DeFi Explained: Kyber Network
A Brief Overview:
Kyber Network is a liquidity protocol that is powered by on-chain token reserves. The most popular use case is the KyberSwap market orders, which allow users to buy and sell tokens directly from the reserves.
The Kyber Network Protocol has also been implemented across the crypto ecosystem. Currently, it is incorporated into popular wallets like mycrypto.com and Coinbase Wallet. These wallet integrations allow users to trade directly from their wallet interface. Any Ethereum application can integrate Kyber protocol because of its decentralized architecture.
The protocol is also popularly integrated into blockchain games that use on-chain payments and trades. The Kyber Protocol allows game developers to quickly integrate payment solutions and accept any supported ERC20 tokens for the in-game items and player based trades.
The Kyber Protocol presents a simple solution for developers; it does not require them to build a complex system and worry about maintaining smart contract security upgrades. As a result, hundreds of developers are turning to Kyber Network for all of their in-app trading features.
Value Proposition
- Traders - Traders can use the KyberSwap app to trade supported ERC20 tokens. KyberSwap supports both market and limit orders. All trades are subject to Ethereum gas fees, as the trades are performed instantly on-chain. As opposed to other popular exchange models, Kyber Network does not have an order book, and its a liquidity pool managed by on-chain reserves.
- Market Makers - Market makers can deploy their own token reserves and launch new projects that require on-chain liquidity. Afterward, they must then deploy the reserve price model. Keep in mind that managing a token reserve on Kyber and providing liquidity is only for advanced traders — this is not an automated market making model. Prices are set by an algorithm with specific parameters that are inputted during setup. (Providing liquidity on Kyber is recommended for advanced traders only.)
- Application Developers - Decentralized applications and wallets may use Kyber Network to access the on-chain liquidity. This effectively provides instant liquidity to open finance applications like lending, wallets, games, robo-advisors, and other crypto exchanges.
- Payment Gateways - Dapps that require users to “pay” in certain tokens use Kyber Network to provide atomic swaps to their users and remove the friction involved in having to hold a specific token. The game Decentraland is a good example of this type of integration. To purchase “land” in the game, the user must pay in “MANA”; the Kyber integration allows users to pay for “MANA” using any of the supported tokens.
Use Cases:
- Crypto Traders - Experienced Ethereum traders are using Kyber Network’s on-chain liquidity as their first choice in trading the most popular Ethereum tokens and stablecoins.
- Exchange Arbitrators - With the growing DEFI exchange ecosystem, more arbitrators are using Kyber to initiate arbitrator trades when the opportunity arises. For example, arbitrageurs might create trades between Uniswap and the lending protocol debt auctions.
- DEFI Users - Dapp users from the DEFI ecosystem use Kyber Network without ever noticing. For example, applications like Compound and DYDX use Kyber on-chain liquidity in the background to auction off the margin loans that have reached their borrow limits. DEFI users across many wallets are instantly buying and selling into their portfolio using Kyber Network integrations without ever leaving the portfolio interface.
KNC Tokenomics:
- DAO Staking Rewards - DAO participation requires the KNC token to be “staked” to vote on the governance of the protocol. Users that participate in the governance are rewarded with a share (currently 70%) of the reserve fees collected.
- Platform Fees - A 0.25% fee is charged to the reserve manager for all trades. Traders do not pay for this fee directly. The market makers that run the reserve managers price the tokens with the fee already priced in. This fee is then used to supply the staking rewards and burn supply according to the ratio that the protocol governance has set.
- Governance - The Katalyst upgrade introduces a new governance system to the Kyber Protocol. Users will need to hold and stake KNC tokens in order to vote and participate in the protocol governance.
- Supply Burn - Kyber Network burns a share of the KNC fees that are collected. Originally, 70% of the fees collected in KNC are used to burn the token from the supply; Now with the Katalyst upgrade, only 5% is burned. In the future, this 5% could change, and supply burn can even be completely removed. It will be up to the DAO participants to decide on the future of supply burn through protocol governance.
- Integrator Rebates - A percentage of the collected KNC fees are awarded back to Kyber liquidity integrators. An example of this is the mycrypto.com wallet, which allows its users to trade directly from the wallet interface. Mycrypto.com is then eligible for their share of the rebates according to the volume share the application brought to the reserve.
- Limit Order Fees — KyberSwap’s limit orders include a 0.1% fee on all trades. KyberSwap is an application built by the Kyber Network team; therefore, the fees are charged in the trading pair. The fees are then used to fund ongoing KyberSwap development costs. (Only limit orders have this fee, It’s important to note that this is an application fee and not a protocol fee).
- KyberSwap Discount - KyberSwap users that hold at least 2,000 KNCs in their trading wallet receive the benefit of commission-free trading. All limit order transactions on the KyberSwap interface are free when you gold 2,000 KNC’s, with a limit of 10 orders per day. It’s important to note that this feature only applies to the KyberSwap application, and other applications that are integrated into Kyber Network can charge their own trading fees.
Q&A With Deniz Omer, Head of Ecosystem Growth at Kyber
A big part of DEFI is the interoperability/composability, How do you see this benefiting the Kyber Network?
We are seeing Kyber used a lot within decentralized margin trading products for building leveraged positions. Within one transaction you can take out a loan, use this loan as collateral to take out another loan and repeat the process to build 2x-50x leveraged positions. Good examples of these are Nuo Network and bZx’s Fulcrum. Kyber’s instant and on-chain liquidity is very suitable for such use cases. Kyber is also used within CDP-related DApps such as DeFiSaver for automating CDP-saving tasks during times of high volatility.
What are the exciting “non-speculative” usages of Kyber you’ve seen or keep seeing?
Not speculative usage includes merchants integrating the Kyber Widget so that their customers can pay for goods in any ERC20 they want while the merchant receives it in the token of their choice (usually a stablecoin). We’re also seeing demand from NFT projects including games who integrate Kyber so that NFTs can be bought with the crypto of the user’s choice. These use cases allow any token to be used practically anywhere and reduces friction within the user experience
What do you think Kyber should get used more for than it currently does?
In general, the DeFi narrative is very dominant within Ethereum so we’d like to see areas outside of DeFi also gain prominence. We see Ethereum as much more than just a financial smart contracts platform so we’re looking forward to new sectors springing up and for Kyber to be used within these new sectors. These could be decentralized social networks, identity platforms, sharing economies, or previously unimagined new industries.
How do you think this liquidity mining will end and what will the DEX landscape look like in 12 months?
It’s hard to tell where liquidity mining will end just because of the huge uncertainty in key areas within liquidity mining. For example, will gas prices continue to increase and price out most traders? Will arbitrage opportunities remain the same high level as liquidity levels scale up? Do users understand the risks involved? Sometimes it can feel like some projects are creating value out of thin air and we’re not sure this is sustainable in the long run and that’s also why Kyber network rewards are distributed not by minting KNC and inflating the KNC supply, but by distributing actual accrued ETH fees to KNC holders. Either way, we expect Kyber to continue being a dominant presence in DeFi in 12 months' time.
Makerdao recently approved KNC as a collateral asset, congratulations! What does this mean for Kyber protocol in the long run?
We’ve been seeing KNC’s volumes and liquidity increase over the last few years and the number of Ethereum addresses holding KNC has doubled over the last year. Together with the addition of KNC to MCD, we see this as validation that the value created through Kyber Network’s on-chain activity is being healthily captured by KNC and this is also reflected in KNC’s price. We expect this trend of increasing the adoption of both KNC and Kyber Network swap demand to continue.
What are Kyber’s biggest obstacles at the moment?
As DeFi dapps explode in popularity and overall Ethereum adoption increases, we are getting close to the Ethereum network’s limitations in terms of transaction bandwidth and this is leading to increasing gas prices. Limits to scaling on Eth1.0 can be an obstacle not just to Kyber’s on-chain activity but the overall dapp ecosystem adoption. We are not in a position to onboard another ten million users (~0.1% of the world population) onto Ethereum which is why we support efforts to bring Ethereum 2.0 into production and welcome all layer 2 experimentations.
Important Project Links
KyberDAO — A dashboard for the protocol governance and staking features. View important metrics like reward distribution, governance participation, and the locked token supply in the staking contracts.
KyberSwap - The flagship application built by the Kyber Network team. Access the token reserves and trade with instant liquidity.
Kyber Tracker - The Kyber Network protocol dashboard. View important protocol metrics like reserve liquidity, trade volumes, and collected network fees.
Ecosystem Reports - Kyber Ecosystem Reports have become a monthly status report that not only documents the adoption of the Kyber Protocol, but also the adoption of DEFI.
