What is Kyber Network (KNC)? The Decentralised Liquidity Hub Explained
Take a closer look and learn all about the decentralised liquidity hub that is the Kyber Network (KNC).
There are thousands of tokens available to hold in the crypto space, and each one of them provides utility for specific decentralised applications (DApps). While this presents opportunities for technological innovation and competition, some people believe that tokens shouldn’t be limited to their DApp ecosystem.
The need to swap or exchange one token for another and holding hundreds of tokens would introduce a lot of friction in DeFi.
- Kyber Network’s protocol functions like a central liquidity hub that facilitates the exchange of digital assets without the need of an intermediary.
- The network also functions like a decentralised exchange (like Uniswap) and provides liquidity for decentralised applications (Dapps).
- KNC is the native cryptocurrency used on Kyber Network’s blockchain, and its main purpose is to pay for the creation of reserve pools in the network, and also for governance in the KyberDAO. (more details below).
What is Kyber Network in a nutshell?
Kyber Network was developed initially as a way for customers to pay in any token or currency that they like, to a vendor who prefers to be paid in a specific currency.
From a certain point of view, Kyber Network does sound like a credit card network in the legacy financial world. If you need to buy from an online shop abroad that only accepts Canadian dollars, for example, you can use your credit card, which will help you make a swift conversion to CAD from your local currency.
However, that is only one feature that Kyber Network offers. There is a reason why it is called a “hub of liquidity protocols”. Taking a look at another point of view, Kyber Network is a decentralised exchange (like Uniswap) and a market aggregator (like Orion).
Instead of becoming a single-exchange protocol that must provide all the coins and tokens in the right quantities to meet all the demands, Kyber Network becomes a network hub where all the asset suppliers and all the buyers trade with one another, quickly and seamlessly.
Existing on the Ethereum blockchain, Kyber Network has its own native ERC-20 token called the KNC, which stands for Kyber Network Crystal.
This token is primarily used for voting and proposing in the KyberDAO (DAO stands for “decentralised autonomous organisation”). KNC is also used to pay for the creation of reserve pools, which is a concept we will go through shortly.
What is an ERC-20 token? In short, these are simply tokens that are used on the Ethereum blockchain and act as assets that facilitate the various utilities and functions on the network. Learn more with our guide.
How does Kyber Network benefit the DeFi world?
Kyber Network’s ultimate vision is to make any token useful anytime and anywhere. It does this by guaranteeing users instant swaps at the best price possible. DApps can be integrated into the Kyber Network to tap into the network’s reserves of various tokens and coins.
Let’s say you are looking for a nice leather jacket, and you’re buying one through a DApp, which we will call Lether. Lether only accepts ethers (ETH). If the owners of Lether were smart, he or she could integrate Lether into Kyber Network so that buyers can pay with other currencies.
Lether so happens to have the advantage that Kyber Network provides, allowing you to pay for your leather jacket in dogecoin and many other tokens imaginable.
Kyber Network can benefit so many members of the DeFi community:
- Users don’t have to hold so many tokens to use a variety of services that are integrated with Kyber Network.
- Vendors can offer greater flexibility in the payment method, and still earn their preferred currency.
- Retail and professional investors can easily access buyers and sellers in this integrated ecosystem.
- Third-party decentralised exchanges, like Uniswap, can access assets from this network of sellers and buyers, in case they run into a shortage in liquidity.
- Crypto wallets nowadays offer instant swap services. Of course, the service must tap into a large reserve of assets in order to satisfy user demands.
Kyber Network has seen more than 74 million USD in monthly volume as the network gets integrated by more than a hundred DApps and other decentralised services.
Kyber Network also benefits from fees collected in ether, which is used to fund new innovations on the platform.
Like any other DeFi services on a public blockchain, Kyber Network is entirely transparent and secure inside a verifiable financial system.
Fun fact: The token is inspired by the Kyber crystals from the Star Wars universe, which powers the iconic lightsabers, some very powerful and utilitarian weapon in a galaxy far, far away.
How does Kyber Network work?
Kyber Network works like how most decentralised exchanges work. In this system, there are two types of users — the market makers and the market takers. Market makers are those who add to the supply of assets in a reserve, while takers do the opposite.
The supply of assets in a reserve is important to keep track of because it will determine the price of that asset in the specific reserve.
Let’s take a reserve of ETH and USDC pairs. When sellers decide to sell their ETH, they will add a supply of ETH to the reserve, and take away USDC from the supply in that reserve.
As a result, USDC becomes more scarce, and a smart contract will set a steeper rate for USDC (sellers of ETH will get less USDC than before). This is how protocols like Uniswap and 1inch Exchange work.
Sourcing from multiple reserves
Unlike single-protocol exchanges like Uniswap, Kyber Network doesn’t rely on one source of liquidity or from one reserve only. Instead, Kyber Network lets anyone establish their own reserve (a bit like opening their own miniature exchange). Reserve owners must pay in KNC for the right to manage them.
Reserves may have different levels of supply and trade volume, so the exchange rates may vary ever so slightly. The aggregator part of Kyber Network comes into play to choose the reserve with the best exchange rate at a given time.
On Kyber Network, a trade must be completely filled in one transaction. Otherwise, when no matching trade can be made, the trade gets cancelled.
The reason for this is to minimise transaction fees on Ethereum. So, the aggregator on Kyber Network will work hard to choose one or more reserves with the best prices for a particular quote.
Because Kyber Network is a hub of liquidity protocols, it can rely on various groups of market makers that provide liquidity.
Is KNC a good investment?
As prefaced above, KNC is the native ERC-20 token of the Kyber Network DApp. The developers of Kyber Network issued a maximum 226 million of these tokens through an initial coin offering (token sale).
As Kyber Network gets upgraded, a token swap introduces the new KNC token (Kyber Network Crystal 2.0). Any KNC holder who has not swapped to the “upgraded” version will hold a distinct KNC token — known simply as the legacy KNC.
If you happen to still hold the legacy KNC, the token swap smart contract address is easily accessible. Simply refer to this guide on KNC token migration.
Starting from the launch of the KNC token, prices were naturally volatile as adoption began to pick up. The ICO boom of 2018 caused the general market for cryptocurrencies to crash, which affected every altcoins and tokens.
However, KNC came back strong throughout the year 2020 and 2021, following Bitcoin’s periodic wave very closely. Of course, when it comes to the fundamental strengths of KNC, there are plenty to discuss.
The new KNC tokens are now burned (removed from circulation) whenever a new reserve is created. Collected fees in KNC can also be reinvested for the network’s expansion, for example by providing incentives to vendors for integrating their DApp to the Kyber Network.
From this model, we can see that KNC isn’t valuable only due to the reduction in its supply. Overall, the token burn and the reinvestment system creates a positive feedback loop, giving token holders long-term value.
Additional utility for KNC — Governance and voting
KyberDAO governance was introduced in July 2020 through the “Katalyst” network upgrade. Any KNC (the new version) holder can now participate in the truly decentralised and democratic governance of the Kyber Network.
Kyber Network collects fees in ether, and a portion of the fees are used to fund new developments of the network. But voting also has other incentives apart from the ability to change the developmental course of Kyber Network.
KNC holders can earn staking (deposit) rewards if they actively vote on all proposals in each “epoch” — a period of time which typically lasts two weeks.
That said, the expected annual percentage yield of simply voting on the network is around 12-13%, but this number could change in the future, especially if the trading volume increases.
At the time of writing, more than 44 million KNC tokens have been staked, indicating a great interest in the future of Kyber Network.
Other recent developments on Kyber Network
Kyber Network currently still exists on Ethereum, but plans to expand to other networks as well. For now, the DApp tries to reduce gas fees as much as possible, using what’s called “reserve routing”.
To add power to the strategy, Kyber Network is also looking at different layer-2 protocols, such as Polygon (MATIC) to further reduce gas fees, become interoperable with other blockchains, and reach a wider range of users.
One of the most important recent developments on Kyber Network is the introduction of the Dynamic Market Maker (DMM), which is an innovative iteration of the classic Automated Market Maker (AMM) that was first introduced by the likes of Uniswap.
This was launched in April 2021. The price doesn’t reflect this, due to the overpowering effect of the recent Bitcoin crash. However, when the DMM feature picks up in the near future, KNC could be one of the most valuable tokens after Uniswap and many others in the DeFi space.
Are you bullish on KNC?
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Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.
Last updated January 19, 2023