The Kyber protocol is designed to aggregate liquidity from a diverse range of sources. In turn, the network provides a single endpoint for takers to seamlessly perform multiple token trades in a single blockchain transaction. Kyber is currently listed as the third-largest application, by daily users, on the Ethereum blockchain and is also listed as the most popular exchange application.
Any Kyber user can contribute their idle Ethereum token assets to Kyber’s liquidity pool. Once a reserve has been created, the tokens become available for use across any Dapp or protocol that taps into the network. Currently, the 6 most popular pairs for trading on Kyber are ETH/DAI, DAI/ETH, ETH/USDC, USDC/ETH, ETH/USDT, and ETH/KNC.
Liquidity on the network is facilitated through an open reserve architecture, managed by Kyber liquidity reserve managers. Liquidity reserve managers need to purchase Kyber Network Crystals (KNC) to create a reserve for a new asset. Every time a transaction occurs on the Kyber Network the associated reserve is charged a network fee in KNC, currently 0.25% per trade.
The KyberDAO was first announced in late 2019 and will arrive as part of a major protocol upgrade called Katalyst. The upgrade will allow KNC holders to receive part of the network fees by staking KNC and participating in the KyberDAO.
One of the first decisions KNC holders will have to make when the KyberDAO will be to jointly decide how much the network fees should be, and how these fees will be used. They will also decide whether network fees should go towards voting rewards, the burning of KNC tokens, or incentives for reserved management like rebates. In the future, KNC holders will have the right to vote for decision making around protocol functionality, operations, and adoption.
A recent blog post explains the implications of these decisions. KNC holders may decide to set high fees and have all the network fees all going to KNC holders, thus increasing the reward for staking tokens but reducing competitiveness. Conversely, having no fees and rewards will lead to lower demand for KNC and a lack of incentives for users, but potentially lead to lower spreads on the platform.
A pre-DAO poll was run on Discord between the 19th and 26th of June to allow the Kyber community to vote on the initial set of network fee parameters for the protocol once the KyberDAO is launched.
On June 19th, it was announced that investment firm Parafi capital had made an investment into the Kyber protocol through the direct purchase of KNC from the Kyber development team. Parafi stated that the core goals of the investment will be to participate in future governance decisions of the Kyber protocols, improve options for market takers by connecting and providing liquidity to Kyber’s network of users and Dapps, and to accelerate the growth of professional market makers who seek to earn spreads through Decentralized Finance (DeFi) protocols.
Leo Luu, CEO of Kyber, endorsed the deal, saying “ParaFi has been a driving force in the governance and growth of DeFi. The ParaFi team did extensive due diligence to understand the nuances and contours of the Kyber protocol, developing a deep understanding of the potential of the network. With their support and active participation in the KyberDAO, we are confident that we can bring Kyber’s role as the liquidity layer for DeFi to the next level.”
The KyberDAO will also launch with a voting rights delegation system, where KNC holders do not have to participate in every voting round, or “epoch” that occurs every two weeks. They do this by assigning their voting rights to an Ethereum address that will vote on their behalf. Projects that setup these Ethereum addresses will be called pool operators and Kyber will set up a range of technical options for pool functionality.
KNC holders will be able to delegate their tokens to a pool using a default Kyber.org interface. Assigning tokens to a pool is non-custodial. This means Pool operators will be able to vote on behalf of delegators who assign their stake to them, but they have no spending rights over any tokens delegated to them.