What is Kyber Network and how does it work? The relatively old protocol might not be the most popular option with its meager $15 million TVL, but future updates have the potential to turn Kyber into a liquidity hub for the entire DeFi market.
There are almost too many decentralized exchanges in DeFi, which contributes to a rising problem of liquidity balkanization. Rather than being held on a few major exchanges, today’s crypto assets are fragmented across numerous dApps and liquidity protocols.
Everyone wants a piece of the DeFi cake, and so, developers continue to work on their own solutions rather than joining existing ones. If the trend continues, we might encounter a situation where users have to switch back and forth between trading platforms to swap tokens. Imagine trying to buy a token like TORN on Yearn Finance only to find out that they do not hold enough liquidity in their LPs!
With projects like Kyber Network, such a disaster may not happen after all. With more than 100 integrations and partnerships with DeFi projects, Kyber does a terrific job at connecting the space with its rich liquidity reserves.
Kyber Network is a liquidity protocol for the DeFi ecosystem that enables users to instantly trade cryptocurrencies by accessing wealthy liquidity reserves, which are provided directly from token teams, market makers, and other market participants.
Much like many other decentralized exchanges, Kyber’s mission is to connect traders not via an order book but via liquidity pools contained within smart contracts. While different in design, Kyber serves the same purpose as popular DeFi giants like Uniswap, SushiSwap, and Curve - a user sends one type of fund to the network and receives another asset in return.
One core difference is that Kyber Network’s ecosystem forms a symbiotic relationship between multiple types of users, which is designed to maximize the size of liquidity pools as much as possible.
Besides the standard users who are only there to perform a simple trade, there are also reserve entities, reserve contributors, reserve managers, and Kyber Network operators. All of them work together to help with Kyber’s main product: its liquidity reserves.
Reserve entities are pools that provide liquidity to the Kyber Network, and they can be either public or private.
Reserve contributors are individuals who are restricted to providing liquidity to public reserve entities, who in return earn rewards for doing so.
Reserve managers adjust exchange rates and maintain reserves.
Last but not least, Kyber Network operators control which cryptocurrencies are available on the protocol and have the ability to add or remove reserve entities. The role is currently filled by the Kyber team but it can be transferred to the community itself through a governance proposal.
To summarize, Kyber Network is an on-chain liquidity protocol where two opposing sides help each other. While liquidity contributors such as token holders, token teams, decentralized funds, and market makers add liquidity to the protocol, dApps, vendors, and individuals access this liquidity and use it.
Since the Ethereum-based protocol is decentralized, practically anyone can provide liquidity to Kyber Network’s reserves at any time. Kyber helps traders and investors alike with skipping traditional crypto exchanges. Rather than creating orders on a CEX where assets are held by the exchange, investors can retain their custodian rights and trade directly from their wallets.
Another major goal of the Kyber team is to harbor a developer-friendly platform, which is why other blockchain creators can easily integrate the project into any other DeFi platform. As a matter of fact, their platform is already used by a number of teams, including: Set Protocol, AAVE, bZx, Coinbase, MetaMask, and many others.
The numbers speak for themselves, according to Kyber’s official website the project has more than 100 integrations. The team also reports having processed more than $1 billion in volume in over 1 million transactions.
Kyber Network Crystal (KNC) is the project’s main utility token, which is part of the wider cryptocurrency market since 2017.
Apart from speculation, KNC’s function in the Kyber ecosystem is to facilitate protocol changes through a governance model. Holders who stake KNC in the DAO gain the ability to create and vote on governance proposals. At the same time, stakers earn a share of the fees that Kyber collects from its liquidity pools.
A portion of the KNC fees collected by the network is burned in order to permanently reduce the cryptocurrency’s supply, which has a positive impact on the asset’s economic flow.
Effectively, KNC is a deflationary token used primarily for staking that increases in value alongside improved adoption rates. This creates a network effect where the project gains value exclusively from the utility that it provides.
Another buying pressure comes from the fact that reserve managers must purchase KNC in order to operate a liquidity reserve. When an exchange is completed within the reserve, the network charges a KNC fee. As previously mentioned, a portion of the reserve’s KNC fees is cyclically burned.
At the time of writing, KNC has a circulating supply of 204 million tokens and a $541 million market cap. Data from market aggregator DeFi Pulse tells us that the project hosts around $15 million in collateralized assets.
Despite the fact that the token did not yet regain its former all-time high (established in 2018 at $5.8), Kyber’s digital asset moves well within the overall crypto market and is close to becoming a top 100 cryptocurrency.
In October 2020, Kyber Network announced a new reserve framework that targets professional market makers, blockchain projects, and developers. Rather than focusing on retail, Kyber Pro attempts to capture market makers who have a non-existing presence in DeFi due to the lack of order books.
Kyber Pro requires minimal smart contract knowledge and offers expert technical and operational support to maximize the user-friendly aspect of its new platform. All market makers who interact with Kyber Pro instantly gain access to the extensive DeFi market, along with all of its dApps.
Kyber Fed Price Reserve (FPR) makes the core of Kyber Pro, functioning as a reserve type that makes market making at a large scale more feasible and profitable. Market makers have less risk exposure, deal with high gas efficiency, and have complete control over pricing strategies along with safety mechanisms that protect privacy.
In comparison to standard order books and automated market makers (AMMs) FPR offers a far better management system that completely changes how liquidity is contributed to DeFi. MMs are not forced to lock-up their liquidity, they can market make for an unlimited number of cryptocurrencies, and have the ability to flexibly deploy custom trading strategies.
According to the Kyber Network, Kyber Pro accounts for 80% of the network’s total liquidity. With that in mind, we can see why market makers are so important for the exotic DeFi market.
The developers who work on Kyber are far from done. The next step in the evolution of the protocol is Kyber 3.0, a brand new iteration that forever changes the project’s infrastructure.
With the future upgrade, Kyber Network transitions from a single protocol to a hub of liquidity protocols that target different DeFi use cases. The transition is planned to be implemented in two phases: Katana and Kaizen.
Kyber 3.0 also introduces the Kyber Dynamic Market Maker (DMM), which brings important benefits for liquidity providers. While not much is known about the DMM at the moment, Kyber claims that the solution will enable fully permissionless liquidity contribution from anyone. Likewise, any form of taker (dApp, user, market aggregator) will be able to access its liquidity.
The third and last major change includes migration of the KyberDAO and KNC to a new token smart contract. The end-goal of this change is to reportedly enhance the crpyotcurrency’s governance power and add new streams of utility. However, this particular update will only be implemented if the community agrees to it in a governance vote.
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