First Mover: Kyber Token's Eightfold Increase Reveals Bet on Future Market-Share Growth

In cryptocurrency markets, newfangled “decentralized exchanges” like Kyber are piddling compared with more-established and centralized venues like Binance.

But in the eyes of traders, it’s the upstarts who are winning lately – at least based on the year-to-date performance of digital tokens affiliated with the various exchanges.

Take Kyber Network Crystal (KNC), which is used to pay trading fees on the decentralized exchange Kyber. The token’s price has surged eight-fold in 2020. That compares with a 21% gain for Binance Coin BNB$897.83, which customers of the exchange can use to pay trading fees, at a discounted rate.

You’re reading First Mover, CoinDesk’s daily markets newsletter. Assembled by the CoinDesk Markets Team, First Mover starts your day with the most up-to-date sentiment around crypto markets, which of course never close, putting in context every wild swing in bitcoin and more. We follow the money so you don’t have to. You can subscribe here.

Part of the performance gap is due to the fast growth in usage of Kyber, one of the biggest players in the white-hot arena of decentralized finance, or DeFi. Daily transactions on the Kyber network so far in July are averaging more than double their June level, according to CryptoCompare.

The price moves are also driven by speculation over future growth, and cryptocurrency traders are betting that decentralized exchanges could gain market share over time. In the meantime analysts are crunching the numbers and realizing that the KNC tokens might provide more ongoing yield than the Binance coins.

BNB is often categorized by crypto-market taxonomists as a utility token, whereas KNC is often lumped in with other DeFi coins.

But Michael Gord, CEO of Toronto-based trading firm Global Digital Assets, says he looks at them side by side, as rivals in the exchange business.

“Kyber is actually competitive to exchanges like Binance,” Gord said in a phone interview.

Just this week, Kyber announced a protocol upgrade known as Katalyst that will allow KNC holders to earn so-called staking rewards – essentially like earning interest denominated in more of the same tokens – starting in a few weeks.

Those staking rewards will come from a cut of the trading fees borne by users of the decentralized exchange. At the current rate, the platform charges trading fees of 0.20%, some 65% of which go directly to stakers. But KNC holders also can vote to change the fee rates and payout mix.

Decentralized exchanges (DEXs) such as Kyber are trading platforms constructed atop the Ethereum blockchain, with built-in programming known as “smart contracts” that allow trading to take place without a middleman to hold funds and match orders. Binance, by contrast, has embraced the middleman role since it was set up in 2017 (though it also launched a DEX in 2019).

Here’s where the centralized exchanges are winning: first-mover advantage, reflected in their dominant share of trading volumes. According to the data aggregator Dune Analytics, decentralized exchanges are averaging a combined daily volume of about $60 million in July. And Binance alone, according to CoinGecko, has $2.1 billion in volume per day.

“DEXs are a great development within the digital-asset ecosystem to trade crypto to crypto,” David Lifchitz, chief investment officer for the Paris-based trading firm ExoAlpha, told First Mover in an email message. “But it’s not a scalable infrastructure, with the current trading volume, for an active trader.”

Jake Brukhman, managing director at token asset manager CoinFund, said that because DEX volumes are low, there’s “slippage,” the difference between the expected price of a trade and the price at which it’s actually executed.

“While I can exchange an asset instantly, I might actually pay a lot of slippage to do that,” Brukhman told CoinDesk in a phone interview.

Comparing the economics of the tokens requires some work. Kyber’s KNC token gives holders a return, or “yield” for providing liquidity, or “staking” by sending crypto to the KyberDAO smart contract.

Binance, in addition to providing discounts for fees paid in BNB tokens, occasionally “burns” some of the tokens or eliminates them from the outstanding supply, offering an additional reward in the form of anti-dilution.

Gord acknowledges Kyber’s network liquidity is still pretty paltry compared with Binance, and that makes it a non-starter for large trading volumes. But he sees the price jump in the KNC tokens as a bet that decentralized exchanges will continue to grow.

“Once Kyber has much deeper liquidity it would impact our trading business more,” he said.

Tweet of the day

Bitcoin watch

BTC: Price: $9,192 (BPI) | 24-Hr High: $9,441 | 24-Hr Low: $9,133

Trend: Bitcoin fell below $9,150 early Friday, reversing most of the gain from $9,060 to $9,480 seen in the first half of the week.

The pullback has invalidated the bullish view put forward by Wednesday’s upside break of a falling channel represented by trendlines connecting June 1 and 22 highs and June 2 and 15 lows.

Essentially, it's a case of failed breakout, which chart analysts consider a powerful bearish signal. In addition, the 3% decline seen in the past 24 hours has established another bearish lower high on the daily chart, as noted by popular analyst Josh Rager.

Even so, it is still too early to say the bears have regained control because the cryptocurrency is holding above $9,000. Sellers have failed multiple times in the last four weeks to establish a strong foothold below that psychological support.

As such, the immediate outlook would remain neutral as long as prices are trapped in the range of $9,000 and $9,480 (Wednesday’s high). Acceptance under $9,000 may prove costly – so much so that the cryptocurrency may end up falling to $7,100, according to crypto market analyst Josh Olszewicz.

Meanwhile, a move above $9,480 would put the focus on the psychological hurdle of $10,000 once more. Option traders are betting on a bullish breakout, as discussed Thursday. At press time, bitcoin is trading near $9,190, as per CoinDesk's Bitcoin Price Index.