What is Kyber Network?

Kyber Network launched during the 2017 ICO boom, raising $60 million in the process. Cut to Spring 2021, and the protocol now has a market cap in excess of $400 million. Its’s not hard to understand why: The protocol makes it easy to swap between tokens cheaply and quickly, all without sacrificing principles of decentralization. But how does it work? And is it a genuine alternative to cryptocurrency exchanges?

What is Kyber Network?

Kyber Network’s primary use is to make it easy to swap different cryptocurrencies without the need for an exchange. For example, an ecommerce site could theoretically accept different types of cryptocurrency, then use Kyber to receive payment in their preferred cryptocurrency. Or a decentralized app that requires a specific token could tap the Kyber Network for a quick swap.

To achieve this, Kyber uses “liquidity pools.” These pools are reserves of cryptocurrencies provided by investors, known as liquidity providers. By combining these funds, costs are reduced, making it possible for a user to get the cheapest exchange rate when switching between cryptocurrencies. When a user trades on Kyber Network, the network searches for the most competitive rate. This also removes the need for a centralized order book—a security risk—as the exchange rates are already determined by the reserves on the Network.

Kyber Network has three different types of reserves: Price Feed Reserves, Automated Price Reserves and Bridge Reserves. Price Feed Reserves take data from other price sources, such as exchanges, to calculate exchange rates. These are for professional traders. Automated Price Reserves changes the price automatically based on the number of tokens someone’s exchanging and the size of the reserve. These are for big token holders. The final type of reserve are Bridge Reserves. These reserves are meant to bring liquidity from other liquidity providers, such as Uniswap.

KyberSwap is Kyber Network’s platform for facilitating transactions. You don’t have to create an account, but you do need an Ethereum wallet: a hardware wallet or software wallet will do.

On KyberSwap, you can place three different types of transactions: swap, transfer and limit order. The amount of Ethereum gas (the term for the charge you have to pay to process transactions on the Ethereum blockchain) a user has to pay depends upon which of these transactions a user is carrying out, as the amount of computational power required varies by transaction size and type.

Another aspect of Kyber Network is cross-chain functionality. This means that different crypto projects can connect and use the network, provided the blockchain the project is built on can handle smart contracts. This emphasis on developer integration has encouraged other projects to use Kyber Network, such as Set Protocol. However, while other blockchains can theoretically be integrated into Kyber, so far only Ethereum-based blockchain are on the platforms. There are plans for expansion down the road, though.

Kyber Network is also a decentralized, permissionless exchange. Anyone can become a liquidity provider. Liquidity pools are made up of these independent users, so no single entity is responsible for processing all the exchanges for any one cryptocurrency. This avoids issues related to one company being able to dominate or control a token’s exchange rate. The competition that comes from multiple providers ensures competitive exchange rates.

The Kyber Network has its own native token, called the Kyber Network Crystal (KNC). As of March 2021, there are currently 210 million KNC tokens in circulation, valued at above $2, with a daily volume of around $140 million. When KNC is used for network fees, it is then taken out of the token supply (called burning) or used to reward users of different dapps that operate on Kyber Network.

It’s also possible to “stake“ KNC, which grants a user a certain number of votes proportional to the amount of KNC they stake. These tokens can be used to vote on so-called “governance proposals”—proposals made by the community to upgrade the network. Stakers can also profit through the minting of new Crystals. The current return on staking is estimated at 12.79%, but this is subject to change. This is carried out through the KyberDAO (Decentralized Autonomous Organization).

Kyber Network saw a significant increase in demand over 2020. Success isn’t guaranteed though. Ethereum gas prices have also risen significantly, deterring transactions on the platform, which is potentially lethal to Kyber Network. To adjust for this, the developers have looked into different protocols to avoid such high gas prices. In 2020, they implemented a system called “reverse routing.” Before reverse routing, a token swap involved Kyber Network searching through multiple reserves for the best exchange rate. Now, Kyber Network can rout to specific reserves, pre-determining how the swap will take place before it has been carried out. This reduces the total number of transactions, reducing gas costs.

Kyber Network has a few different potential users. One of these are crypto wallets; by connecting to Kyber, wall users can swap between different cryptocurrencies with minimal friction. Dapps also can use it, as they often have their own native token which may be cumbersome to use without a service such as Kyber mediating the transaction. Finally, vendors can use the platform to accept various forms of crypto payments, while they are paid in just a single cryptocurrency.

Kyber Network counts several decentralized exchanges, such as 1inch and Uniswap, among competitors, and its success is by no means guaranteed. Despite the implementation of reverse routing, fees remain high and they will only rise as more people trade on the Ethereum blockchain. In addition, Kyber’s success depends on the success of other cryptocurrencies, as if they fail, there would be little interest in swapping between them.

How is Kyber Network different than Bitcoin?

Bitcoin is a cryptocurrency where new coins are minted through computers solving complex mathematical puzzles in a process called proof of work. It can be used to buy and sell different goods, and is also used as an investment with a hope for future gains. Kyber Network is a medium through which different cryptocurrencies can be exchanged. It may facilitate transactions by enabling cryptocurrencies to be easily exchanged, but this is done through other tokens that use the Kyber Network instead of using its own cryptocurrency. KNC is used to pay for fees and maintain the network; while it could theoretically be used in transactions, this is not its primary purpose.

Another difference is that Kyber Network is built on Ethereum, while Bitcoin is not. Ethereum is a platform for developing blockchain software. Bitcoin, created in 2008, predates Ethereum, so it has its own blockchain entirely separate to the Ethereum blockchain.

Kyber Network is similar to Bitcoin in that they are both decentralized. Bitcoin is held and verified by potentially millions of people. Hypothetically, if more than 50% of all Bitcoin mining was done by one entity, the chain could be compromised. Similarly, Kyber Network’s liquidity pools relies upon a variety of different providers to ensure cheap rates and to avoid centralized control.

Despite those similarities, the two projects represent very different investments. Bitcoin’s success depends upon its adoption as a payment system and as a store of value arising from proof of work. In comparison, Kyber Network’s success depends upon the cryptocurrency space as a whole, as it is a method for exchanging between currencies.

How to buy and earn Kyber Network Crystals

Ironically, Kyber Network Crystals can be bought on traditional, centralized cryptocurrency exchanges, such as Binance or Coinbase. This could be a good option if a user wanted to speculate on the future of the network as a whole, trading it against other cryptocurrencies such as Bitcoin or against fiat through Tether, a USD stablecoin.

Kyber Network Crystals are currently valued at a little over $2 per crystal, which is similar to its debut price back in 2017. However, in 2019, the price fell close to $0.2 at various points. The amount of KNC circulating has also remained steady since its inception, so these price reactions correlate directly to market cap.

Staking is the main way to earn KNC. By participating in the platform and voting on changes to the protocol, a user can receive over 10% per year as a return. This does require holding some KNC to stake in the first place, though. Also, the more KNC the hold the more votes a user has, so staking a large amount of KNC is a method to hold some sway over the platform. If you are only interested in generating a return and don’t care about the voting rights, it’s possible to use custodial services that vote on your behalf. One example of this is xToken. By entrusting your KNC with xToken, xToken will vote on your behalf and reinvest gains back into KNC. This can reduce the burden of gas costs that come from voting on Kyber Network.