A Bet on the Future of DEX: Bancor, Kyber and Ox Protocols Examined
Despite the clamour for decentralization, some of the biggest players in the cryptocurrency space are still centralized entities.
The most obvious examples are Binance (BNB) and Tether (USDT), both of which are top ten tokens, and two of the only tokens to record a growth in market cap between 2018 and 2019.
But with decentralized exchanges on the horizon, there’s reason to believe this paradigm will eventually shift. Decentralized exchanges don’t require any sign-up, KYC, identification uploads, nor do they require you to send your funds to their platform – making them non-custodial. Even the Ethereum-based Maker/Dai stablecoin can be bought on DEX’s, possibly numbering Tether’s days as the prime dollar-peg.
With that in mind, let’s take a look at some DEX protocols which stand to benefit from first-mover status when decentralization becomes more of an issue in the crypto space.
Bancor is a self-adjusting protocol where liquidity is maintained via Bancor’s trademarked Smart Tokens. These Smart Tokens come with a built-in liquidity mechanism which makes sure any one ERC20 token is available for trade with any other, without the need for market makers.
Cutting out market makers also pushes Bancor further towards complete decentralization, as it means whales won’t be able to dictate prices to profit from the exchange’s spread. Bancor’s autonomous functioning is helped by a self-calculating algorithm which adjusts coin prices and supply automatically, and is named after an economic theory laid out by John Maynard Keynes.
“The Bancor Protocol is named in honor of the Keynesian proposal to systematize international currency conversion by introducing a supranational reserve currency called Bancor.”
Any ERC20 token can be bought on Bancor regardless of whether or not anyone is willing to sell. Tokens are connected to reserves of other currencies (ETH), and a system of back-and-forth issuing and burning of tokens keeps prices and supply statistics accurate up to date. From the website:
Building Long Tails
The Bancor whitepaper posits that the top 10% of cryptocurrencies make up 90% of the total global market cap, as well as 99% of all trade volume. This makes the tail end of the crypto landscape ‘practically insignificant’, and this is something that Bancor is built to address. From the technical documentation:
“This stands in sharp contrast to many other online ecosystems where the tail end cumulatively makes up a significant part of total volume, an observation known as the long tail phenomenon. For example, books with too little volume to be carried by regular bookstores make up an estimated 30-40% of the titles sold on Amazon.”
Ultimately, Bancor’s protocol makes it so that small-cap, low-liquidity ERC20 tokens can be bought and sold regardless of whether or not they’ve made it to Binance. In this sense, Bancor sets itself up as a kind of YouTube for cryptocurrencies, allowing the little guy to get exposure without requiring high-profile (and costly) exchange listings.
One could probably make the point that, at this stage, most of these ‘little guys’ aren’t necessarily worth watching. It would be hard to argue with that right now, but that doesn’t take away from what Bancor is actually offering.
Currently ranked just outside the top hundred tokens by market cap, the Bancor Network currently processes just over $1 million worth of daily trades. The BNT token is traded on multiple prominent exchanges, and has averaged daily volumes of around $3 million since the start of 2019. In March that volume spiked to $31 million as BNT gained over 50% over a few days, and BNT’s growth since the December 2018 stands at around 73% as of Q2 2019.
Kyber Network (KNC)
Kyber Network (KNC) differs from Bancor in a couple of ways. First of all liquidity is provided by physical token reserves, which are provided by fund managers, whales, token teams, etc. Thus, unlike Bancor, market makers are present on Kyber, and are incentivized with spread profits to provide network liquidity. This creates a free-market competition among reserve providers to set the most attractive exchange rates.
Kyber adherents say this gives KNC more chance of being a good long-term token to hodl, since its value will increase via two different paths. As it stands, the Kyber protocol is already used by a number of Dapps, wallets and payment services, including the Trust Wallet, MyEtherWallet, and those pictured below.
Atomic Swaps and Wrapped Bitcoin
Atomic swaps are defined as transactions of coins across different blockchains via the use of event-triggered smart contracts. Kyber Network’s method of providing atomic swaps is slightly different in that swaps are conducted on-chain via the previously mentioned reserves.
Kyber also introduced a method of interacting Bitcoin on the Ethereum blockchain with the inception of Wrapped Bitcoin (WBTC). Wrapped Bitcoin is a BTC-backed token on Ethereum which can be used as regular Bitcoin. From the documentation:
“The proof of reserves is on-chain, which shows the exact 1:1 ratio between minted WBTC tokens and Bitcoin stored by the custodians. When WBTC token holders redeem their tokens for Bitcoin, the tokens are burned. The minting and burning of tokens is in turn tracked and verifiable on the blockchains.”
This opens the possibility of Bitcoin holders utilizing Ethereum Dapps, and allows users to trade a Bitcoin-pegged asset from a decentralized Ethereum wallet.
KYC on KNC
This Reddit response by a Kyber dev from 2018 reveals that the project is taking aim at more than simply being a decentralized exchange. So much so that they stated the word DEX would be removed from all official wording:
“Kyber is liquidity ecosystem, where a platform, individual, exchange, or dapp can plug into and immediately have liquidity. It is not a dex in the traditional sense and as such, since that post we have completely removed DEX from our lexicon and will be changing all of our documentation and channels to reflect this during this month.”
According to the team, which has Vitalik Buterin as an advisor, Kyber is actually being set up as a retail product. This is a change in direction from Kyber’s initial plans, and more details can be found in the previously linked Reddit post.
Because of the retail push, Kyber has introduced KYC registration for certain tiers of user. No KYC is needed for daily transactions of up to $3,000, or daily trading up to $15,000. But for anything above that a submission of personal documents in required. (Note: Kyber attaches these transaction limits to addresses, not users. Thus using different addresses has been proposed as a way of bypassing these limits).
Ox Protocol (ZRX)
Ox (ZRX) differs again from the previous two DEX’s covered, in that it uses a hybrid method of conducting transactions where the matchmaking is done off-chain. This has the advantage of cutting down on network fees by reducing the amount of metadata that has to be sent across the blockchain.
Maker fees are provided to Matchmakers who maintain off-chain order books, and match buyers with sellers before sending the transaction to the blockchain. For this reason some believe Ox fails in its attempt at true decentralization, since matchmakers must be trusted to process the right orders. That said, ZRX holders will also get a vote in the governance of the network, so bad actors could be voted out if necessary.
Below are the numerous smaller decentralized exchanges that have utilized the Ox protocol. Unlike the previous two projects, Ox doesn’t have its own DEX platform. Rather, it provides the infrastructure necessary for implementing exchanges on the Ethereum blockchain.
Ox has set its sights beyond providing DEX functionality, and many consider it more of a platform than a decentralized exchange. This is similar to other multi-faceted projects like Komodo (KMD), which provides the tools necessary for DEX’s and atomic swaps, as well as more typical blockchain functions.
With blockchain prediction markets, stablecoin launches, and loan systems all planned on Ox, it might be the case that Ox will be competing with other platforms, rather than simple DEX’s. Also, because of Ox’s off-chain matchmaking process, it means the ZRX token won’t find much application in transaction fees, perhaps making more a risky hold than others, but not necessarily.
The idea of a DEX is simple: a trustless, non-custodial method of transferring and transacting cryptocurrencies.
But as we can see, there’s more than one way to skin a cat, and each of these three projects bring different features to the table. Each is philosophically different from the others in at least one way, and each has a chance of filling some kind of niche in the hypothetical future of the crypto space.
All three tokens mentioned trade on Binance, among other major exchanges. Only Ox (ZRX) has yet made it to Coinbase, although Kyber Network was mentioned in a December announcement as one of the ERC20 tokens imminently appearing on Coinbase Pro.
Betting on the future of decentralized exchanges isn’t an easy gamble, but there’s enough reason to believe at least one of these three projects will benefit from future adoption of the DEX.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
Featured image courtesy of Shutterstock.