I’m a bit late with my Kyber review. It’s already gotten the hype it needs and is well on its way to having an extremely successful ICO. They have already closed their whitelist because of overwhelming demand. I read the whitepaper last week and I get the hype. Kyber is going to be huge because of its features. Let’s look deeper into them.
Owning shitcoins can be a real pain sometimes. Usually they are illiquid, can only be found on certain and have incredibly wide spreads. Plus, you can’t transact with them as most ICOs and services only take BTC, ETH or maybe Zcash. It’s just unfeasible to do anything but hodl them.
Even when you want to get out of one token and into another, it’s a real pain to convert them. Let’s say that you have shitcoin X on Bittrex, but want to close your position and purchase another shitcoin Y on Liqui. First, you have to sell X for ETH or BTC, which can take time if the coin happens to have low volume or if the asks aren’t being bought up. Once exchanged for a major coin, then it must be withdrawn from Bittrex and sent to Liqui. When and if it arrives, then finally the ETH can be exchanged for shitcoin Y. At every step fees are paid and hopefully the spreads aren’t too wide.
Another issue is ICO’s normally only take ETH and sometimes BTC. It doesn’t matter how much Golem you have, you can’t use it directly to invest into the newest, hottest ICO.
This is this problem that the Kyber team will solve with their on-chain decentralized exchange which will be able to convert tokens “effortlessly and trustlessly.” There won’t be any bid/ask spread, Kyber will instead give the price for the reserve provider who will be able to offer liquidity any token pair. The conversion of tokens is handled by several smart contracts and neither Kyber, nor the liquidity provider can influence the transaction.
The Kyber ecosystem is made up of five actors:
- Users who send and receive tokens to and from the network. Users in KyberNetwork includes individual users, smart contract accounts and merchants.
- A reserve entity(ies) provides liquidity to the platform. This can be our own reserve or other third party reserves that are registered by other market makers. Reserves can also be classified into public and private reserves which do and do not take contributions from the public.
- Reserve contributors who provide capital to the reserve entity and share the platform profit. This actor only exists in public reserves which accept contributions from public to build up the reserve.
- Reserve manager who maintains the reserve, determines exchange rates and feeds the rates to the KyberNetwork.
- KyberNetwork operator who is responsible to add and remove reserve entities, list/delist pairs of tokens in the network. Initially the Kyber team will act as the KyberNetwork operators to bootstrap the platform in the early phases. Later on, a proper decentralized governance will be set up to take over the task.
Every actor in their ecosystem is independent and operates according to different procedures. Users exchange tokens using the KyberNetwork. Reserve contributors provide liquidity to the reserve, while the Reserve manager feeds exchange rates into the network. A diagram of it can be seen below.
The novel aspect of Kyber is its dynamic reserve pools, which will guarantee high liquidity for users to transact. When a user queries a pair conversion rate, the KyberNetwork searches through all of the reserve contributors to find the ones who are offering the best rates and then executes the transaction automatically by means of smart contract. The overall reserve pool will be made up of several smaller reserve contributors, creating a de-monopolized and decentralized reserve. The result will be competition between reserve contributors to provide the tightest spreads and will also reward individuals for providing liquidity for low volume pairs.
To participate in the system, reserve contributors will have to pre-purchase KyberNetwork Crystal (KNC) tokens. Every time there is a trade, a small percentage of KNC tokens will be paid to Kyber and supporting partners. Once the fees are collected, the tokens will be burned, or taken out of circulation. This is will create price deflation and incentivize long term holding of the token.
Kyber describes the fee system as follows:
As an example, for a trade volume of 10 ETH with a 0.01% fee, a corresponding 0.001 ETH worth of KNC will be paid by the chosen reserve to KyberNetwork as a fee for the use of the reserve dashboard and access to network users. Suppose the rate of KNC at the trading time is 1 KNC for 0.1 ETH, the reserve needs to pay 0.01 KNC to the Kyber platform. The wallet/ website that helped the user initiate the trade will get, supposedly, 5% of the fees, or 0.0005 KNC. The remaining 95% of the fees, or 0.0095 KNC will be burned forever.
While there are a lot of moving parts, Kyber’s model is relatively easy to understand. The system allows for automated pairs trading, with the liquidity provider rewarded for their service. This will create instant and secure exchanges, with no withdrawal wait times, and unlike other exchanges, Kyber doesn’t hold users’ tokens, negating any threat of theft or loss.
Kyber will also create a universal wallet, which will be able to accept any current or future token without any changes to code. This will be a great resource, I have a bunch of wallets and it would be great to just have one primary wallet I control the PK to and held all of my crypto.
Additionally, Kyber will be able to act as a payment gateway to allow the user to pay for any service with their preferred token. A benefit of this will be that users could invest into an ICO using tokens other than ETH. I could use my TNT to invest into Enigma, or ZRX to get into the Monetha ICO.
One of the later developments for Kyber will be the creation of more advanced financial instruments, such as forwards, options and other derivatives. The KyberNetwork’s exchange rates will be visible to other contracts, allowing for these instruments to use the on-chain info as the source for their pricing models.
Kyber is going to be huge. I don’t think it will complete dominate the other exchanges, but it will provide a service that no one is right now. They have a ton more info on their blog about how anyone will be able to establish themselves as an exchange.