Kyber: Delivering a Sustainable Liquidity Infrastructure for DeFi

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Kyber Network

6 min readOct 7, 2020

Hi Kyberians,

It has been a crazy few months for decentralized finance (DeFi) and Kyber Network. The recent yield farming and liquidity mining trends in DeFi have created an environment that is ripe for innovation and growth, but at the same time plagued with a multitude of tokens, scams, and an unhealthy obsession for unsustainable yield. Even with its huge potential, the DeFi world is fraught with uncertainty.

Instead of chasing fleeting trends, the Kyber team has been biding our time and focusing on our goal of building a sustainable and antifragile liquidity infrastructure for DeFi that is built upon real network growth and can weather all seasons.

We have written this strategy update to share some thoughts with the community regarding how we perceive the current environment and elaborate on our plans for Kyber moving forward.

Where We Are

First of all, we would like to present an honest assessment of the current position Kyber is in. The yield farming trend and explosive increase in the number of DeFi tokens have captured the attention of the space. ‘Liquidity mining’, where liquidity providers gain newly-minted tokens for contributing liquidity to a platform, has driven huge token inventory to various Automated Market Makers (AMM), allowing them to frequently outperform our (more capital efficient) Automated Price Reserves (APR) in terms of liquidity for certain token pairs.

For now, Kyber’s architecture does not support open integration with liquidity mining protocols or permissionless contribution of liquidity by any user. This was a deliberate design choice to mitigate the proliferation of scam and non-compliant tokens, while we develop the KyberDAO and a more sustainable liquidity infrastructure. However, this also meant that Kyber was not able to serve the liquidity needs of many yield farming-related activities and missed out on substantial trading volume in the process.

Ethereum gas costs have also been very high due to the increase in on-chain transactions (e.g. borrowing and yield farming activities) and this has negatively affected Kyber Network, KyberDAO, and KyberSwap (our in-house token swap platform) users. In particular, there were periods of extremely high gas costs that forced our market makers to temporarily halt operations, further impacting our volume.

A Strong Foundation

Despite our current challenges, Kyber remains one of the most fundamentally-sound projects in the DeFi space, thanks to our powerful on-chain liquidity protocol, strong taker ecosystem, flexible reserve framework, and of course, the support from our vibrant community.

Our Katalyst protocol upgrade and KyberDAO have been very successful. Since its launch on July 7, we have become one of the most successful DAOs in terms of staked value, voters, and rewards distributed.

Over 50 Million KNC tokens have been staked on the KyberDAO
Over 8,000 votes in total across 6 successful Epochs
Over $1 Million in ETH rewards distributed to KNC voters
Over $360,000 in rebates given to Fed Price Reserves (FPR)
Over $140,000 in KNC burned

In addition, we remain the most integrated on-chain DeFi protocol, used by the vast majority of aggregators and decentralized applications (DApps). This ensures that liquidity provided on Kyber is accessible to almost the whole DeFi ecosystem.

Our reserve system is also the most proven and flexible liquidity system in the space, allowing token teams and developers to easily create innovative reserves that suit their needs, including automated pricing systems, professional market making systems etc.

With this solid foundation, Kyber is now well-positioned to enter the next exciting phase of our development.

Forging Ahead

Moving forward, we intend to take aggressive actions to identify and shore up any weaknesses, boost our liquidity and token competitiveness, establish ourselves as DeFi leaders, as well as harness our resources to help Kyber thrive.

These actions will fall under 3 key areas

Enhancing liquidity by optimising network fees and building up our dedicated reserve ecosystem
Shifting control to the KyberDAO when it comes to adding tokens and reserves to the network
Creating a new open system for permissionless liquidity contribution that is usable by anyone in DeFi

Through these actions, we would like to greatly increase the diversity of liquidity sources in our network, increase the speed of onboarding new tokens, and generate new growth channels for Kyber. Together, they will help us build a sustainable liquidity infrastructure and establish ourselves as leaders in DeFi.

Proposals for the KyberDAO

As an immediate measure to restore the competitiveness of the network and to shift the focus to Kyber-dedicated (non-bridge) reserves, we are submitting the following Kyber Improvement Proposals (KIPs):

KIP-3: A reduction of our Kyber Network Fee parameter from 20bps to 10bps (0.2% to 0.1%). While this might mean a short-term reduction in rewards, we believe this is an important factor in retaining competitiveness and in turn leading to long-term network growth and long-term returns to stakeholders.
KIP-4: To add fees to our bridge reserves, which currently are not charged any fees. This will create an equal playing field between the bridge reserves and market makers running our Fed Price Reserves (FPR) and APRs.
KIP-5 and more: In the coming months, we will also be gradually allowing the KyberDAO to approve new tokens and reserves. The KyberDAO will soon be able to take an extremely active role in deciding which tokens and reserves can leverage our network, and expedite the addition of popular utility tokens.

We strongly encourage all community members to participate in our KIP discussions on discord and work together with the Kyber team to further optimise our protocol.

Key Initiatives In Q4, 2020

In addition to the immediate actions we are proposing to the KyberDAO, we are also launching several key initiatives in 2020 for professional market makers, developers, and the majority of users/liquidity providers. We aim to fortify our long-term advantage, mostly in terms of expanding the number, variety, and depth of liquidity provisions on Kyber.

Given that Kyber is already integrated into the majority of applications and aggregators in DeFi, enabling permissionless liquidity contribution and enhancing Kyber-dedicated liquidity should lead to an exponential increase in volume.

KyberPRO — Professional Market Making Framework: Professional Market Makers account for more than 70% of our current volume, and very often provide the best rates in the ecosystem. We will launch KyberPRO, an end-to-end framework that enables professional market makers to easily onboard and operate on Kyber’s network. The framework includes an upgraded FPR system, robust toolings, and comprehensive documentation covering infrastructure, technical, and market making strategies. In addition, we will be launching an incentive programme to help market makers quickly get started and run a profitable operation.
Custom Reserve Ecosystem: As mentioned in the protocol paper, Kyber’s core architecture is designed to enable any type of reserve to be created and added to Kyber Network. Currently, apart from Kyber, the on-chain DeFi ecosystem is dominated by AMMs like Uniswap and Balancer. We believe there are various new liquidity systems that can be created beyond the existing platforms — and the timing is perfect to unleash the necessary tools for innovation. We intend to give developers of all stripes who want to provide liquidity to the ecosystem the ability to easily build new reserve systems on Kyber. More details will be shared soon.
Permissionless Liquidity Contribution: One of the most heavily-requested features by the community is a system that allows anyone, whether you are a developer or an average user, to contribute liquidity seamlessly. This is an area we have been working very intensely on during the past few months, and we will have exciting news to share before the end of the year.

These initiatives will complement our existing Automated Price Reserve (APR), Fed Price Reserve (FPR), and Bridge Reserves, representing our concerted efforts to enhance liquidity for Kyber and DeFi.

Beyond 2020

Apart from the aforementioned initiatives, we are also working hard on longer term solutions to solve several critical problems that afflict the space today.

Scaling DeFi and making it accessible to regular users and newcomers again, and not just ‘whales’ who can afford high gas prices.
Solving the liquidity fragmentation problem, where liquidity is fragmented and hence inefficient, even with the help of aggregators.
Making DeFi much more usable, compared to its current state, where user experience is still extremely complex, even for experienced users.

We will unveil more details in the coming months!

Onward, Kyber Network

We hope to contribute towards a better DeFi world, one with less toxicity and more transparent, inclusive, and sustainable practices. Along with the other DeFi projects in the space, we need to hold ourselves to a higher standard.

DeFi trends come and go, but we are determined to emerge stronger from every challenge and continue to be 100% committed to our goal of building a sustainable liquidity infrastructure that enables long-term creativity, innovation, and the democratization of finance. Let’s achieve this goal together as one united Kyber community!