A decentralized, blockchain-based protocol, Kyber Network aggregates liquidity and facilitates token exchanges without an intermediary. Kyber Network can be integrated into decentralized applications (dApps), crypto wallets, and decentralized finance platforms (DeFi). Through KyberDAO, a decentralized autonomous organization (DAO), holders of Kyber Network Crystals (KNC) govern the protocol.
By using a blockchain-based protocol, Kyber Network facilitates token exchanges without intermediaries and provides liquidity for decentralized finance (DeFi) applications. Kyber Network powers KyberSwap, Kyber’s decentralized exchange (DEX), and has been integrated with more than 100 applications at the time of this writing. Kyber Network is governed by the holders of its native KNC token through KyberDAO, a decentralized autonomous organization (DAO).
Kyber Network Provides DeFi with Critical Liquidity #
The DeFi ecosystem relies heavily on liquidity, so let’s first examine Kyber Network’s design. Liquidity refers to several things in the cryptocurrency community: the ability to exchange an asset without its price substantially shifting, the amount of trading activity in a market, and the ease with which assets can be converted into cash. New DeFi protocols may find it difficult to attain and maintain liquidity, which is important for a healthy, functional, user-friendly market.
Liquidity providers in traditional financial markets are centralized institutions such as banks and financial institutions. Using centralized entities to provide liquidity in DeFi markets, however, would run contrary to the ecosystem’s decentralized ethos. As a result, permissionless protocols like Kyber Network have emerged to take their place. Kyber Network aims to create a world where tokens of value can be used anywhere for swapping in any wallet, as well as for payment services and other newly developed financial products.
Kyber Network: How Does It Work? #
Kyber Network consists of a set of smart contracts that can be implemented on any blockchain that can execute smart contracts, though as of December 2020 it is only implemented on Ethereum.
On its network, the protocol aggregates liquidity from a variety of sources, such as token holders, market makers, and decentralized exchanges. Everyone can contribute liquidity. Kyber Network allows its three main clients – decentralized applications (dApps), vendors, and crypto wallets – to perform instant token swaps without the use of a trusted third party.
Below are two types of trades:
Tokens represent the core asset in every trade. The Ethereum implementation of the protocol uses Ethereum (ETH) as this token, so any trade requires an exchange of ETH for another token. Suppose you want to trade Ethereum for Basic Attention Token, Brave’s cryptocurrency:
- A smart contract on the Kyber Network is where you send your ETH.
- The contract then queries its reserves for the best BAT to ETH exchange rate.
- After that, the contract sends the ETH to the reserve at the best ETH to BAT exchange rate.
- After that, you receive your BAT from that reserve.
Let’s say you want to exchange BAT for DAI. Since ETH is the primary asset in this example, some additional steps are required since you aren’t trading directly in ETH:
- A smart contract on the Kyber Network receives your BAT.
- After that, the contract queries all of its reserves for the best BAT to ETH exchange rate.
- The contract then sends the BAT to the reserve with the best rate of BAT to ETH.
- The contract then receives ETH from that reserve.
- In order to find the best ETH to DAI exchange rate, the contract queries all its reserves.
- ETH is then sent to the reserve at the best exchange rate between ETH and DAI.
- Afterward, you receive your DAI from that reserve.
Both trades are completed through a single blockchain transaction, regardless of the number of steps involved in the second trade. The Kyber Network settles all trades instantly on the blockchain, either executing in full or reversing them. Alternatively, you should never partially execute your trades (even on other types of exchanges). You can also query the smart contracts to verify all exchange rates offered by reserves.
In combination with dApps, DeFi platforms, and crypto wallets, the Kyber Network has numerous applications. A dApp that accepts users who do not hold its native token can integrate the Kyber protocol so that users can exchange tokens in-app and convert tokens. Users of the dApp can use any Kyber Network-supported token, while at the same time, the dApp can accept payment with any Kyber Network-supported token.
KyberDAO and KNC #
KyberDAO allows Kyber Network members to participate in network governance. Through staking, KNC holders can vote on the network’s fee model, rebates for reserves, and other proposals, as well as earn ether-based rewards. The supply of KNC will decrease over time since it is a deflationary staking token. As of December 2020, KNC is only an ERC-20 token, but Kyber Network anticipates that it will also be implemented on other blockchains in the future. Despite this, its supply will be managed as if it were a single token, and Kyber Network is developing technologies that will enable the transfer of KNC across blockchains.
With Kyber Network’s broadly integrated protocol, DeFi’s liquidity problems can be resolved on-chain and decentralized, and ERC-20 tokens can be used across the ecosystem.
