Capital Efficient, Low Slippage Market Making


Most efficient liquidity contribution method for token teams and individual token holders

TLDR

  • Kyber APR is highly suited for token teams that want to list their tokens and individuals who want to utilise their large token holdings.
  • For the same price range and inventory, Kyber’s APR can provide a lot more liquidity, better slippage, and has the ability to serve more volume than other platforms.
  • Many of the top token teams have already set up APRs, including Synthetix, Melon, DAOstack, and Gnosis.
  • APR allows Reserve managers to: a) Provide liquidity for close to 100 integrated platforms b) Market make for profit on each trade c) Save funds and resources by efficiently utilizing token inventory

Kyber ended 2019 on a very strong note, having facilitated over $500 million in 600,000 fully on-chain trades. We are now the most used DeFi liquidity protocol in terms of users, with the highest number of integrations and the largest monthly volume on average.

Previously, we explained our bridge reserves and how they help Kyber to be a single liquidity endpoint for all on-chain use cases, particularly for DeFi applications. In this blog post, we will explain how token teams and whales can contribute liquidity to Kyber directly using the Kyber APR (Automated Price Reserve), an approach utilized effectively by teams such as Synthetix and Melon.

First off, let’s start with a simple overview of Kyber’s protocol and the reserve system. We will then explain the mechanics behind APRs and how they are different from other automated on-chain market makers. This will show why providing liquidity on Kyber is the most efficient use of token inventory for token teams and individuals, compared to other platforms.

In contrast to off-chain or hybrid/semi-off-chain models such as 0x, Kyber’s fully on-chain design allows for seamless composability with DApps, which require intricate smart contract interaction. In hybrid models, it is either not possible or very challenging to use within smart contracts, making it wholly unsuitable for more complex DeFi use cases. Since Kyber’s matching engine is purely on-chain, all transaction data is transparent, allowing anyone to verify that the taker has the best rate available. In the case of hybrid models that match off-chain, what you see may not be what you get.

To provide on-chain liquidity for takers, Kyber integrates a wide variety of liquidity providers, known as ‘Reserves’, into one single endpoint, using a ‘request for quotes’ system. Given a taker’s request, the protocol will ask a multitude of different reserves for the best quote and return it to them. This ensures that an on-chain taker will always achieve the best rates.

These 3 key reasons: fully on-chain liquidity, full transparency and verifiability, and liquidity aggregation, are the main reasons why the majority of popular DApps, particularly DeFi applications, are using Kyber as their single liquidity endpoint.

For this blog post, we will be covering the Automated Price Reserve (APR).

How the APR works

Why should token teams and individual holders contribute liquidity via Kyber APRs?

1. Provide Liquidity for the Entire Decentralized Ecosystem

2. Market make for profit on each trade

Example*

  • Ren (REN) APR was set up at the end of January, 2019. To date, it has made ~181.8 ETH ($48,555 USD, ETH at $267) from fees.

*Estimated. Profits made are also dependent on the token demand, prices, liquidity, and popularity at the given scenario. Figures can be verified on-chain.

Katalyst Rebates For Kyber-Dedicated Reserves

Once the Katalyst protocol upgrade is live, part of the total network fees collected will go towards incentivizing reserves based on how much trades and volume they facilitate for the network. This type of incentives for market makers, applicable to both APR and FPR reserves, are known as rebates in traditional finance.

In addition, reserves (including APRs) no longer need to maintain a KNC balance for fees, removing a major friction point, reducing costs, and simplifying reserve operations substantially.

3. Highly efficient use of token inventory, saving resources

Token teams that provide liquidity to typical AMM (automated market maker)-style liquidity pools e.g. Uniswap or Bancor, might end up getting their token ‘priced to infinity’ by the AMM algorithm. In other words, for the standard AMM model, a portion of token inventory is being inefficiently allocated to price points that are not required by the market and are highly unlikely to hit in the short-medium term.

For illustration purposes only. Not drawn to scale.

In comparison, for the same price range and inventory, Kyber’s APR can provide a lot more liquidity, better slippage, and serve more volume. As an example, a transaction of 1 ETH might move the price by 1% on a Kyber APR, while for the same amount on a different platform, the price might move by 2%. In such a scenario, Kyber would be able to serve 2 times more volume.

For illustration purposes only. Not drawn to scale.

This is possible due to Kyber’s APR giving token teams the flexibility to price tokens within a specific, self-stipulated price range. The tradeoff is that once the token price goes beyond the lower or upper bound set by the reserve manager, the APR reserve has to rebalance its token inventory.

Comparison Of Capital Utilization (Examples)

1. To support a 50–200% Token Price Change

b) ETH Inventory required by respective platforms, assuming we want to achieve the same slippage level

2. To support a 90–110% Token Price Change (e.g. low volatility stable coin pairs)

a) Slippage comparison assuming the same ETH Inventory size

b) ETH Inventory required by the platform, assuming we want to achieve the same slippage level

Together, these steps will further propel Kyber towards being able to provide takers and DApps with the single endpoint for their on-chain liquidity needs, ensuring they receive the best possible price (quote) for each trade, without needing to integrate multiple systems.



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