KyberNetwork: Hello World!

The next generation of decentralized exchange and on-chain payment service

When Ethereum was first introduced, many people had anticipated that it would become the mammoth it is today. At the time of writing, the market capitalization of Ethereum is already over $30 billion, with a host of DApps (decentralized applications) including Digix, Gnosis, Golem and Melonport, to name a few, and contributing to the further expansion of the ecosystem. Interestingly, the emergence of DApps in the blockchain space re-instigated the ICO (initial coin offering) phenomenon, in which start-ups conduct fundraising events based on token sales to finance further development of their project. Through ICOs, companies and organizations introduce their crypto-assets, or colloquially known as tokens, to the public. These tokens are a new form of tradable digital asset made possible by blockchain technology.

The Side Effects of Having Many Crypto-tokens

We are approaching an ecosystem with a huge amount of diverse crypto-assets. As more and more projects raise fund through the launches of platform tokens, the number of tokens in the market will increase. Over time, investors of blockchain companies and contributors of the various protocols will acquire a variety of desired tokens as part of their investment strategies. However, limited option to liquidate tokens in the market makes convertibility of one token to another token a new challenge for both investors and operators alike. Further, having more tokens in the market also means more options for payments, putting more pressure to merchants to accept all forms of tokens from users.

The Elephant in the Room: Crypto-assets Exchanges

Today, daily trades between notable cryptocurrencies such as bitcoin and ether are in the millions. Similarly, average daily trades between ether and other crypto-assets, most of which are less than 2 years of age, are also in the millions. Having said that, despite the decentralized and trustless nature of crypto-assets, the major fraction of trading volume is on centralized exchanges, which are still subject to internal fraud and external hacking. This is an ongoing concern as various hacking incidents have been reported at different exchanges affecting thousands of users and causing loss of hundreds of millions of dollars.

Not only that, existing exchanges, whether centralized or decentralized, often required users to wait for several minutes before a trade can be confirmed and allow users to withdraw sales proceed out of the exchange. This means that the selling price that users see when an order is placed might not necessarily be the price charged when the same order is filled.

Despite already having several offerings in the market now, there are still issues that decentralized exchanges have to address before they are ready for mainstream adoption. These issues/ challenges consist of low liquidity, lack of user friendliness and so on. For example, some of the decentralized exchanges keep their order book on-chain. Nothing wrong with that, but doing so makes adjustment and cancellation of bids costly due to the compounding of transaction costs, a result of repeated revisions of orders until a match between the buy and sell side is found. Moreover, the delay between when an order is created and when an order is added to a block creates a buffer that can be exploited by attackers. (Read more here)

To address the issues that centralized and decentralized exchanges face, KyberNetwork was born.

Introducing KyberNetwork

Very simply, KyberNetwork is a decentralized and trustless exchange that facilitates instant conversions between crypto-assets. Through KyberNetwork’s service, a user can send token A to an intended recipient who wishes to receive the payment in token B in a single transaction. Not only that, KyberNetwork will also introduce a new smart contract interface that would allow existing wallets, which only accepts certain specific tokens (e.g. Jaxx only accepts REP, GNT, etc. but not others), to receive any existing or future token (e.g. PAY and CVC) without having to modify the token contract code (i.e. the recipient is not aware that the payment actually was proxied via KyberNetwork). In other words, KyberNetwork enables smart contracts and recipients to access a wider class of users and receive contributions and payments from any token that the platform supports.

How KyberNetwork Differs from Status Quo?

Speed and Security. KyberNetwork is block-instantaneous and it significantly reduces the buffer between when an order is made and when it is filled. As soon as the transaction which initiates the order gets accepted into a block, the trade is confirmed. This feature offers users greater trading security as it eliminates the vulnerability a result of the acceptance window of transactions that could be exploited by attackers. By design, KyberNetwork operator does not hold users’ tokens and orders are enforced by smart contracts, so these tokens are secured from theft losses.

Liquidity Guaranteed. KyberNetwork guarantees liquidity by a combination of the following 2 ways: (1) Leveraging on its own reserve warehouse, which holds an appropriate amount of crypto-tokens; (2) Reserves in the network managed by independent reserve managers, which may or may not be directly associated to the KyberNetwork operator. Each of the reserve can make its own price for every token pair that it supports. When there is a request for converting from token A to to token B, the Kyber operator contract will pick the best rate from all the reserves to process the request.

Compatibility and On-chain Exchange. In addition, since KyberNetwork runs on chain and all the trades are instantaneously confirmed, KyberNetwork works with all accounts, including normal accounts and smart contracts. With KyberNetwork, orders are matched between senders and recipients without any intervention from third party, thereby allowing users to send and receive tokens of any kind without the need to alter the form of contracts and the underlying protocol of Ethereum.

How Do We Do It?

KyberNetwork’s innovative approach to guarantee the liquid, trustless and instant convertibility of tokens involves these 5 actors, and can be summarized by a figure below:

An illustration of the interaction between the 5 actors within the KyberNetwork framework.

Each of the actors illustrated in the diagram above interacts with the smart contract independently in a different way, and collectively, the dynamic reserve pool within KyberNetwork is able to feed a user’s request to convert a token to another within a single transaction.

Moreover, KyberNetwork allows multiple reserves to co-exist so that the platform can offer the best conversion rate between a range of tokens for users. Other than the reserve managed by KyberNetwork’s operator, individuals or organizations not associated to KyberNetwork can also participate in the system by registering with KyberNetwork to contribute to the overall reserve pool, and become the reserve manager of their proposed entity. By enabling this, KyberNetwork is essentially setting up channels to facilitate conversions and transactions of low-trading-volume tokens. In this case, KyberNetwork does not hold the funds managed by independent reserve managers, but KyberNetwork will ensure that their reserve contracts comply to the platform’s terms.

More details on how KyberNetwork works can be found in our whitepaper!

How Are Reserve Managers Incentivized?

KyberNetwork creates a platform for reserve managers to monetize their otherwise idle assets. By serving trade requests from users, reserves earn profit from the spread determined by reserve managers. As KyberNetwork gain more traffic through collaborations with wallet providers and various other token projects, reserve managers are likely to benefit directly from the trading volume due to network effects within KyberNetwork.

In addition, KyberNetwork provides a reserve dashboard software to help reserve managers monitor transactions to and from their reserves. The reserve dashboard will come with standard and popular trading algorithms and strategies, which reserve managers can employ to automatically set prices and re-balance their portfolio. This flexibility of the platform allows reserve managers to implement and deploy their own strategies when and where they see fit.

What Else Does the Platform Offer To Users?

The illiquidity of crypto-assets results in highly volatile exchange rates between tokens due to irregular and unpredictable demand and supply. Worse, unless the trading volume of a token is significant, hardly any exchange would warehouse the tokens, and that limits token holders’ options to trade or liquidate a particular token. As such, it is impossible for token holders to hedge their positions to reduce the risk of adverse price movements in the future.

In view of this, KyberNetwork will be addressing the liquidity challenge by introducing derivative trading including options and forward contracts.

Options. Option contracts allow users to hedge against adverse price movement for a fee known as a premium. A “call option” gives the owner of the contract the right to purchase a crypto-asset at an agreed price, while a “put option” allows the owner of the contract to sell a crypto-asset at an agreed price. The premium here will be calculated using the implied volatility of the underlying crypto-asset.

Forward Contract. In a forward contract, involved parties agree to execute a trade at a later date at a price specified in the present. Forward contract will be useful in a case where token holders need a specified amount of tokens at a future date. For example, assuming that Alice has Melon tokens and she wishes to acquire some Ether to invest in an upcoming ICO in three weeks’ time. Her option is either to exchange Melon tokens for Ether now, or she could enter and purchase a forward contract due in three weeks to negate the risk of Ether’s price fluctuations, should she wish to hold on to her Melon tokens for a longer time or she is waiting for an event where she would receive her Melon tokens.

What Is KyberNetwork’s State Now?

The team at KyberNetwork, led by Loi Luu, is currently finalizing the details for their token launch event. Meanwhile, they are working simultaneously on the minimal-viable-product. Aside ensuring basic functionalities as proposed in the whitepaper, the team will also explore ways to integrate financial instruments into the platform. On the non-technical front, KyberNetwork will engage several blockchain entities to jointly set up reserves in anticipation of trading demand, as well as to extend the influence and vision of KyberNetwork throughout the blockchain ecosystem.

Please join our Slack group (http://slack.kyber.network/), follow us on Twitter (https://twitter.com/KyberNetwork) and subscribe to our Medium blog for more updates.

*poster photo is courtesy of wallup.net