The rise and the rise of DeFi was propelled by the sudden (but not unexpected) advent of the decentralized exchanges / swaps protocols after their initially more successful and marginally older brotherins - custodial platforms - had gradually succumbed to severe regulatory pressure and one by one started to introduce humiliatingly annoying and highly controversial KYC/ AML procedures.

Here I have to mention that, to the credit of our freedom-loving and oppression-defying industry, there were some who tried to actively resist by moving their businesses into more crypto-friendly jurisdictions reducing their degree of interference with users privacy to a reasonable minimum.

(Some, however, might object that it was more the matter of pursuing business interests rather than following the ideological adherence).

Totally with accordance to a free-market's magic of 'an invisible hand', those users, which have to enjoy a particularly high level of their governments' 'care' about how and where they dare to spend their hard-earned dimes, happily embrace the brave and rapidly expanding world of DEXs.

One of those new species - 'Kyber Network' (KNC) - I have decided to review and to rank on the SVET scale ('System' - 'Vision' - 'Execution' - 'Trust') today.

SYSTEM:

According to its WhitePaper (v0.1 'An On-Chain Liquidity Protocol' as of 22 April 2019): 'Kyber, a fully on-chain liquidity protocol for implementing instant cryptocurrency token, swaps in a decentralized manner on any smart contract enabled blockchain.'

The one crucial characteristic of DEXs - that they have a serious incentive to stay opened for an external scrutiny - makes them very attractive for public auditors like me.

That also helps them to maintain an important competitive advantage, creating a level of transparency (in our space often associated with an attractiveness for developers and individual security-focused users) unattainable for even the long established custodial exchanges.

Kyber Network (in addition to the habitual and extensively populated GitHub account) maintains in a number of dedicated web-pages a very thorough record of its overall contracts design features and a description of its core contracts functions for external developers' access (see link below). Only that alone induces me to raise Kyber's 'Transparency' straight up to 'a-' level ('minus' is explained below).

As to Kyber's 'Engineering' ('a') it is the simplicity itself, which within its two main contracts (KyberNetwork.sol and IKyberReserve.sol) connects Proxies and Maintainers (see below) to the Network, which then, in its part, connects to the Matching Engine, the Storage, Fees Handlers and the Reserve.

(Kyber's list of main contract functions includes: getExpectedRateAfterFee; tradeWithHintAndFee; addReserve; removeReserve; listPairForReserve; getConversionRate; and trade.)

Basically, it means, that anyone (have to get through Maintainers first :) can create its own Reserve and then control its level and a pricing mechanism. All Reserves allow funds pulling and, in a bunch, create an indispensable feature of the Kyber core protocol - an instant market making, which is based on the best prices discovery among different reserves.

[ Btw, those 'maintainers' force me to pull Kyber's 'Transparency' to 'a-' levels.

Extract: 'Maintainers refer to anyone who has permissions to access the functions for the adding/removing of reserves and token pairs, such as a DAO or the team behind the protocol implementation.' ]

Here we come to one of the major disadvantages for users of decentralized exchanges. 'Instantaneous' matching and free-market based Fees Handlers (combined with a relatively small numbers of Reserves) mean that those fees can get astronomically high (as it is currently the case with Kyber where the price paid for one transaction reaches now up to $20).

For a regular, 'none-wale' trader, which usually places a large number of relatively small orders that might be a party-crasher.

That reality (combined with the 'maintainers' institution and the fact that Kyber has presently only 70 reserved coins) pulls Kyber's 'Velociy' to 'c+' level.

As to its 'Security', although, I've got a relative confidence that the open-for-all parties' investigations Kyber's contracts have already provided a practical safeguard for its users, we all know too well that there's no such a thing as the 'bullet-proof contract'. It has to withstand the test of time before I can move Kyber's 'Security' up from the present 'b-' level.

Result for 'System' (Security - Velocity - Engineering - Transparency): b-/c+/a/a-

VISION:

Since February 2018, when Kyber launched its mainnet, a lot of money has gone under the bridge connecting users and the DEXs wonderland. Specially so during the latest couple of months, when daily trading volumes have increased from a meager 10 mio at the end of July to about $3 billion in the mid-August (it is still under $10 bln monthly).

Please, correct me if you can, but it looks like with 180000% yearly expansion rate, we have, probably, just created the fastest growing market in history :) Apparently, 'Volume' is to be set at the 'a' level, right? Well, not so fast (for the reasons to be clarified in the following couple of paragraphs).

However, we all, also, know that Kyber is neither the largest nor the most dynamic DEXs out there (the crown is Uniswap's, of course).

Still, Kyber is in the top five (4th) by volumes (with Uniswap, Curve, Balancer and 0x) but second only to Uniswap and IDEX by the number of users (totaling under 40 thousands daily).

In fact the DEXs big family (which, basically, includes several dozen other members - most notably the following, by the order of a magnitude: Uniswap, Balancer, Curve, 0x, Kyber, dYdX, Synthetix, IDEX, Bancor, Oasis, Loopring, DDEX and Gnosis) is pretty small by all imaginable standards. Therefore, Kyber's 'Singularity' (reverse to the 'strength of competition') is also in the 'a' range. Let's make it 'a-', for the number of smaller DEXs continues to grow as more and more developers are FOMOing into the space.

Nonetheless, the DEX market is still in its early infancy. For example, compare this to about 280 centralized crypto- exchanges and their more than $2 Trillion monthly volumes (DEXs barely have 0.4% of that bonanza now :))

In essence, if we take only one large exchanges, which monthly trading volumes alone are nearing 300 billion, all DEXs are in 3% range of this one exchange alone .

Important to note here that under the current regulatory regime DEXs can't trade USD pairs, which might prevent them from reaching their full growth potential in the nearest future.

Obviously, before getting to DEXs users have first to channel their money through 'legalized', custodial coins / tokens exchange platforms. That fact (coupled with rising fees and an aversion felt by most 'regular users' to 'speculations') might get DEXs volumes lagging far behind their centralized counterparts for a prolonged period of time (unless, of course, the proportion of 'day traders' will increase sharply).

Notwithstanding, the question is how far could DEXs market grow and will it capture some alts' volumes from the centralized exchanges or will it create its own market, composed from newly issued tokens?

Difficult question to answer. The way it's going now it looks like DEXs are mostly trading a whole new generation of second and third layers protocols, most of which have already became part of DeFi by themselves.

So, where does it put Kyber's 'Volume' rating? Looking at the most recent astonishing piece of DEXs' growth it is easy to forget that not so long time ago, in February 2020, the percentage of DEXs volumes in the total exchanges volumes was actually decreasing (since January 2019 level of 0.1%) to a sub-critical level under the 0.01% :)

That makes me to be more cautious now in estimating the potential market size for DEXs. Hence, I set Kyber's Volume' to 'b'.

With that I still have its 'Timing' (right / wrong time coming to the market) and 'Empathy' (users emotional attachment) left to value.

As to the former it's about 'b+', for Kyber founding in 2017 turned to be a bit premature, but, at the same time, it has positioned them to meet Summer 2020 rush already backed by the two years of coding and growing its community.

Speaking of which it has a tiny bit but, still, relatively more than the rest of the pack: about 3.5 thousands traders (>120th Twitter followers).

Not to mention that Kyber is completely overshadowed by Uniswap's 65th people trading each day. On top of that, I haven't noticed an extensive level of users admiration with Kyber, although, the general public attitude appears to be positive. Hence, 'Empathy' is 'b-'.

Result for Vision (Singularity - Volume - Empathy - Timing): a-/b+/b-/b+

EXECUTION:

Kyber was one of the crypto craze early beneficiaries rounding about $50 mio in September 2017. It was added by an undisclosed amount (allegedly ~2 mio) in January 2020. Among Kybers contributors there are several boutique VCs from Italy (Iconium), Hong Kong (IOSG), USA (Amino Capital, 8 Decimal Capital) and China (Chain Capital).

One of the major issues facing public auditors like myself is that information about projects current financial state and its revenue stream remain carefully hidden from our eyes for the old sake of preserving corporate confidentiality.

In my view it is the complete nonsense in our age when all companies have to submit to authorities. Concealing the state of business finance from users, most of which are your investors anyway, only leads to an unwanted anxiety on the markets and pose a serious threat to project's reputation.

It is specially important for small, fledgling businesses like Kyber, which issue its own coins.

While big, centralized, already well established exchanges might temporary enjoy the luxury of being secretive on their internal finance without rising publics' suspicions and backlash (although this situation usually change precipitously after the hack or financial scandal), small ones have to be much more observant and forthcoming.

In fact, we all (big and small) have to admit that every company in our space is public by definition, that all users are our stakeholders and take on ourselves the responsibility to report to our worldwide shareholders regularly.

Until that happens, however, I'm left with my wild guesses on the 'Equity' side of the Kyber rating.

The mere occurrence that Kyber had to resort to the venture round at the edge of 2020 (despite its 50 mio ICO only two years earlier) tells me that unless the Summer rush would not have happened its financial situation would be frivolous (again, it is only my speculations - no facts).

Also it indirectly suggests Kyber's yearly burning rate of about $25 mio, which is pretty steep for the project with less than 10 team members, I would say (unless, of course, each member gets big corps CEO full package :) It also means that Kyber would have to net about 2 mio monthly just to survive if not for its coins constant appreciation.

Yes, this burning rate might be completely fake-factual. However, despite all its incongruity those wild assumptions (coupled with an absence of reliable info on the real state of its accounts) compels me to question Kyber's financial stability and only its coins' crazy valuation saves it from falling to 'c' level. "Equity" is 'b-'.

Kyber has two technical co-founders (Loi Luu and Victor Tran), which is always, as yo know, a delight to my eyes. At the same time, previous to Kyber Loi (PhD in Philosophy) didn't have much of exposure to real business and spend only a year as a CS research assistant in the National University of Singapore. Victor's career (he's 2013 graduate of Vietnam University of Engineering and Technology) in tech is a bit longer and includes, primarily, three years of lead engineering with 'SmartPool' company.

Nonetheless, strength of the founders is to surround themselves with undiscovered talents and let them roam the market in one cohesive unity. Additionally, Kyber results speak loader than its employees bios and CVs. Moreover, Vitalik is in their advisory board, so I have no basis to question Kyber's 'talent-management practices'. Hence, I compel to assign strong 'b+' to 'Team' part of the rating.

Despite my emotional adherence to everything DeFi I can't deny one thing, which is extremely handy with legit centralized exchanges - that they are literally legit and sometimes have official legal name available for everyones scrutiny registration and, even, available by phone :)

On the other hand, although, it is no difficult to find out from open sources that Kyber is headquartered in Singapore, neither its legal names nor its form are known (not to mention any other details like shareholders or affiliates). That always put me out of my comfort zone and as a result I tend to assign as low 'Validity' rating as I can ('c') to such types of projects. That exactly what I intend to do in the case of Kyber, unless, of course, somebody enlighten me on this subject.

Of course, I understand that asking for the legal registration from a DEX sounds strange but in case of Kyber we are still dealing with a fledgling network relying mostly on core group of developers associated with a particular company

(pls, correct me if you know for certain that it is now fully disintegrated on devs side)

Contrary to 'Validity' Kyber's 'Solution' (or business model) would deserve, imho, straight-forward 'a' for being, hmm, the straight-forward (fees based), if not for a fact that it is not clear from open sources how much (if at all) core devs take from that (as far as I know, Kiber DAO decides on the network fees). Hence, 'Solution' is 'a-'.

Result for Execution (Solution - Validity - Equity - Team): a-/c/b-/b+

TRUST:

Kyber Network tokens (KNC or 'Kyber Network Crystal') together with all other DEXs coins have experienced the 2020 Renaissance during which its prices 10x on sharply rising volumes during January - March period and then (after March 15 tectonic downward eruption) added an another leg up but this time a bit less enthusiastically, while the wave of new byers arriving to the market has been gradually flattening.

You shall not be some kind of a technical analysis genius to notice the massive discrepancies in prices to volumes ratio existing between two periods - those of 2017/18 and the most resent one in 2020.

That picture is the abnormal one and reveals massive speculative fever when the same number of coins are frantically changing hands multiple times. It can't be sustained without constant inflow of new buyer to the market, which I doubt we have had left too many (unless, of course, some major crypto-fund suddenly opens the gates for its LPs into our DeFi mad kindergarten). Hence, 'Sustainability' is 'c+'.

It doesn't, of course, mean that KNC could not appreciate further, specially, if the wales school, which had played this market all winter-summer season round will feel itself reinvigorated by the continuing to the fall BTC sleep-rally and pump back part of their profits into DeFi. Meanwhile, I do not see as project fundamentals (such as, f.e. a relatively low number of Kyber users) can substantiate Kyber's present marketcap over $300 million. Result, 'Value' is 'b-'.

As I said, the level of users engagement (usability) with KNC is very low, but the fact that this coin is designed to be used in KyberDAO for voting makes me waver a bit and I am compelled to keep its 'Engagement' rating at 'b' level. Consider it as a credit though :)

On the other hand transacting with and holding ERC20 KNC token is not an issue. However, astronomical fees you have now to pay for all EVN based transactions makes Kyber useless fro micro-payments. Result, 'Transactions' is 'b-'.

Result for TRUST (Sustainability - Value - Engagement - Transactions): c+/b-/b/b-

[Please, do not forget that I am not your financial advisor and all above was not intended to be a financial advise, of course. You’ve got to use your own gray matter enclosed between both of your ears to take all important as well as unimportant financial decisions.]

For the original version of this article, please, refer to: http://svetrating.com/rating_text/35/tok/

Link (Kyber WhitePaper): https://files.kyber.network/Kyber_Protocol_22_April_v0.1.pdf

Image: Dutch Stock Exchange, Amsterdam