A planned upgrade that would allow token holders to earn staking income is bringing out users in droves to Kyber Network, a decentralized exchange (DEX) for cryptocurrency trading.
The number of addresses with a balance in Kyber Network Crystal (KNC) – an Ethereum token that fuels operations on the DEX – reached an all-time high of 61,980 on April 27, according to blockchain intelligence firm IntoTheBlock.
The number is up 14% from the tally of 54,210 addresses seen on Jan. 1.
“With more addresses, we are seeing more users and the community trusting and embracing the Kyber’s growth potential,” said John Ng Pangilinan, managing partner at Signum Capital, which is an investor in Kyber Network.
Kyber’s active addresses, price and trading volume have also witnessed solid growth this year.
The number of active addresses using KNC on a given day has increased by over 100% over the last 12 months, as noted by IntoTheBlock’s report.
Meanwhile, the token’s U.S. dollar-denominated price recently rose to nine-month highs near 82 cents in March and was last seen at 67 cents – up 260% on a year-to-date basis, according to data provider Messari.
Bitcoin, the top cryptocurrency by market value, has added just 8% so far this year, according to CoinDesk’s Bitcoin Price Index.
Daily trading volume surged from $10 million in early January to $240 million in mid-March.
While first-time Kyber users have doubled since the beginning of the year, USD and ether (ETH) volumes on the DEX have more than tripled, according to the network’s official blog.
On March 12, bitcoin crashed by over 40% and extended the decline to levels under $4,000 on the following day, injecting extreme volatility into the broader crypto markets. On March 13, Kyber recorded its highest daily activity with $33.7 million traded over a single 24-hour period.
In search of yield
The surge in investor interest could be attributed to the upcoming protocol upgrade Katalyst, which will allow KNC holders to earn yield on their token and participate in determining and facilitating economic flow on the network. The upgrade is expected to take place at the end of the second quarter.
Backing up a bit, Kyber Network is an on-chain exchange that allows instant trading and conversion of cryptocurrencies and tokens with high liquidity.
It does so with the help of reserve entities – either internal or arranged by third parties – which bring liquidity to the platform; reserve managers who maintain the reserve, calculate exchange rates and feed the data into the network; and the Kyber Network operator, which adds and removes reserve entities.
The reserve managers are required to purchase KNC tokens to operate a reserve on the network, and pay a small KNC fee to Kyber each time a transaction or a token exchange occurs. The fee is then used to reward third parties who bring trading volume to the network and the rest of the tokens are taken out of circulating supply via coin burn.
Put simply, Kyber currently relies on coin burn to provide value to KNC holders.
However, following the impending protocol upgrade, KNC holders will receive a cut of transaction fees in the form of ETH relative to the number of tokens staked. “Also, reserves would get rebates for volume generated and wouldn’t have to hold KNC to operate on the network,” said Shane Hong, marketing manager at Kyber Network.
Staking refers to the process of holding coins in a cryptocurrency wallet to support the operations on a blockchain in return for newly minted coins. In layman’s terms, it is similar to earning interest on a fixed income investment like bonds.
Essentially, the protocol upgrade will allow holders to earn yield by staking the tokens.
“These additional ways to generate yield via staking, coupled with token burning is a major incentive to purchase and hold KNC,” said Connor Abendschein, crypto research analyst at Digital Assets Data. “This could be the reason why we have seen such a drastic rise in the number of addresses holding KNC.”
Pay for participating
Other decentralized exchanges have been turning to staking models that allow holders to generate higher returns as the network grows.
For instance, the Ox protocol implemented a staking system for ZRX token holders in December, when the Ox V3 upgrade went live on Ethereum mainnet.
However, KNC staking will earn rewards only if the holders vote on network issues under a new community platform for decentralized governance.
That platform, known as KyberDAO, is to launch simultaneously with the Katalyst upgrade.
“It will complement the new token model, where KNC holders, who stake KNC, will get to vote for proposals and earn voting rewards in ETH,” Hong said.
Essentially, the decentralized autonomous organization (DAO) will give more power to the wider community in determining key parameters of the network such as network fees, burning ratios and reserve incentives.
“The fact that holding KNC will allow investors to participate in developing the protocol could also be a prominent reason for the rise in addresses with KNC balances,” said Pangilinan.
DeFi demand
Kyber, being an on-chain liquidity protocol, is also benefiting from the growth in the decentralized finance (DeFi) space, where there is an increased need to swap assets.
In February, bZx, a DeFi lending protocol that uses Kyber Network’s price feed, suffered an oracle attack, which saw a trader walk away with a profit of 2,388 ether ($468,000 as per the latest ETH/USD rate).
Some observers criticized Kyber for low liquidity back then. “The attack came down to bad price data, specifically from DeFi network Kyber”, bZx co-founder Kyle Kistner told CoinDesk at the time.
That, however, did not have any negative impact on KNC’s price or reputation as a price oracle, or supplier of price information.
“As investors, we watched the fall out happen but KNC held its price and started to bounce back,” said Pangilinan.
KNC’s price rallied by 18% on Feb. 18 – the day the attack took place.
The network is now being used by over 100 decentralized applications, more than 45 reserves and is the most used DeFi project on Ethereum.
New projects including Rarible, Unstoppable Domains, Bullionix, Gelato, and Idle Finance integrated the protocol in March and April.