decentralized token exchange capabilities to users on the Ethereum protocol in addition to payment APIs that will allow merchants to process payments in any tokens
How does Kyber Network Work?
Kyber Network aspires to guarantee liquidity and offer instantaneous on-chain conversions by leveraging independently-managed reserve pools.
- This means that unlike centralized exchanges, Kyber Network does not hold consumer funds in escrow nor keep a global order-book.
Here’s the simplified process (explained in more detail below)
- Users initiate trade requests (either a market order or specifying a minimum conversion rate);
- Kyber Network fetches the best conversion rate offered amongst all of its externally-managed reserves; and
- A smart contract will then execute an atomic transaction and the user will receive their requested tokens directly to their wallet.
What is Kyber Network Token (KNC) and Why does it have value?
KNC Token Type
There are currently 134,132,697 KNC tokens in circulation.
19.5% of KNC tokens are held by the Kyber Network project, 19.5% are held by founders, advisors, and seed investors, and 61% is held by the general public.
KNC Use Cases
First, Reserve managers use KNC to pay Kyber Network a small fraction of the transaction (the transaction fee). This is equivalent to reserve managers making payment in exchange for the right to be able to operate on KNC.
Second, Kyber Network has stated that it will pay partners in KNC for every trade that they introduce to Kyber Network. This includes wallets, blockchain explorers, and on-chain smart contracts.
All tokens that are paid in transaction fees by the reserves are burned by the Kyber Network, thus permanently decreasing a portion of the token’s supply. This means that, by design, there will be upward pressure on the price of KNC as trading volume increases.
- Note that because the fees are taken as a percentage of the “coins in circulation”, the total supply of KNC will never be exhausted.
In this Reddit post from January 2018, Kyber Network writes that:
“This token utility model was cocreated and advised by Vitalik (Co-founder of Ethereum), a similiar model can be found in his blog post here”
How does Kyber Network Facilitate Instantaneous Transactions?
The following diagram from the Kyber Network whitepaper depicts how the network functions:
In order to further explain how the Kyber Network system functions, I’m going to go through each network participant one-by-one.
Here are the four entities:
- The User;
- The Reserve Contributor;
- The Reserve Manager; and
- The Kyber Network Operator.
First, we have the Users.
Who are Users? They are entities who want to execute trades. They can be individual users, smart contracts, or merchants.
Permissible Actions: Users can query conversion rates and execute trades (from their digital or hard wallet).
Here’s what the Users get from Kyber Network:
- Instantaneous (atomic) and Trustless Exchange: Kyber Network does not ever hold user tokens, so there is no risk of users getting hacked. Kyber Network simply facilitates an on-chain transaction between the user’s wallet and reserves via smart contracts.
- Minimal Fees: Users only pay the gas fee to pay for the transaction on the Ethereum network (which is common on all exchanges). No additional service/transaction fees are charged.
- Some Level of Customer Support: Kyber Network uses ZenDesk, a reputable customer service company, to field inbound support tickets, and offers a FAQ Page on its website to memorialize common user questions.
- No Sign-up Required: Currently, no sign-up is necessary for token exchanges up to $3,000. Kyber Network does require sign up and KYC checks for exchanges over $3,000.
- Minimalist User Experience: The user interface will be similar to that of ShapeShift as Kyber Network does not have a global order-book, but instead derives exchange rates from multiple market APIs and shows the user the best rate among all the reserve managers.
- A quick look at the Kyber Network website is enough to see that that they are focused on offering an intuitive and user-friendly interface:
Second, we have the Reserve Contributors.
Who are Reserve Contributors? They are entities who pool their tokens into an externally-managed reserve to allow Kyber Network’s smart contracts to access it.
Permissible Actions: Reserve Contributors can contribute reserves and withdraw funds from the reserve.
Reserve Contributors earn a profit on the spread between the base rate (determined by Kyber Network) and the rate that the user pays.
- Kyber Network will employ transparent fund management, so that contributors of the reserve can track all trading activities done by reserve managers. In addition, Kyber Network will put restrictions in place to only allow reserve managers to transfer funds to predefined addresses.
Third, we have the Reserve Managers.
Permissible Actions: Reserve Managers can only set their own conversion rate.
Kyber Network will need to institute restrictions on Reserve Managers to prevent bad actors from derailing the system. Kyber Network highlights the following in their whitepaper:
- Required KYC Checks: To be a reserve manager, you will have had to pass all Kyber Network’s KYC checks, and helps to commit to good service (low spreads and sufficient liquidity)
- Bounded Reserve Spread: Kyber Network may consider bounding the reserve spread on different tokens to prevent reserve managers from offering outrageous prices.
- Investigate on a case-by-case basis: Kyber Network offers guidance to reserve managers and should a price differ from the system rate by a certain amount, Kyber Network will investigate the issue.
- Kyber Network will also be developing a reserve dashboard software to help reserve managers manage their reserve portfolio.
Fourth, we have the KyberNetwork Operators.
Permissible Actions: KyberNetwork Operators can list/delist new exchange pairs and add/remove reserves.
- At first, the Kyber team will act as the KyberNetwork Operator to bootstrap the platform in the early phases. Kyber Network intends to set up a proper decentralized governance to take over this task in the future.
Loi Luu (CEO) is a CS PhD researcher at the National University of Singapore. In addition to having strong technical capabilities, he is also clearly passionate about Kyber Network’s mission, and is great at promoting Kyber Network without being promotional (which is a great quality in any CEO).
- I would highly recommend listening to Luu’s interview on the Crypto 101 Podcast from 2/10/2018.
- Here is a concise and thoughtful Forbes opinion piece that Luu wrote about Blockchain Adoption.
- Luu was also recently selected to the 30 Under 30 List for ForbesVietnam
Yaron Velnver (CTO) is a CS PhD. His research focused on aspects of game theory incentives in blockchain protocols and formal verification of smart contracts.
Victor Tran (Lead Engineer) has experience developing and building infrastructure for social marketing platforms and ad networks.
Vitalik Buterin (Founder of Ethereum) is the most notable advisor to the project.
- Vitalik was involved with the design of the platform and token utility design, but Kyber Network notes that they do not engage with him as frequently as they did in the past (December 2017 Reddit AMA)
Kyber Network has a list of top-notch investors behind it in the blockchain space including Pantera Capital, Danhua Capital, Hyperchain, Fenbushi, Signum, and FBG
- ICON is one the largest blockchain networks in the world aiming to build a decentralized network that allows independent blockchains with different governances to transact with one another without intermediaries.
- Partnership Details: Kyber Network will connect its token conversion services to ICON’s inter-blockchain network and is intended to bring Kyber Network one step closer to supporting cross-chain transactions, thereby delivering utility for different decentralized applications across chains.
“The token exchange system is a key component of the inter-blockchain ecosystem…Our partnership with Kyber Network brings us one step closer to inter-chain token exchange.” — J.H. Kim (ICON Foundation Council Member)
- Ripio Credit Network is a global credit network protocol based on cosigned smart contracts. It has 170K users, and is trying to expand from Latin America to the global P2P lending market. RCN smart contracts connect agents with information on the borrower’s identity to agents that analyze the borrower’s credit risk impartially and a cosigner acts as a re-insurer that distributes and reduces the lender’s risk, and at the same time, helps to improve the contract conditions by retaining access to the borrower’s local legal system
- Partnership Details: Kyber Network will provide the conversion services (as an on-ramp and off-ramp partners) necessary for credit exchanges and wallet providers to integrate the RCN protocol. Once RCN network is fully deployed in Q2 2018, both parties will pilot test.
- Wanchain is a universal cross-chain protocol with private cross-chain smart contracts and token exchange privacy protection.
- Partnership Details: Kyber Network intends to collaborate with Wanchain, which raised $36mm in its October 2017 ICO, in three major areas:
- Both parties will share marketing, PR, community and partnership building contacts when relevant.
- Kyber Network will also work to build out a decentralized exchange on the Wanchain platform.
- Both parties will collaborate on PeaceRelay Project, which is aimed at allowing communication and interaction between Ethereum-forked blockchains
- CoinManager is South Korea’s largest portfolio tracker and wallet provider, with 350K active users.
- Partnership Details: Kyber Network will integrate its service into CoinManager’s wallet, such that CoinManager users have access to seamless and instantaneous in-app token conversion.
- Coinduck is the world’s first Ethereum payment service that brings easy Ether transactions into everyday purchases in Korea.
- Partnership Details: Kyber Network will integrate its token conversion protocol such that Coinduck will be able to expand its payment service beyond just Ether to all ERC-20 tokens.
- Change is a mobile app that aims to become a one-stop decentralized platform for payments, storage, investments, P2P loans, and fund transfers in Singapore.
- Partnership Details: Kyber Network will integrate its protocol with the Change Wallet to allow more users to exchange ERC-20 tokens with very little fuss. Change customers will be able to use Kyber Network’s on-chain conversion services to send and receive different cryptocurrencies without ever leaving the wallet or using any other interface.
- imToken is China’s leading mobile wallet app with 350K users worldwide. It supports multi-tokens, third-party DApps, HD-Wallet, address book, transaction push notifications, and access to exchanges.
- Partnership Details: Kyber Network will integrate their protocol with the imToken wallet, essentially allowing users to make instant token conversions without ever having to leave the comfort and familiarity of their wallet. This integration guarantees liquidity for imToken users and allows them to seamlessly manage a variety of digital assets.
- Huobi is a centralized exchange with about $900mm in daily trading volume.
- Partnership Details: Kyber Network has commenced an integration with Huobi, so that they can use the exchange for price feeds as well as to rebalance their portfolio.
February 11th, 2018: Mainnet launches and supports trading between ETH and 10 other tokens during pilot phase until April 2018
- First version of Kyber Network; partnering with Jaxx, MyEtherWallet, and Status
Q2 2018: Supports trading between arbitrary token pairs
- Kyber Network will work with other partners to build APIs to allow users in their platforms to efficiently withdraw in preferred tokens.
Q3 2018: Supports the trading of more advanced financial instruments
- Plans to work with decentralized HF platforms that allow people to invest in trustless HFs
Early 2019: Supports cross-chain trading
- Either using chain relays or interchain communication protocols
Kyber Network is highly transparent about company developments within its community and with the general public. Both Loi Luu (CEO) and Lewis Abela (Marketing & Communications) post regularly on social media. While based out of Singapore, the project is global and has Telegram Groups and Medium Pages available for English, Korean, and Chinese speakers.
Kyber Network has 63K followers on Twitter, 7K members in their Telegram Group (16K on the Announcement Channel), and 3K users typically online in their Subreddit page. In addition, their GitHub is active with 2,934 total commits for repositories updated within the last 3 days (1,738 of these are focused on Kyber Network’s wallet).
Additionally, Kyber Network also has regular developer meetups. For example, on January 20th, they hosted 200 people in Seoul and awarded two teams $30K each to further develop projects built on Kyber Network.
Google Trends also seems to indicate increased public interest in Kyber Network as evidenced by the increase in searches not seen since Kyber Network had its ICO:
The following are potential (hypothetical) reasons why Kyber Network might fall short in its mission to become a successful decentralized exchange:
- Kyber Network is unable to achieve mainstream user adoption due to poor UI/UX, inability to exchange fiat currency, slow order processing, and/or slow cancellation.
- Kyber Network falls short with respect to its technical roadmap due to development mistakes or shortcomings of other technology projects that Kyber Network relies.
- Kyber Network is unable to onboard reserve managers/reserve contributors and Kyber Network remains the sole reserve pool.
- Other decentralized exchanges outcompete Kyber Network and achieve mainstream adoption and/or more decentralization faster than Kyber Network. Developer talent and users consolidate around the most successful ones.
- Kyber Network (and other decentralized exchanges) encounter surprising pushback from regulators. Regulators argue that decentralized exchanges facilitate AML/KYC violations and don’t want cryptocurrency trading to be decentralized.
In my opinion,
Risk #1 is mitigated because Kyber Network is investing time and energy into its wallet and its merchant API. Both of these areas of development are crucial because they widen Kyber Network’s market opportunity to beyond today’s exchanges (which are mostly for speculative buying/selling). In addition, we have seen the success of ShapeShift, which has a similar user interface. Finally, Kyber Network doesn’t have to compete with Coinbase and provide the absolute best user experience. If Kyber Network can provide competitive liquidity and fees, it can win a substantial amount of market volume by winning over intermediate and advanced users.
Risk #2 is mitigated because Kyber Network (i) has an active developer community as evidenced by its frequent meetups and active GitHub, (ii) has a leadership team with strong technical capabilities, and (iii) has a track record of meeting its milestones in the past. Nevertheless, Kyber Network is ambitious with respect to its development for cross-token and cross-chain interoperability trading, and is vocal about its reliance on the success of other projects such as Melonport, Polkadot, and Cosmos.
Risk #3 is mitigated because Kyber Network has $50mm+ to bootstrap the project and provide liquidity for users. Kyber Network can mitigate this risk by winning over whales and centralized exchanges who have unused reserve capacity, while simultaneously establishing partnerships with wallet providers and other payment services. However, Kyber Network faces the same problem that plagues traditional platform companies, and that is, you need one side of the network to provide value to the other.
Risk #4 This risk is mitigated because there can be multiple winners in this space. . According to Nathan Sexer at ConsenSys, there are 170+ cryptocurrency exchanges and 99% of those are centralized exchanges. There is no reason why there cannot be multiple successful decentralized exchanges with different system design and different customer segments. However Kyber Network does face competition from ShapeShift, which is an existing non-custodial exchange that does not take counterparty risk.
Risk #5 is mitigated because Kyber Network’s unique system design allows it to leverage liquidity of other exchanges and token holders, while at the same time preventing security breaches and unsafe store of information, funds and private keys.
One Potential Tailwind
One potential tailwind for Kyber Network is the increasing frequency and magnitude of hacks on centralized exchanges. If this trend continues, Kyber Network could see increasing developer interest and user adoption.
Major Hacks of Centralized Exchanges
- March 2014: ~$473mm stolen from Mt. Gox (Japan)
- January 2015: ~$5mm stolen from Bitstamp (Luxembourg)
- August 2016: ~$66mm stolen from Bitfinex (TBD)
- February 2018: ~$170mm of NANO stolen from BitGrail (Italian)
- January 2018: ~$400mm of NEM stolen from Coincheck (Japanese)
In addition, continued hacks (and media coverage of such hacks) of other entities (i.e., wallets, ICOs, etc.) may indirectly prove to be a tailwind for Kyber Network given its focus on instantaneous and secure token exchange.
Other Major Hacks (ex-centralized exchanges)
- June 2016: ~$50mm stolen from DAO
- July 2017: ~$7mm stolen from CoinDash (CDT)
- July 2017: ~$32mm stolen from Parity Multisig Wallet
- July 2017: ~$8mm stolen from Veritaseum wallet
- August 2017: ~$500K stolen from Enigma (ENG)
- November 2017: ~$31mm stolen from Tether
Fundraising and Trading Information
KNC Token Sale
In September 2017, Kyber Network held its token sale and raised 200,000 ETH, worth about $60mm at the time.
KNC Price Information
According to CoinMarketCap, Kyber Network currently has a market capitalization of $357mm.
It’s current price is $2.53, which is 57% off from its all-time high of $5.90 on January 9th, 2018.
KNC is available for trading on the following exchanges: Binance, Huobi, Coinnest, and OKEx. Its 24hr trading volume is ~$10mm.
Links to Official Kyber Network Channels
Additional Readings on Decentralized Exchanges
Nathan Sexer (CCO VariabL and resident at ConsenSys) recently wrote the State of Decentralized Exchanges, 2018. It’s a great overview of the space. He does a great job of highlighting all of the related projects out there and their innovative business models.
Michael Oved (Co-founder of AirSwap and resident at ConsenSys) also adds useful perspective by discussing how the AirSwap Team is using the Swap protocol (which went live February 1st, 2018) to create a decentralized exchange platform in his post titled The Market Maker’s Guide to Decentralized Exchange.
Three Recommended Educational Resources
I’m recommending three reading lists, organized by reputable people in the blockchain space:
- a16z Crypto Canon: Andreessen Horowitz, the Silicon Valley venture capital firm with investments in Twitter, Facebook, Airbnb and Lyft, recently put together this amazing and comprehensive list of crypto readings and resources. It covers everything under the blockchain sun, with links to articles, blog posts, and YouTube videos.
- MIT Digital Currency Initiative Reading List: The Digital Currency Initiative is a cutting-edge group at the MIT Media Lab that focuses on cryptocurrency and its underlying technologies. This is their list for getting started.
- Dan Romero’s Digital Currency Reading List: Dan Romero is a VP and GM at Coinbase.
Three Recommended Cryptocurrency Podcasts
I listen to all three of these podcasts on a regular basis.
- Blockchain Curated: Blockchain Curated is “making the best content in the blockchain and bitcoin industry more accessible to the world.” It features a collection of curated articles that are written by industry veterans and leaders. Founders, advisors, and contributors to organizations including Coinable, Ethereum, Polychain Capital and Digital Currency Group.
- Crypto 101: Crypto 101 describes itself as the Average Consumers Guide to Cryptocurrency. It’s great for those of you who are totally new to cryptocurrencies and want to start from scratch.
- Crypto Bobby: Crypto Bobby is a down-to-earth enterprise tech guy who has been in crypto for a while. He has nice short and sweet 10–20 minute daily podcasts where he goes over relevant happenings in the crypto world and touches on his favorite coins. He also does longer form interviews with thought leaders in the industry.
- Coin Mastery: Coin Mastery is much more oriented toward the day trader or people who are interested in talking about macro events. They also share tips and strategies that help you leverage market movements so you can turn your hard earned cash into generational wealth.
Three Cybersecurity Recommendations
- Always use Two-Factor Authentication (2FA): I recommend getting into the habit of always using Google Authenticator, Duo Mobile, or Authy, especially for accessing exchanges or wallets. 2FA is where you need two different methods, usually two devices, to login to your accounts. Avoid using SMS for this because it is weak due to number porting attacks.
- Use a Virtual Private Network (VPN): I recommend using expressvpn ($9.99/month) to conduct any transactions online. It’s a great way to protect yourself and your identity, especially when you are using public Wi-Fi.
- Consider Investing in a Hardware Wallet: I recommend the Ledger Nano S or a Trezor. These two companies are the two most reputable out there. Always buy directly from the manufacturer (not from Amazon or other third-party vendors). Don’t end up like this guy who lost his life savings when he up bought one from a reseller.
- What’s a cryptocurrency wallet? A cryptocurrency wallet is a secure digital wallet used to store, send, and receive digital currency like Bitcoin. Most coins have an official wallet or a few officially recommended third party wallets.
- How do they work? Wallets do not store your cryptocurrencies. They do store your public and private keys — AKA key pairs. Public keys (AKA addresses) are like a location on the blockchain to track where assets are owned.
About Me: My name is Jake Hallac and I’m wrapping up my MBA at MIT where I work with Professor Christian Catalini on ICO-related research in the MIT Cryptoeconomics Lab. Prior to MIT, I structured private investments into hedge fund vehicles and invested in public equities at the Blackstone Group.
Disclaimer: Neither the author of this article, nor Divergence Digital Currency Fund provide financial, investment, or legal advice. The content provided on this site is for informational purposes only and should not be relied upon in connection with an investment decision or be understood as an offer, recommendation or solicitation regarding any investment. This is not an endorsement of any company, project, or token discussed in this article.
Disclosure: Divergence Digital Currency Fund invests in cryptoassets and owns equity interests in distributed ledger technology projects.