Kyber Network is an Ethereum-based on-chain liquidity protocol for the decentralized trading of Ethereum tokens. In lieu of maintaining a global order book, Kyber Network seeks to foster liquidity via a system of reserves, smart contracts, and referral fees. The project considers itself a scalable liquidity platform and plans to eventually offer cross-chain trading via atomic swaps. Although Kyber operates its own front-end swapping service, KyberSwap, the Kyber Network functions as a back-end protocol that front-end services, including decentralized exchanges, (DEXs) plug into.
There are three types of actors in the Kyber Network ecosystem: Kyber smart contracts, takers and reserves. At a high level, Kyber smart contracts provide the infrastructure for tokens to be swapped and traded, while reserves provide the liquidity for takers, the entities (typically users or integrated front-end services) who execute trades, taking liquidity out of the Network. Kyber connects these reserves into the Network with the hope of aggregating liquidity and thus offering superior trading conditions (tighter spreads and deeper liquidity) compared to regular DEXs. Kyber supports three types of reserves, namely;
- Bridge Reserves: Connects other liquidity protocols like Uniswap to the Kyber Network
- Automated Price Reserves: Allows entities with large token holdings to have automated and customized pricing systems
- Price Feed Reserve: Run by professional market makers and contribute the majority of Kyber’s liquidity
The network allows for the occurrence of multiple reserve managers/contributors/entities for a given trading pair, and the Kyber Network contract automatically selects the cheapest rate available for execution. Although Kyber Network is non-custodial, it is still relatively centralized with the Kyber team in control of the protocol’s code and smart contracts. As part of an attempted move towards decentralization, a decentralized autonomous organization (DAO), the KyberDAO is being formed. KNC holders will then be responsible for much of the governance process including decisions on protocol upgrades and Kyber’s economic model.
Kyber differs from other liquidity protocols such as 0x in that it executes trades on the Ethereum blockchain rather than using off-chain computation. This design choice is subject to much debate within the Ethereum ecosystem as to how best handle trading volumes, with critics of Kyber’s model pointing to the limited throughput of the Ethereum network, stating that this will hinder the performance and capacity of Kyber.
To foster liquidity, Kyber Network envisions a diverse set of trade origination partners including software and hardware wallets, blockchain explorers, and smart contracts. Partners that refer trades to Kyber Network will be paid in the platform’s native token, Kyber Network Crystals (KNC) for every trade that is introduced. Reserve managers are required to pre-purchase and store KNC tokens prior to operating on the network. In return for the right to operate on the network, reserve managers pay a small fee to the Kyber Network platform for each trade executed.
Kyber’s economic model is currently in transition however, with a new model called Katalyst set to go live. Currently, the Network enforces a fixed 0.25% on all trades that is payable in KNC. The cash flows from these fees are then used to buy back and burn KNC, similar to the Binance Coin model. In the new design, however, and with governance transitioning to the KyberDAO, KNC holders will decide how these cash flows will be spent, with three principle avenues currently proposed:
- Burning KNC
- Paid as rebates to reserves (proportional to the liquidity they provide) for providing liquidity
- Paid directly to KNC holders for staking KNC and participating in governance decisions