Anyone who has traded cryptocurrencies is familiar with the problem of exchanges. In recent history, there have been multiple instances of exchanges going down for several reasons. To trade and diversify cryptocurrencies, these exchanges are the gatekeepers in the crypto-world: when these exchanges do not function, users are left with funds trapped, or stolen, on the exchange.
Cryptocurrencies are decentralized: transactions within blockchains are secure against single points of failure and attacks; however, this security is only maintained within the cryptocurrency. When converting out to fiat, or when trading from one cryptocurrency to another, the current exchanges are bottlenecks. Popular exchanges like Coinbase or Kraken remain centralized, and do not enjoy the security and stability of decentralization.
This has resulted in delays and downtimes, to the detriment of its users.
1. During these downtimes, users are unable to trade their cryptocurrencies from one form to another.
2. Current exchanges require users to transfer money from their wallets into the exchange. When the exchange experiences downtime, users’ funds are locked up in the exchange, and unable to be drawn out.
Enter KyberNetwork (price as of writing KNC 5.20 USD). KyberNetwork is a decentralized exchange platform, and it aims to solve issues with the current exchange platforms in the market.
Blockchains are famous for being decentralized. It is a large part of its appeal, as it provides a more secure platform. KyberNetwork is no different: a decentralized exchange means that there are not likely to any downtimes, unless all nodes across the world are compromised simultaneously.
Decentralization also brings along the added benefit of KyberNetwork being trustless: the user’s funds are not stored on the exchange, unlike current exchanges. Even if the network is compromised, no funds will be locked in or lost, which no centralized exchange has been able to guarantee at the time of writing.
KyberNetwork will have a reserve which contains a store of all tokens and will be maintained by a reserve entity. Initially, this entity will be KyberNetwork alone, with plans for including trusted and registered third party reserves in the future. This reserve is split into two main sections: private reserves, which do not accept public contributions, and public reserves which do.
The effect of this reserve is that it enables both high liquidity and virtually instantaneous transactions.
The following image illustrates the KyberNetwork flow.
Image taken from KyberNetwork Whitepaper
5 Main Actors of the KyberNetwork
Users: they send and receive tokens in KyberNetwork.
Reserve: a storage of tokens that will be used for cross-blockchain transactions.
Reserve Contributors: these are people who contribute to the public reserve in KyberNetwork.
Reserve Manager: they maintain the reserve, determine exchange rates, and feed these rates to the KyberNetwork for a period of several seconds.
KyberNetwork Operator: in charge of adding and removing reserve entities, as well as listing pairs of tokens in the network.
Each of these components interact differently with the contract, and results in a mutually beneficial arrangement for all.
Users enjoy the high liquidity and instantaneous transactions, courtesy of the reserve entity. In return, the reserve contributors are incentivized to place idle assets within KyberNetwork as a reserve contributor to gain a share of profits.
Security of the Reserve
Having a large pool of cryptocurrency on hand means that additional security measures have to be taken in.
The private reserve, initially run by KyberNetwork, will follow good security practices which place the risk within acceptable range. They are also handled locally, and will be immune to external party manipulation.
The public reserve has a larger risk, as public contributions are accepted. To counteract this, KyberNetwork has plans to implement a transparent fund management model to ensure that all actions taken by the reserve managers are in line with KyberNetwork’s protocol. There are also plans to introduce restrictions on the public reserve to ensure that extraction of funds out of the system is regulated, and that gas prices are not exorbitant.
Use Case of KyberNetwork
As an exchange platform, KyberNetwork excels in two areas that matter most to a user: speed and security. Transactions are instantaneous due to the reserve entity, and security is guaranteed as user’s do not have funds stored on KyberNetwork.
The KyberNetwork API allows for a user to pay for services and products using any token, regardless of the token required by the vendor. KyberNetwork automatically converts the token into the appropriate token accepted by the vendor based on the current exchange rate.
A forward is much like a futures contract, where both parties agree to trade an asset at a later date in the future at a specific price. This is especially useful in a market as volatile as cryptocurrency, where both parties are able to mitigate risk.
Comparison of KyberNetwork
Image taken from KyberNetwork Whitepaper
Decentralized exchanges are not just a fad, but a necessity in the cryptocurrency market. The idea of decentralization is a core component of cryptocurrency, and it is ironic that a market so bent on achieving decentralization is being bottlenecked by centralized gatekeepers. KyberNetwork addresses an issue that all cryptocurrency investors face, and will only grow in importance in the future.