A Data-Driven Analysis of Kyber Network
For a long time now, decentralized exchanges (DEXs) have been touted as a transparent, more secure and cheaper alternative to traditional exchanges. Currently some of the main decentralized exchanges options include Uniswap, 0x, IDEX and Kyber Network. While DEXs in general are still far from surpassing centralized exchanges in terms of volume and liquidity, they have certainly grown significantly in the past few years.
One protocol in particular that has grown in both transaction volume and token price in the recent months is Kyber Network. Its native token, Kyber Network Crystal (KNC), has rallied an impressive 170% year to date despite the market-wide sell-off. While price charts provide the value traders are willing to pay for a token, blockchain data offers a detailed view into the overall growth and adoption of a token. Throughout this article we will go through an overview of the Kyber Network and analyze onchain indicators from IntoTheBlock.com to reveal valuable insights about the fundamentals of Kyber and its KNC token.
Brief Explanation of Kyber Network
An onchain liquidity protocol, Kyber Network facilitates peer-to-peer cryptocurrency trading by aggregating the orders and aligning the incentives of market makers and market takers. Kyber is currently deployed on the Ethereum blockchain, allowing for trading of multiple ERC-20 tokens, but has the capacity to be implemented in any smart-contract-enabled blockchain. In order to better understand Kyber it is important to introduce the following key components: Takers, Reserves, the KNC token and Maintainers.
Takers — A common term in traditional markets, takers refer to traders who execute an order by accepting the price set by a liquidity provider’s order, thus taking liquidity off of the order book. In Kyber’s case, the takers are usually the end-users using Kyber’s website or app to swap one cryptocurrency for another. Decentralized applications (Dapps) and wallets can also act as takers by leveraging smart contracts automating the transaction process.
Takers benefit from Kyber’s decentralized, permissionless instant trade settlement through which they are paired with the best rates offered by the network’s Reserves. In other words, users access multiple orders of the token they would like to exchange and are able to automatically fulfill their order without the need to trust a third-party custodian or provide identification (no KYC is required for transactions of up to $2,000 and $15,000 per day per address). By not having to trust a third-party the user is always in control of their funds without risking them getting stolen through a hack.
Reserves — These refer to the liquidity providers of the platform, supplying tokens and exchange rates for orders future orders. Reserves are the equivalent of market makers in centralized exchanges. Reserves implement a series of smart contracts in order to register in the Kyber network and then are able to provide tokens and manage them as they choose to. Anyone can opt to be a reserve, but usually token projects, large players (whales), funds and liquidity pools take on this role.
Reserves benefit from charging higher prices at the ask than the prices they purchase at the bid. Therefore, the reserves leverage market making techniques such as scalping in order to profit from the spread. While market makers strengthen exchanges by providing liquidity, they could also take advantage of the system. To avoid this, Kyber has reserves pay a fee in KNC for every trade, acting as a barrier for them to perform wash trading.
KNC Token — Kyber’s native token is used to manage incentives and align them with the network’s overall health. Having reserves pay a fee in KNC makes it costly for them to act against the networks best interest. Additionally, part of the KNC paid in the fee is burned in every transaction, thus reducing the supply and making it a deflationary token. This creates incentives for token holders as in theory price should increase with supply decreasing all other things being equal.
KNC also plays an important role as the network’s governance token. As such, KNC is used to vote for decisions in the KyberDAO (Kyber’s decentralized autonomous organization). Though the KyberDAO has not launched yet, it will be part of the upcoming protocol upgrade, Katalyst.
Maintainers — Finally, Maintainers act as reserve managers overseeing the registration and removal of reserves and token pairs. While network maintainers from each blockchain are initially in control of the reserve management process, this responsibility is expected to shift onto KNC holders as the network matures and Kyber governance transitions into a decentralized autonomous organization.
Takers, Reserves and Maintainers together constitute the Kyber network, with each player’s incentives aligned towards the overarching benefit of the network. A flow diagram of how they interact is shown below:
Asides from the launch of KyberDAO, the Katalyst upgrade will also bring other elements improving the network. In short, Katalyst will introduce staking, allowing KNC holders to receive part of the network fees as earnings, and reserve rebates, which similarly will be provided to reserves as incentive for market making activity. Overall, these changes are aimed towards increasing the number of network participants and the amount of liquidity available.
Since releasing the details for the Katalyst upgrade in December 2019, the Kyber community has gotten increasingly bullish on the network’s prospect with the KNC token rallying around 170% as seen below:
Onchain Analytics
While the rising price can be interpreted as a sign of user approval of the upcoming upgrade, it does not provide a complete picture of Kyber network. Even though onchain analytics are not necessarily correlated with price, they do provide remarkable insights of a project’s growth and adoption. Data from IntoTheBlock.com is used to take a deep dive into the Kyber Network protocol.
Growing Transaction Activity & Adoption
KNC’s increasing price has been accompanied by a growing number of transactions and transaction volume. The average number of transactions of KNC has increased over 90% in the last year from 933 to 1790 per day. Remember that in every trade taking place in Kyber the reserves pay a KNC fee, so the total number of KNC transactions acts as a proxy of the daily number of trades taking place in the Kyber network.
While this may seem like a small number of transactions, the transaction volume has also increased by more than 90% in the last year, peaking at over $60 million in KNC traded within 24 hours. The total volume traded in Kyber, however, is expected to be much larger as KNC fees are only 0.25% per trade.
While transaction activity has grown significantly, daily active addresses have grown even more. The number of unique addresses using KNC in a given day has increased by over 100% throughout the last year. Perhaps more importantly the rate of new addresses being created (entering the network) has outpaced the rate of addresses going to zero (leaving the network), leading to positive net network growth. This is a robust sign of increasing adoption.
New Money Flowing Into Kyber
It may come as no surprise that more people become interested in trading a token as prices rise. In Kyber’s case, the 170% year-to-date return has attracted significant amounts of new money into the market. As seen in the graph below traders, addresses with a holding period of less than a month, have doubled over the last month as their volume increased almost 40%.
While traders, in general, tend to seek short-term profits, hodlers (addresses with holding periods of over a year) usually seek longer-term investments. As can be seen in the graph below, hodlers consist of nearly 80% of all KNC addresses. As well, the number of hodlers managed to increase despite this month’s price crash. Both potential signs that KNC addresses are long-term-oriented holders.
Highly Concentrated in a Few Addresses
Whales, which IntoTheBlock defines as addresses with over 1% of circulating supply, hold roughly 58% of the KNC supply. Additionally, investors (addresses that hold between 0.1% and 1%) control around 20% of the circulating supply. This leaves us with a retail volume of 22%.
Having the majority of KNC tokens within 17 addresses could be interpreted as a potential risk of collusion were these holders to use their governance rights that will be granted once the KyberDAO is live. Additionally, there is the potential downside price risk of having a whale or investor sell their position. While token concentration within a few addresses can be seen as worrisome by many in crypto, it is important to consider that several of these addresses belong to exchanges and the protocol itself.
Overall, Kyber Network has proven to be an increasingly important protocol within decentralized exchanges, and possibly within exchanges broadly. While KNC’s 170% year-to-date growth is impressive, the network itself has also grown remarkably in terms of transactions and active addresses. In turn, this, along with the upcoming Katalyst upgrade, has led to a wave of new players entering the Kyber network, while also solidifying the number of hodlers. Despite this, it is important to note that supply of KNC is highly concentrated and there are risks associated with this, as well as with investing in cryptocurrencies in general.
While these onchain metrics are not direct predictors of KNC price action, they do shed light into the value being created by the underlying Kyber network. Ultimately, onchain indicators serve as a valuable complement to traditional technical analysis, tailored to the unique nature of cryptocurrencies.
This piece is not to be used as financial advice. I do not hold any KNC. If you gained some knowledge from reading the article, give it a clap and feel free to share it.
