The Beginner’s Guide
Kyber Network is cryptocurrency that wants to create an alternative to traditional exchanges where users can buy and sell crypto assets. It is one of the growing numbers of DeFi cryptocurrencies.
This means that Kyber Network is trying to provide a service similar to Kraken itself. But instead of being operated by a single company, its exchange is fully powered by code, a distributed network of software users, and the Ethereum blockchain.
To this end, the Kyber team has developed three tools designed to work on Ethereum. A protocol for decentralized exchange. An application programming interface (API) for entity transformations. And the KNC cryptocurrency that helps users manage their maintenance and operations.
Together, these tools helped launch KyberSwap, a decentralized exchange application that allows users to exchange crypto assets without a centralized order book or operator.
Instead, conversion rates for existing assets are built directly into the protocol. This means that users only pay fees in ether (ETH) to execute transactions. And then it settles on Ethereum.
Kyber Network Crystal (KNC), the cryptocurrency of Kyber Network, is then used to pay for important transactions outside of this exchange, including voting for updates to software rules.
As of July 2020, Kyber Network has over 1 million user transactions. It has achieved a total volume of over $1 billion.
How does the Kyber Network work?
To understand how the Kyber Network works, it is important to review the network components that together help provide an exchange service.
- Smart Contracts – Provide infrastructure for trading and exchanging of tokens.
- Reserves – Offer liquidity to the network.
- Buyers – Execute transactions and get liquidity from the network. (Examples include Dapps, merchants, and wallets.)
Kyber’s Reserve Model
Kyber Network relies on reserves to provide liquidity.
This means that when a user initiates a trade, the network performs a search for available reserves to find the most favorable rate offered by buyers.
It provides buyers with the ability to instantly convert tokens at the most competitive price.
There are three main types of reserves:
Price Feed Reserves (PFR) – PFRs to calculate conversion rates. And it acts as an alternative to the protocol’s market makers, using price flows to store this data in smart contracts. Reserves then refer buyers to the smart contract to calculate token conversion rates.
Automatic Price Reserves (APR) – APRs provide liquidity to the network. And it relies on smart contracts to provide rates for existing tokens. All APR transactions are done on the Kyber Network blockchain. And smart contracts are used to store tokens and exchange them with other users.
Bridge Reserves – Bridge Reserves are responsible for deepening liquidity by accessing other decentralized exchanges (e.g. Uniswap).
In the past, Kyber Network backups were required to hire KNC to pay network fees. However, a network upgrade removed this feature and eliminated friction for backups.
Kyber Network collects its fees in ETH. Some of them go to these reserves. And it collects according to the amount of liquidity they provide.
Who created the Kyber Network?
Kyber Network was founded in 2017 by Loi Luu, Victor Tran and Yaron Velner.
At that time, the Kyber team raised 200,000 ETH (approximately $50 million) in the initial coin offering of the KNC cryptocurrency. During the sale, a total supply of 226 million KNCs was created, most of which were sold to buyers and investors.
In October 2017, Kyber Network burned over 10 million KNC tokens. And it reduced the maximum supply to about 215 million KNC.
The software went live on the Ethereum blockchain in February 2018.
Why does KNC have value?
The KNC cryptocurrency plays an important role in maintaining and operating the Kyber Network.
By staking KNC, users gain the ability to vote on network upgrades and policies (e.g. fee models and rates), and each vote is proportional to the amount of KNC they deposit.
Users can also transfer their tokens to other validators and allocate votes to them, while still earning a portion of the block reward.
Of note, users staking KNC will receive rewards in the form of ETH for their contributions.
Investors should keep in mind that network fees paid on KNC will burn over time to permanently reduce the cryptocurrency supply. Therefore, while the initial supply is just over 215 million KNC, this could gradually decrease and make KNC more valuable over time.