Kyber 3.0 Sees Revamp to Liquidity Hub Architecture

William Peaster
Jul 22, 2021
|7 minutes read
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As a known player in the DeFi industry, Kyber Network is experienced at adapting to meet the ecosystem’s needs for more efficient access to liquidity. With Kyber 3.0, its most significant system upgrade to date, Kyber introduced its new Dynamic Market Maker (DMM) Protocol

Kyber DMM, launched slightly over 2 months ago, grants greater flexibility and addresses two of the most critical problems in AMMs today — capital inefficiency and impermanent loss.

What is Kyber 3.0?

Kyber Network is a blockchain-based liquidity hub that aggregates liquidity from a wide range of sources to power instant and secure crypto exchange for any application without the need for an intermediary. 

This new version is an architecture revamp of the whole Kyber Network, upgrading Kyber Network from a single liquidity protocol to a hub of diverse, purpose-driven liquidity protocols catered to different DeFi use cases. Among other exciting new features, 3.0 introduces optimizations for the different types of liquidity providers (LP) that interact with the protocol, from passive investors to professional trading desks.

Kyber’s approach of unifying a network of liquidity protocols makes sense when you consider that different types of liquidity providers use different strategies. While passive LPs invest their assets to accumulate trading fees performing only a handful of interactions with the protocol, professional LPs focus on market making and constantly update their positions accordingly. Not to mention, there are many other market participants such as projects running their liquidity mining programs and dApp automation that have special requirements. Naturally, one protocol can’t provide a unique solution for such a diverse group. 

A hub of interconnected liquidity

Kyber’s liquidity hub architecture allows developers and the Kyber team to rapidly innovate and integrate new protocols into the overall Kyber Network to cater to different liquidity needs, with the first major protocol being Kyber’s Dynamic Market Maker (DMM).  

Takers and traders have the option to access Kyber’s liquidity from a single flexible on-chain endpoint, or through each protocol itself, since all of them have their own endpoint for specific needs and gas optimization. This architecture design allows for on-chain and off-chain aggregation on the overall network. 

It is important to note that through the new architecture on 3.0, the Kyber team, DeFi projects and developers can create and maintain innovative liquidity protocols that address upcoming user’s demands. New liquidity protocols will be added to Kyber’s protocol hub and that can be seamlessly used by makers and takers. 

Kyber’s Dynamic Market Maker (DMM)

Kyber DMM is a new liquidity protocol added to Kyber 3.0’s liquidity hub that introduces amplified liquidity pools and a dynamic fee model designed to be highly efficient for liquidity providers (LPs) and traders. As a liquidity provider, depositing assets into Kyber DMM allows you to maximize the utilization of your capital. Kyber DMM also allows anyone or any DApp to contribute or source liquidity, perform swaps, or integrate the protocol. 

Kyber’s DMM introduces two key improvements when compared to traditional constant product AMMs.

1) Amplified Liquidity Pools

The first improvement is the creation of amplified pools for high capital efficiency. Pool creators have the flexibility to program the price curve in advance by implementing an “amplification factor” (AMP), which allows the protocol to focus liquidity around a specific price range for two tokens in a given pool. Trades are based on virtual balances and magnified by this AMP factor, depending on the relationship of the tokens in the pair.

Highly correlated pairs like stablecoin pairs have very low capital efficiency when being traded at typical AMM platforms, so a relatively small order can cause a significant slippage, even if the trade size is not so large when compared with the pool’s total liquidity. The reason for this is that the liquidity is equally spread across all price ranges, from -∞ to +∞, and thus, only a small fraction of the capital actually provides liquidity for a given price range.

On Kyber DMM, pool creators can create amplified pools by setting up a programmable, custom pricing curve that leverages the “amplification factor”. The result is that, with the same amount of liquidity, the protocol can support trades of higher volume and lower slippage, achieving higher capital efficiency. Finally, the lower ratio between an order and its impact on the price allows the protocol to capture more fees for LPs.

2) Dynamic Fees Model

The second improvement introduced in Kyber’s new version is related to the fee model. Unlike most DEXes and protocols which charge a fixed percentage of every trade, Kyber’s DMM has a dynamic fee model that adjusts to market conditions. It basically increases fees during high volatility periods and decreases them during low volatility periods, optimising earnings for liquidity providers over time.

During high volatility periods, the cost of transactions isn’t the trader’s primary concern since they are willing to pay higher prices to execute transactions. So when volumes are higher than usual, Kyber increases fees to maximize LP returns and better compensate them for the risks of providing liquidity. Kyber’s DMM keeps track of the volume of all trades to determine the market’s fluctuation. On the other hand, it is important to incentivize more trades (and increase trade volume) in periods of low volatility. So, during those periods, Kyber lowers LP fees and lowers the cost for traders accordingly.

Commitment to Security

Kyber has always maintained a high standard of smart contract security for all of its protocols and initiatives, and has facilitated close to $5 Billion worth of trading volume for thousands of users since 2018. The new Kyber DMM codebase has been reviewed and audited by both the team and external auditors such as Chain Security with no critical issues found, and the codebase remains open source on Github for community developers to review. 

As an additional safeguard, Kyber DMM is covered up to $20 Million by decentralized insurance provider Unslashed Finance and has an ongoing DMM Bug Bounty program.

Partnership with Polygon to Enhance DeFi Liquidity

Kyber just announced a partnership with Polygon to deploy Kyber DMM on Polygon (30th June) besides the Ethereum network.This partnership will enhance liquidity and bring more users to Polygon’s DeFi ecosystem, with Kyber and Polygon contributing 2.52M KNC (~$5M) and $500,000 worth of MATIC tokens respectively as part of the ‘Rainmaker’ liquidity mining program which will run on both Ethereum and Polygon.

KyberDAO will be allocating 2.52M KNC (~$5M) to the Polygon phase of the liquidity mining program and 12.6M KNC (~$25M) to the Ethereum phase. The Rainmaker liquidity mining program will last 2 months on Polygon and 3 months on Ethereum.

More details will be provided soon closer to the launch date around 30th June.

Concluding thoughts

Kyber 3.0’s innovations are a significant improvement upon traditional AMMs. Especially due to Kyber DMM’s amplified pools and dynamic fees, liquidity providers automatically enjoy greater flexibility, higher earnings potential, and high capital efficiency.

Being one of the most promising players in DeFi, Kyber is well-positioned to meet market needs and deliver a sustainable liquidity infrastructure for DeFi.

If you want to learn more and stay up to date on the growth of the Kyber ecosystem, make sure to follow Kyber on Twitter, Telegram, and Discord. You may also watch this video for a quick recap about Kyber DMM

Disclosure: This post is part of our paid promotional Partners Program; We’ve partnered with Kyber to help educate and inform the community about the Kyber Network. As always, we’re committed to providing the entire community with quality, objective information, and any opinions we express are our own.