The Kyber Network is a platform for the instant decentralized exchange of cryptocurrencies, as well as a payment service. The exchange is executed through smart contracts. A network of reserve managers is used to maintain liquidity of transactions and high speed of transfers. According to CEO Loi Lu, in 5–10 years the Kyber Network will become a crypto hybrid of NASDAQ and Visa. Vitalik Buterin has joined the project as an adviser.
On February 11, there occurred a pilot launch of the Kyber Network Mainnet, and testing will last until April. Because of possible malfunctions, access to the platform was granted only to users who got into the whitelist during the ICO.
Why Decentralized Exchanges Are the Future
In 2014, the world's first crypto exchange Mt. Gox was hacked, resulting in the loss of $460 million in Bitcoin. In 2016, hackers stole $72 million worth of Bitcoin from the Bitfinex exchange. In January of this year, the Coincheck exchange was hacked, and a record $550 million in the NEM cryptocurrency was stolen. A week ago, the BitGrail crypto exchange operator got hacked, and $170 million was stolen in the Nano cryptocurrency. Such thefts in record amounts are possible due to the fact that the exchanges accumulate a considerable number of cryptocurrencies in one place, which is their "centralization."
Decentralized exchanges do not store users' funds. The exchange is carried out using smart contracts directly between users. If someone wants to exchange Ether to EOS, then the smart contract will find a person willing to part with their EOS tokens in exchange for Ether and make the transfer directly, and the funds will never be stored on the wallets of exchange. At the same time, unlike other decentralized exchanges, Kyber is the most secure, as it performs the entire exchange process in the Ethereum blockchain system, while, for example, 0x stores the order book off-chain.
Despite the claimed reliability, decentralized exchanges are now losing significantly to centralized exchanges in terms of trading volumes. This means that it is difficult for the user to find a buyer who is ready to exchange a cryptocurrency in the right amount at the best price. Kyber solves this problem with the help of a reserve system, which is not found in any other decentralized exchange. The Kyber Reserve is a cryptocurrency pool that is always available for trading. The equivalent in the traditional financial world is called a "market maker."
For example, anyone who has OmiseGo and Ether can become a market maker of the [OMG / ETH] pair by transferring their funds to the Kyber reserve. The owner of the cryptocurrency, or the reserve manager, will place their own bids and the size of the spread, and this pair will always be available to network users. The goal of Kyber is to have several reserves for each pair that will compete, offering the best rates with the lowest spreads.
Reserve managers can become large owners of cryptocurrencies. These include centralized exchanges, for example, Binance, which collect transaction fees in various tokens, companies investing in ICOs, or even the founders of new projects.
Under ideal conditions, users will buy and sell cryptocurrencies from a pair in approximately equal quantities. But in case users start actively selling Ether to purchase OmiseGo, which will lead to depletion of the reserve levels of OMG, the Kyber will activate a rebalancing function. The Kyber Reserve software has a feature that uses a combination of trading bots and smart contracts associated with large exchanges, such as Binance, Bittrex, and Huobi. In the scenario described above, the Kyber Reserve will start trading an excess of ETH to buy OMG on a centralized exchange offering a better price to replenish the reserve to its previous levels. This allows reserve managers to profit from their assets while retaining initial investments.
To obtain the right to profit from spreads in the Kyber network, Kyber Reserve managers must purchase KNC Kyber Network Crystal (KNC) tokens. When the manager receives a profit from the spread, the percentage of this profit is paid to the Kyber network in KNC. The Kyber Network uses KNC to pay its expenses and reward partners. After all payments are made, the remaining KNCs are burned. Thus, with an increase in the amount of reserves and a reduction in the number of tokens due to the burn, the price for KNCs will constantly increase.
Users can easily connect to the Kyber Network without setting up an account, by using hardware wallets. Users can go to the Kyber site and directly connect their Trezor or Ledger Nano wallets as well as software wallets. At the moment, the list of partner wallets for Kyber includes ImToken, Coin Manager, and Trust Wallet. As soon as Kyber becomes available to all users, the "Kyber" option in the user interface will appear in these wallets.
After connecting to the Kyber Network via a hardware or software wallet, the user will see all the trading pairs offered by the Kyber network. At this stage, only 10 ERC20 tokens can be exchanged. They are AELF, BAT, MANA, EOS, GTO, KNC, OMG, POWR, REQ, and SNT. Fees will be charged for the conduct of transactions through smart contracts, and there are no plans to introduce other fees.
The Kyber Network is creating an API payment interface that will allow buyers to pay in their chosen cryptocurrencies, and the seller will receive payments in cryptocurrencies they selected as the main ones. For example, if one only has MANA tokens and the seller accepts payment in Ether, then the first can pay in MANA. Using the Kyber technology, the cost is recalculated, and the seller receives an equivalent amount in his account in Ether. To ensure the accuracy of such calculations, a fixed conversion rate will be used, through which users will be able to calculate the amount they will receive when exchanging or paying.
Soon, the currency used for payments will be a matter of personal choice. Some people will prefer Bitcoin, some Ether, some Zcash. There will also be hundreds of applications built on blockchain requiring various tokens for access and functioning. In such a world, it is necessary that all these assets be compatible. If the Kyber team achieves its goals, the Kyber Network can become the foundation that will link the complex world of cryptocurrencies together.