The Kyber 3.0 upgrade would see the project expand into all niches of on-chain liquidity pools.
Kyber Network (KNC), a decentralized exchange platform and aggregator on Ethereum, announced plans for Kyber 3.0, a complete overhaul of its platform.
With the 3.0 release, Kyber will transition to become a network of specialized liquidity pools, similar to how different exchanges optimize for different kinds of assets. For example, Kyber 3.0 will allow very high amplification factors for pairs between different wrappers of the same asset, similar to Curve. The team says this would allow a 100-fold improvement to slippage. Other, less stable pairs like Bitcoin (BTC) to Ether (ETH), would be able to benefit from a five-to-ten-fold improvement in capital efficiency.
The optimization is achieved by implementing dynamic market makers, or DMMs. This iteration on the original concept allows fine-tuned adjustments to the key parameters of a liquidity pool. Creators will be able to customize the pool’s relative weights of each asset — similar to Balancer — and set a custom amplification factor to reduce slippage.
Trading fees will be adjusted dynamically as well: During periods of high volume, fees will be increased, and conversely they will be decreased during lower volume periods. Such a mechanism helps mitigate some of the damage from impermanent loss, the phenomenon where a liquidity provider’s assets are constantly rebalanced to sell the winner and buy the loser. Since most of the impermanent loss occurs during decisive and likely high-volume moves to either side, a higher fee parameter helps capture some of the upside.
Another important improvement is gas optimization. Previous iterations of Kyber generally consumed much more block space and were thus more expensive to use. In a conversation with Cointelegraph, a spokesperson from the team explained that this was due to Kyber using a single access point for interacting with its many reserves and routing paths. The new version will allow higher flexibility, with users being able to take liquidity directly from the source they need, in addition to a general improvement to gas efficiency. The new architecture is also designed to support future cross-chain and layer-two scaling solutions.
These improvements are just a start, the spokesperson said. Future plans include more specialized liquidity pools for certain user niches. These include the Professional Liquidity Protocol, a specialized liquidity model for professional market makers, the Bridge Protocol for pulling liquidity from external sources and an upcoming derivatives trading platform.
The token economics of KNC will also be overhauled to bring it in line with other governance tokens:
“In the coming proposal, KyberDAO will have multiple sources of value accrual, including the new DMM and all new liquidity protocols. The governance utility of KNC will be greatly enhanced as well, given that they now have effective oversight of these various protocols. KyberDAO will also have the ability to vote in and fund new protocols for the network.”
The details of the change will be discussed and approved by the existing community, the spokesperson clarified. The KNC token will also have various value capture mechanisms, with holders being entitled to a portion of the fees generated by the protocol.
The upgrade will be rolled out in two phases, called Katana and Kaizen. The first will feature the DMM and a proposal for KNC overhaul and migration. Though no specific dates have been selected, the full transition is expected to be completed late in the third quarter of 2021.