Understanding Kyber Network
Original Post (Spanish) = https://criptoblog.tutellus.com/entendiendo-kyber-network/
In the last week we presented a detailed explanation of how the UniSwap protocol works. We saw how decentralized exchanges and token swaps are gaining momentum, reaching daily volumes of several million USD. This is one of the most necessary ecosystems for the integration and adoption of Dapps and Blockchain applications; In a world where tokens are abundant and where each of them has different uses and utilities, the need to be able to change tokens at minimal costs, at any time and without compromising your privacy and security, is an essential aspect.
That is why today we will analyze Kyber Network, one of the central projects in the DeFi world thanks to the multitude of integrations it has in both Smart Contracts, Dapps and Wallets. So let’s check it out.
Kyber Network is an on-chain liquidity protocol that allows swaps on smart contract platforms (mainly in Ethereum, although they work to integrate the protocol in other networks such as EOS or Ethereum Classic). This is achieved through its own pools -as we saw with UniSwap-, although with a different system, or by using other DEXs (such as UniSwap, Oasis or Bancor) and fulfilling a function of “liquidity aggregate”: the pool used will be the one that offer a better exchange rate, regardless of the origin of the reservation.
Therefore, we can understand Kyber as a door that connects users with all liquidity pools, always looking for the most profitable swap.
This is why the most important peculiarity in Kyber and that differentiates it from other pools such as UniSwap is that it not only acts as a liquidity pool but also offers a “single ending point” interface for all those who need liquidity to carry out swaps. That is, its interface to access liquidity can be integrated practically anywhere: in smart contracts, Dapps, wallets and vendors, allowing access to liquidity to be enormous and the current entry barriers due to many tokens getting smaller and smaller.
The problems that Kyber solves are several, the most important being the dependence we have on centralized exchanges to be able to exchange tokens. These are vulnerable, slow and loaded with costs and commissions. It is certainly not a useful exchange in the “token economy” or for a user of the DeFi world. This solution is also shared with UniSwap and other liquidity pools, although where Kyber differs is in its role as a “liquidity portal”. Its interface and easy integration allow users to access liquidity from many points, turning the concept of Swap and liquidity into something normal and accessible.
In fact, today the first “layer bridges” between different blockchains are already working, to be able to make cross-chain swaps between Ethereum and EOS tokens for example. Kyber’s liquidity protocol is intended to be a bridge and a gateway to liquidity pools, not only of Ethereum, but of various Blockchains.
OVERVIEW
As we can see, there are several participants. First of all, we have the takers, which refers to anyone who calls the smart contract to make a swap, from users, to Dapps, wallets or other smart contracts.
Then we have the Kyber Core Smart Contracts, which are responsible for making the system work, consulting prices, making swaps … These consult prices of the reserves integrated in the protocol, thus seeking the best exchange rate.
Finally we have the maintainers who refer to all those with permission to change certain elements of the protocol, such as the functionalities of smart contracts or available reserves and pairs. Currently this is in the hands of the team, although the “katalyst” update aims to generate the KyberDAO, where KNC token holders can vote in decision-making for protocol changes.
In the following graph we see how Kyber smart contracts work in order to find liquidity. Basically they consult the different reservations in search of the best price to be able to offer the “taker” the best change and instantly. Transactions can even jump to multiple tokens if this is the best option. For example, if you want to swap BAT-DAI, the Kyber protocol may find a BAT-ETH swap more profitable followed by an ETH-DAI swap, all automatic and invisible to the taker.
KYBER NETWORK RESERVATIONS
Unlike UniSwap and other liquidity pools, Kyber does not have public pools where users can deposit any amount in exchange for an interest generated by swap fees. Although this is something that is intended to open with the update of “Katalyst” at the moment it is not functional. So there are currently 3 booking options:
- Fred Price Reserve (FPR): This is a reserve designed for projects, professional investors such as Market Makers and the well-known “whales” or people with high availability of tokens. These pools are generated on-chain, and have smart contracts that allow, for example, to check the conversion ratio (swap price). Now, the logic behind the price movement is not in smart contracts but in an off-chain server; This, on the one hand, gives the liquidity provider a lot of control over the trading strategy and price movement that it wants to follow, at the same time that it implies a cost of execution and maintenance of the reserve.
- Automated Price Reserve (APR): This reserve pool is oriented to the same profile as the previous one, but it differs in the fact that there is no need to implement the logic of the off-chain price movement, rather it is integrated on-chain through smart contracts. This logic designed by Kyber seeks to be more efficient than other pools such as UniSwap, since it allows to establish maximum and minimum prices of swaps to avoid leaving liquidity in disuse and unused due to the exponential increase in the cost of Swaps. Some APR cases that exist in Kyber have been generated by Synthethix, DAOstack or Melon. And it is logical: it is more efficient and gives you instant access to a multitude of integrations that can use your reserve for swaps.
- Bridge Reserves (DEXes): These are the reserves of other protocols such as UniSwap, Oasis, DutchX or Bancor, which Kyber accesses in search of the best conversion price.
It is through these reserves that all Kyber integrations access in search of liquidity, supporting a protocol to be able to have the best prices from a final and easily accessible interface.
KYBER vs UNISWAP
At first, it may seem like direct competition, but on closer inspection, despite having similar liquidity pool services, UniSwap is a protocol that works at a lower level than Kyber. Not only because of its simplicity and absence of a business model around its own token, but because this ends up being one of the reserves that Kyber uses to offer liquidity to the end user or “taker” as we have seen. Kyber works as a layer above, an interface that can be easily integrated into many elements of the Blockchain, becoming a kind of liquidity portal, which connects with the different pools in search of the best price and which even begins to connect different Blockchains.
Kyber also has its own pools, which in this case would compete with UniSwap, although again these work in different ways; the clearest difference is the price cap that Kyber sets in relation to UniSwap. The latter can offer enormous prices depending on how much you stress the pool, causing part of the available liquidity to be unusable, since the change it offers is too high to accept it. To give an example, you could be paying DAI for $ 4, 4 times its real value, and this is unlikely to be accepted. On the other hand, Kyber establishes a limit price between the ranges in which the price is going to move at the time of swap, allowing more efficiency but also more risk of depleting all the capital in the pool. Another difference is the commission, since in Kyber it is 0.25% and in UniSwap it is 0.30%, and between ERC-20 tokens it is 0.60%. Finally, Kyber pools are usually not public like UniSwap, since there are certain conditions to be able to start them, such as the need for high liquidity by the provider.
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Another curiosity of the KyberSwap is the possibility of being able to determine at what variation of the established price you agree to continue accepting once the swap is executed. That is, you can set the growth percentage by which you would cancel the operation if the swap price exceeds it, since there is a time between the moment of requesting the swap and its execution. It automatically marks a 3% variation, although you have the option of putting the amount you want.
KYBER AS A LIQUIDITY BRIDGE
As we have seen, the Kyber Network protocol allows endpoints (Wallets, smart contracts and users) to access all available liquidity pools from a single platform and always find the best exchange prices.
In this sense, Kyber connects the entire Ethereum ecosystem thanks to its protocol, although it also intends to fulfill this same function as a liquidity provider for other Blockchains and between Blockchains.
As we see in the following graphic, the Kyber protocol connects to other Blockchains through the “relay bridge” function. This development — despite being early — is already giving the first results, connecting the Ethereum and EOS network through the “Waterloo” relay project and also connecting Ethereum with Ethereum Classic with the “Peace Relay” project. Kyber also seeks to promote liquidity bridges for platforms without Smart Contracts such as Bitcoin and other cryptocurrencies, mentioning the concept of “wrapped coins” or “tokenized cryptocurrencies”.
KYBER INTEGRATIONS
This is one of the parts of the Kyber protocol that attracts me the most, since it offers any developer the possibility of implementing an interface that allows access to liquidity and swaps quickly and easily. This is not limited only to Dapps, but also smart contracts or wallets. An interesting factor about integrations is that it allows developers to include their own spreads, that is, a commission added to the 0.25% of Kyber Network, which the integrator would receive for each Swap made since its integration. This is really interesting, as it not only encourages developers to use Kyber as a liquidity provider but also allows you to profit from this integration.
Integrations are done through the “developer” section in kyber.network, and it offers different options depending on where you want to integrate the interface. There are different functionalities, moldable to the interest of each one.
To integrate kyber = https://developer.kyber.network/docs/Integrations-Intro/
KNC Token
The KNC token is the Kyber Network utility token, used for fees and incentives, and with the integration of KyberDAO it will become the protocol’s governance token.
Currently, the fees generated on the platform are used to incentivize and compensate reserve funds and 70% to a “burning” system, promoting the scarcity of the token and increasing the incentive to hold it. From the integration of the DAO, the KNC tokens can be used for staking in order to have voting power, and decide together with the community how the platform fees will be distributed, including a new compensation to KNC holders who participate in the decisions of the DAO.
As with MakerDAO, we are in front of a model where it is the community that dictates the direction and evolution of the protocol, something interesting, since we will see how they should seek stability. For example, if the votes dictate that all fees are used to compensate KNC holders, this would increase the reward for participating and staking the token but would significantly reduce the competitiveness of the protocol, since it did not open incentives to maintain the reserves that provide liquidity to the system. On the other hand, greatly reducing the incentives to increase the value of the token (burning and staking) would reduce the demand for KNC. These are decisions that the Kyber community will have to make as a whole, something I see as one of the wonderful elements of DAOs.
CONCLUSIONS ON KYBER NETWORK
Blockchain and the world of decentralized applications does not stop growing, and in an ecosystem where there is an abundance of tokens, having an interface that allows you to access liquidity from practically anywhere adds great value to the ecosystem.
As we have seen, there are already liquidity pools like UniSwap that work wonderfully. What Kyber proposes is to serve as a single point of access to all liquidity options, quickly, easily, easily integrable and with the possibility of also looking for the cheapest exchange option. In some way, integrating your liquidity in Kyber reserves guarantees automatic availability of your token to thousands of users thanks to the integrations.
We will be attentive for the next updates of the protocol where we hope to see the decentralized version of the protocol with KyberDAO and the appearance of the first public liquidity pools of Kyber to be able to be a liquidity provider even with less than $ 10 as happens with UniSwap.
We study Kyber in depth, both at the protocol level and with practical workshops, both in the Blockchain Master and in the DeFi Bootcamp.
REFERENCES
https://files.kyber.network/Kyber_Protocol_22_April_v0.1.pdf
https://kyberswap.com/swap/eth-knc
https://developer.kyber.network/docs/Start/
https://blog.kyber.network/katalyst-kyber-protocol-upgrade-and-2020-plans-20427ef47ac6
