119,876 – that's how many ethereum ERC-20 tokens are currently in existence.
It's a number that is growing by the hundreds every day, but the trouble is, according to Loi Luu, the CEO and co-founder of decentralized exchange Kyber Network, the majority of those tokens fall short of a practical use case.
"What we observe is that most tokens are used only on exchanges for trading purposes or within their own specific platforms if the platform is live," Luu said.
Luu wants to change that and unlock the potential of ERC-20 tokens to be used for payments.
And to do that, Luu revealed exclusively to CoinDesk, Kyber Network will be extending the on-chain liquidity smart contract protocol, called Kyber Network Crystal (KNC), which underlies its decentralized exchange to allow businesses to accept payments through any ERC-20 out there.
Luu told CoinDesk, "Our main goal is to make tokens usable anywhere."
In practice, this means businesses can accept payments in any ethereum token, and that token can be instantly converted into any other token as well.
And Luu has some experience to back up their ambition. For one, he's known for founding ethereum security tool Oyente and building a protocol that uses a scaling solution, sharding, for the enterprise blockchain Zilliqa, before going on it found Kyber Network, that facilitates instant ethereum token swaps on its decentralized exchange (a term, while long a dream in the industry, has failed as of yet to live up to expectations).
"With Kyber we aim to connect between ERC-20 tokens and use cases, so tokens can be seamlessly used for payments, as collateral for lending, investing in funds and so on," Luu said. "This will definitely create more use cases for tokens."
And according to Luu, Kyber Network has already secured partnerships with leading ethereum game, Etheremon, popular wallets MyEtherWallet and Coinbase, and ethereum-based microblogging site Peepeth to integrate KNC.
"Anyone can integrate, with no gatekeepers dictating innovation," Luu explained, adding:
"Done right, this protocol can be the transaction layer for the decentralized economy, facilitating value exchange across all parts of the decentralized ecosystem."
Kyber Network also announced today a developer grant that Luu said will "provide financial support to projects built in and around Kyber's on-chain liquidity protocol."
And already, startups Canal and MoatFund are getting grant money.
Liquidity contracts
The key technical problem that the crypto industry faces is liquidity – a term that relates to the availability and stability of cryptocurrencies.
Liquidity has been the focus of Luu's research for many years, and it's what initiated his foray into Kyber Network, that allows for seamless trades between different kinds of tokens. Indeed, Luu's adaptation of KNC to the business world isn't much of a deviation from the tech underlying the DEX. Rather, it's just an extension of the tech into a wider use case.
"In terms of technical architecture, it's not different," Luu told CoinDesk. "The decentralized exchange was one use case of the on-chain liquidity protocol; it's just one way to utilize the on-chain liquidity protocol that we have been building so far."
Stepping back, the KNC contract has two essential components.
On the one hand, there's the aspect of the contract that deals with instant conversions between tokens, and on the other, there's what is known as the "Kyber reserve." So-called "liquidity providers" commit tokens and ETH, the native cryptocurrency of ethereum, into a pool that is used to fuel the remainder of the contract.
Because all this happens on-chain — meaning stored in a smart contract hosted on the ethereum blockchain — it doesn't rely on a trusted intermediary in order to execute trades.
Luu told CoinDesk, "These properties are critical to an open protocol since they allow permissionless innovation and trustless collaboration to happen between all the parties seeking the value exchange."
Many (d)applications
Users that commit tokens to the pool can withdraw funds at any time.
While this might seem worrisome to crypto enthusiasts, especially after decentralized exchange and token creation platform Bancor suffered a $13.5 million hack, according to Luu, the KNC smart contract has undergone rigorous security testing to ensure funds are safe in the code.
As well as having undergone multiple audits, the KNC contract is built in such a way that liquidity providers are still in control of their finances, so even if there was a security breach, users cannot lose funds.
According to Luu, it's for these reasons that the technology will power many experimental payment solutions for businesses and financial services.
"This protocol enables many transactional and payment flows to happen atomically and in a single step between multiple parties," Luu told CoinDesk. "These use cases would otherwise be very difficult or impossible to achieve."
Making it so that commerce can accept multiple tokens simultaneously and seamlessly convert these tokens into other crypto tokens, Luu anticipates the technology will be highly useful for the decentralized applications (dapps) in the ethereum ecosystem as well.
"Since the vast majority of interesting payment patterns and financial use cases require multiple token swaps between several parties, this mechanism is critical in enabling innovation in many classes of dapps," Luu said.
Speaking to this more broadly, Luu concluded:
"It is crucial that we make tokens much more liquid and useful by allowing them to be easily spent by users and integrated into dapps by developers."
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