On October 22, 2020, Kyber Network – the popular on-chain liquidity protocol for decentralized ERC-20 token swaps – launched KyberPRO: A Professional Framework for On-chain Market Making.
KyberPRO is a groundbreaking release that allows professional market makers (MMs) or advanced developers to effectively market-make and generate profits on-chain, using the Kyber Fed Price Reserve (FPR) framework.
Today I’ll explain in detail why KyberPRO and Kyber’s Fed Price Reserve (FPR) framework is such a big deal for on-chain market making.
KyberPro website homepage
The Problem: On-Chain Market Making
First, a short intro on what actually is market-making?
Market making is an activity whereby a market maker (liquidity provider) plays a fundamental role in asset markets by providing liquidity to both buyer's and seller's end.
Market makers simultaneously quote bid (buy) and ask (sell) prices for the same asset. By quoting prices, they stand ready to buy and sell, thus facilitating price discovery and making a trading pair liquid.
Market makers increase the overall efficiency of a market by reducing price volatility and assisting with fair price discovery. A market without market makers will have insufficient liquidity and is unattractive to traders because the spread between assets is too high and causes volatility.
Therefore, market makers are necessary especially for initial markets to facilitate tighter spreads, fair price discovery, reduced volatility, and sufficient liquidity.
Now for the problem:
Market making is extremely hard to do on-chain. Existing on-chain order books are generally too gas and capital inefficient to be used for market-making, especially when the goal is to market make for a large number of different tokens.
Problems with On-Chain Market Making:
- Dynamic Trading Strategies are difficult to execute due to a high gas and capital costs. Every time you make a move you must pay gas, and for dynamic strategies, you need lots of capital because you must provide separate liquidity for each token pair.
- Risk Management is difficult because canceling an order is slow and might be exposed to gas wars.
- Gas Efficiency is low because every addition or removal of an order requires gas.
- Capital Efficiency is low because the liquidity a market maker provides can only be used for 1 token pair, rather than multiple. For example, for 100 ETH of orders, you need to commit 100 ETH, and for 5 different token pairs, you might need 500 ETH.
- Capital lockup, market makers must forgo their long positions on provided liquidity because it needs to be locked.
As you can see from the variety of problems above, on-chain market-making just isn’t feasible for most professional market makers. That is until Kyber came out with their Fed Price Reserve (FPR) framework for on-chain market making.
How KyberPro & FPR Solve This
Kyber’s Fed Price Reserve (FPR) framework solves all of the existing problems with current on-chain market-making options through the following design advantages:
1. Immediate Exposure To The Widest Range Of DeFi Takers
(Source)
Professional market makers with serious liquidity require a robust pool of takers to absorb the liquidity they provide. They need market participants on the other end making trades to make their provided liquidity worthwhile, otherwise, they wouldn’t make any money.
Without someone on the other end of their bids and asks, the market maker wouldn’t generate any profits. With Kyber’s FPR, market makers averaged about 35bps (basis points) of profits per volume traded in 2019 (about 1.2M ETH).
To put things in perspective, centralized exchanges with high turnovers struggle to average 1bp of profit per volume.
Kyber’s FPR can deliver such high profits because Kyber Network is the most used and most integrated token swapping endpoint for wallets, DApps, and aggregators in the entire DeFi space.
Since Kyber Network’s launch, the protocol has secured over 100 integrations, generated more than $1Billion in total trading volume, and has facilitated 1 million+ transactions since launch.
2. One Quote Inventory For Many Tokens
Perhaps the most major advantage of Kyber’s FPR is that it’s designed to allow market-maker provided liquidity to be used for all the tokens that the MM is pricing, not just for 1 single token pair.
This design feature alone solves multiple problems experienced by the existing on-chain market maker solutions. It allows much more efficient use of token inventory as 100 ETH committed to Kyber can be used for all the different token pairs.
For example, with 100ETH you can now create orders across more than just one token simultaneously. Say a market maker wants to place orders for LINK, LRC, MKR, and COMP. Normally he'd need to spread his capital of 100 ETH for each pair, so 25ETH each. With Kyber PRO, he can have orders across all these pairs using only 100ETH.
No longer do on-chain market makers need to commit great sums of ETH to each individual token pair or keep on changing which pair they provide liquidity to, which costs an exorbitant amount of gas fees.
With Kyber’s FPR market makers only commit inventory as needed and that's a great deal.
3. Flexible Utilisation Of Token Inventory
In addition to being able to use provided liquidity for all token pairs on Kyber, a market maker’s token inventory can also be used to market make on other exchanges or other advantages of the inventory (like interests, voting power, staking etc.).
This is a major advantage over existing on-chain systems like Oasis or Uniswap where tokens need to be locked up for every trade and cannot be used elsewhere. Kyber’s FPR provides market makers with full control over their provided liquidity, enabling them to capitalize on it in a variety of ways.
4. Gas-Efficient Batch Price Update Mechanism
Kyber’s FPR solves the problem of high gas costs associated with placing many orders on-chain by providing a quoting mechanism that feeds the price for tokens in batches, allowing operators to update their price for all tokens with a single transaction.
This feature enables market makers to always maintain current prices on-chain and is what makes Kyber’s FPR efficient and feasible for professional market makers.
5. Algorithms For Pricing, Rebalancing, and Exposure
As mentioned before, Kyber’s FPR market makers have total control over their provided liquidity. This includes, but is not limited to:
- Control over the pricing algorithm, allowing them to determine the price off-chain and feed tokens to the contract.
- Control over the algorithm used to rebalance their inventory, they can withdraw excess inventory and use it elsewhere.
- Control over important parameters for liquidity exposure, including step functions to adjust the price for larger volume, max volume per block, and max imbalance volume per block.
- + much more flexibility and advanced control over pricing
To summarize, Kyber’s FPR solves existing on-chain market maker problems by enabling market makers to save a ton on gas fees, use less capital, and be able to squeeze higher profit margins.
How Investors & Community Reacted
Kyber’s Fed Price Reserve (FPR) framework and the launch of KyberPRO was very well received by the Kyber Network community and KNC investors alike.
The community is very excited about Kyber’s increased potential to dominate the DEX space by bringing professional market makers on-chain.
When Kyber first announced FPR on June 9, an excited fan used the announcement to show people how the groundbreaking development would enable Kyber to dominate the DEX space:
Moreover, Kyber’s most recent announcement of the launch of KyberPRO was received even better than the FPR from June.
Source)
All in all, I don’t think most people have realized just how big a deal the KyberPRO Fed Price Reserve (FPR) framework for on-chain market makers really is.
However, you can bet that professional market makers are already taking notice of this development and it may now only be a matter of time before Kyber Network starts to dominate the DEX space.
