First Class Cabin [Public Due Diligence] In-Depth Report: Kylin Network

Project Overview

The vision of Kylin Network is to become a data processing protocol within the Polkadot ecosystem, covering businesses such as oracles, data trading markets, and data analytics.

Currently, there are no projects in the Ethereum ecosystem that simultaneously address both oracles and data trading markets.

An oracle is an intermediary that uploads external data to the blockchain or brings data into smart contracts. In the Ethereum ecosystem, the value of DeFi applications has exceeded tens of billions of dollars, and oracles play an indispensable role in this.

However, the oracle space on Ethereum is highly competitive, with the oracle business almost monopolized by Chainlink, and other oracle projects emerging in 2020. Kylin has chosen to develop on Polkadot to avoid fierce competition. However, Chainlink will also connect to the Polkadot ecosystem, which may impact Kylin Network's oracle business.

The data trading market is a place where data is assetized and traded, allowing individuals or companies to package and sell the data they acquire. Currently, traditional data trading markets are not mature and face issues such as government/company data monopolies and the public sale of personal privacy data. A decentralized data market can effectively address these problems.

Ethereum faces issues such as high transaction fees and network congestion, while Polkadot offers certain scalability and customizable parachain attributes, making it a new option. The big data industry is not fully mature, and there are relatively few decentralized data market projects, so Kylin Network has considerable room for growth.

In product design, Kylin's business includes both oracles and data trading markets, with the oracle business being Kylin's first step, while the data market can further expand its business. The product has not yet been released, and its specific deployment situation needs to be observed.

So far, according to information disclosed by the team, development has been relatively smooth, and the first milestone has been completed as planned, with the mainnet expected to launch in Q3. The team has quickly established partnerships with multiple projects and has shown good operational capabilities.

In the economic model design of Kylin Network, the participation of the KYL token is high, playing a role in ensuring network security and data accuracy and reliability. The main demand for KYL comes from node staking and user payments for data request fees. As Kylin Network's mainnet is deployed and business expands, the demand for KYL tokens will increase. It is important to note that Kylin Network has not yet launched its mainnet, and KYL tokens are circulating as ERC-20 tokens.

1. Basic Overview

1. Project Introduction

Kylin Network aims to become a decentralized data processing protocol within the Polkadot ecosystem, covering businesses such as oracles and data trading markets. The oracle business can provide external data for projects in the Polkadot ecosystem, while the data market supports any party in assetizing and trading their data. The KYL token is used to ensure the security of the parachain and to pay for service fees.

2. Basic Information

2. Project Details

1. Team

The official introduction states that the team consists of 21 members, while the website shows 6 members, with no relevant information on the others.

2. Funding

Kylin Network has received funding from the Web3 Foundation and successfully completed a seed round of financing in November 2020, with investors including Digital Strategies, SigNum Capital, PNYX Ventures, AU21 Capital, Moonrock Capital, CMS, ZMT Capital, Tenzor Capital, and Rarestone Capital.

Kylin Network successfully completed a $2.7 million private placement round in February 2021, with a project valuation of $30 million. Investors include FreeCompany, Digital Finance Group, Longhash, Master Ventures, Dealean Capital, Brilliance Ventures, and Ceras Ventures.

Seed round investors CMS, Rarestone Capital, and AU21 Capital made additional investments. Kylin Network conducted an IDO in March 2021 using Polkastarter + Balancer LBP, selling 15 million KYL. 2 million were sold on Polkastarter at a price of 31,250 KYL = 1 ETH (approximately $0.05).

3. Code

Figure 2-1 Code Submission Status

Figure 2-2 Number of Participants in Code Submission

According to Figures 2-1 and 2-2, Kylin Network's code submissions were mainly concentrated in 2020, with a large number of developers involved. Starting in February 2021, the volume of code submissions and the number of contributors began to decline.

4. Technology

Kylin Network will connect as a parachain within the Polkadot ecosystem, having its own underlying consensus while sharing the security of Polkadot. Kylin Network aims to become a data processing protocol, primarily covering the oracle and data trading market businesses, while also integrating data analytics modules.

Parachain

Kylin Network uses NPoS (Nominated Proof of Stake) consensus, which includes two roles: validators (miners) and nominators. Validators are responsible for running nodes, packaging, and verifying blocks. Nominators (token holders) stake tokens and have the right to authorize trusted validators and receive staking rewards.

Kylin Network ensures network decentralization through the following means:

1) Optimal Ranking Zone Model: Kylin Network does not always choose the nodes with the highest staked tokens but selects nodes through a random ranking weight algorithm. Nodes in the selected area have the right to participate in block packaging.

2) Verifiable Random Function: The optimal ranking area is determined through a verifiable random function.

Network dispute resolution method: Introduce arbitrator nodes, which need to stake a portion of tokens in advance (1.2 times that of the challenged node). When malicious behavior is detected, the arbitrator node can initiate a dispute challenge, which requires re-querying data for verification.

If the challenge is successful, as a penalty, the malicious node will lose its tokens and pay that portion to the challenger. If the dispute challenge fails, the challenger’s staked tokens will be reduced. The amount of reduction is determined by the network status at that time. The more malicious nodes there are, the higher the penalty.

Block rewards: 80% of block rewards go to validators and nominators, while 20% is stored in the Kylin treasury for future project development. The inflation rate of block rewards depends on the current network token staking amount. The specific formula is not listed here, and the following figure shows the curve drawn based on the formula:

Figure 2-3 Block Reward Inflation Rate

Note: The x-axis represents the staking rate, the blue line represents the average annual inflation rate of block rewards, and the green line represents the average annual yield.

According to the above figure, the optimal staking rate is 60%, at which the average annual inflation rate of block rewards is 8%, and the average annual yield is 12%.

Network Architecture

Kylin Network is mainly divided into four key components: Kylin Data Oracle (decentralized oracle), Kylin Data Marketplace (open data trading platform), Kylin Data Analytics (data analytics toolset), and KYL token (details can be found in the economic model). The oracle is the core of the entire network.

Figure 2-4 Kylin Network Architecture

Data Sources

Accurate and reliable data sources are one of the prerequisites for Kylin Network to operate normally. To ensure availability at the network's launch, Kylin will initially introduce reliable and well-known data providers, including CoinMarketcap, Coingecko, and Coinbase, ensuring that there are at least three trusted data sources. Additionally, anyone can create nodes and provide data.

Oracles

Figure 2-5 Oracle Operation Diagram

The oracle process can be simplified as follows: User initiates inquiry > Node retrieves data from data source > Data aggregation results in final data > User obtains final data.

There are five roles within the oracle component:

1) Data requester/user: This can be any smart contract, API, protocol, or application within the Polkadot ecosystem, which needs to pay KYL tokens to obtain the desired data.

2) Data Warehouse (DW): DW is a decentralized on-chain storage repository for integrated data, capable of storing query queues and historical verification data.

3) Oracle nodes: There are two types of oracle nodes: on-chain nodes, which are Kylin Network miners that handle data requests and sign transactions, and off-chain workers that provide data.

4) Arbitrator nodes: Responsible for ensuring the accuracy and security of data, they have the right to point out incorrect data but must pay a challenge fee.

The system operation roughly consists of the following steps:

1) User initiates a data request: The user submits a data inquiry request in the Kylin client, selecting one or more oracle scripts and paying fees in KYL tokens.

2) The network distributes tasks to oracle nodes: Upon receiving the user-initiated request, Kylin Network immediately selects different validators through random numbers, who are required to execute the oracle scripts.

3) Nodes execute inquiry tasks: Nodes execute the oracle scripts, obtain N pieces of data, and then transmit the data to Kylin Network. The VRF algorithm ensures that even malicious behavior by miners cannot affect the network.

4) Data verification: Arbitrators will verify the random numbers, and only data submitted by verified trustworthy miners will be valid; nodes uploading invalid data will be penalized.

5) Data integration and upload: Kylin Network miners will package the final data and transmit it to the user.

Data Trading Market

The data market is an expansion direction for Kylin Network's business, uploading verified off-chain data to the chain, and providing higher quality reference data for data consumers through coordination and management, assisting users in decision-making. Typically, users can only search for data already available within Kylin; if the required data is not on-chain, users can initiate a bounty to incentivize data providers to capture and upload relevant data to the chain.

Figure 2-6 Data Trading Market Diagram

Data Analytics

The ultimate goal of Kylin's data analytics module is to provide query engines and analytics services for third-party applications and external analytics tools through open APIs or SDKs. No detailed documentation is available yet.

5. Ecosystem

Figure 2-7 Kylin Partners

Note: The projects listed in the above figure are not all partners of Kylin Network.

Summary: From the product design perspective, the team aims to create a data processing protocol on the Polkadot chain, rather than being limited to oracles. In terms of development, the oracle is the primary development task for Kylin Network, while the data market and data analytics modules currently lack detailed information.

3. Development

1. History

Table 3-1 Kylin Network Progress Details

2. Current Status

Due to receiving funding from the Web3 Foundation, Kylin is required to submit development progress reports to the Web3 Foundation regularly. Kylin has submitted a total of three milestones. Kylin has already completed the first milestone, which was officially confirmed and approved by Web3 in March.

The main development content of the first milestone includes: 1) Development of Data Warehouse; 2) Improvement of oracle nodes; 3) Improvement of blockchain nodes; 4) Design of the oracle data market.

The team is currently working on the development of the second milestone, which is expected to take three months. The development content includes: 1) Development of arbitrator nodes; 2) Completion of oracle nodes and blockchain nodes, and implementation of OCW functionality; 3) Integration of documentation for oracle data services; 4) Kylin proxy interface.

3. Future

The development content of the third milestone includes: 1) Introduction of a mining mechanism; 2) Provision of Kylin oracle SDK and improvement of related documentation; 3) Completion of the oracle market frontend; 4) Completion of the testing payment system. The team plans to complete the mainnet launch in Q3 2021 while simultaneously carrying out other development work.

Summary: Kylin Network's partner expansion speed is very rapid, demonstrating certain marketing and operational capabilities. The team has completed the first milestone according to the roadmap submitted to the Web3 Foundation. The team will regularly release project reports, and the information is relatively transparent, with hopes of completing its milestones on schedule.

4. Economic Model

1. Supply

Initial Token Distribution

The total supply of KYL is 1 billion tokens, which will be distributed through ERC-20 and test tokens before the mainnet launch.

Table 4-1 Initial Token Distribution

Current token distribution:

Figure 4-1 Top 10 Addresses by Token Holdings

According to the above figure, KYL tokens are mainly concentrated in the hands of the team, while portions for advisors, token sales, etc., will be gradually released according to the initial distribution rules.

2. Demand

KYL is a utility token within Kylin Network, primarily used for:

1) Block rewards, used to maintain the security of Kylin Network's parachain;

2) Payment tokens for data requests/trades, where the KYL tokens paid by users will be distributed among four parties in a fixed proportion, ensuring that every participant in the network is incentivized.

3) Data security assurance measures: Both arbitrators and miner nodes need to stake tokens, and malicious behavior will result in token reductions to ensure that nodes perform their respective duties.

Figure 4-2 Uses of KYL Tokens in the System

Funds in the treasury will be allocated based on decentralized voting governance.

Summary: In Kylin Network's economic model, the participation of KYL tokens is high, playing a role in ensuring network security and data accuracy and reliability. The main demand for KYL comes from node staking and user payments for data request fees. As Kylin Network's mainnet is deployed and business expands, the demand for KYL tokens will increase.

5. Competition

1. Overview

Kylin Network aims to become a data processing protocol within the Polkadot ecosystem, integrating oracles, data trading markets, and data analytics. Oracles, data trading markets, and data analytics correspond to different application scenarios and user groups for data, each having different requirements but all needing sufficient data support, including on-chain and off-chain data.

Oracles

In simple terms, an oracle is middleware that calls and accesses data. In a narrower definition, an oracle is middleware that solves 1) whether questions and 2) how much data is, enabling smart contracts to call external data.

From the perspective of server distribution, oracles can be classified into centralized oracles and decentralized oracles. Centralized oracles are prone to single points of failure and data accuracy issues. A decentralized oracle network consists of a group of oracle nodes providing data, with each node independently retrieving data from information sources and transmitting it to the blockchain, then aggregating the data to derive the true, definitive value.

Currently, decentralized oracles in the blockchain space are mainly applied in DeFi projects for real-time pricing. An ideal oracle should meet the following characteristics:

1) High efficiency of data calls; 2) Security of data calls; 3) Data accuracy and reliability.

Data Trading Market

Data trading services refer to the assetization of data and the buying and selling of big data. Data trading is usually combined with data analytics. The data trading market is the midstream of the big data industry, with upstream being data collection, storage, and management, and downstream being data operation and application. In the era of big data, data is continuously collected and analyzed.

Companies and organizations can analyze the data they collect and use the results to provide personalized user services, optimize company decision-making processes, predict future trends, etc.

Currently, data trading services can be broadly divided into:

1) Pure buying and selling of raw data; 2) Selling results after cleaning, analyzing, modeling, and visualizing data based on the requirements of the demand side, usually sold in the form of API interfaces; 3) Collecting relevant data through legal means such as web scraping and crowdsourcing based on the demand side's requirements, organizing, proofreading, and packaging it for sale, often sold in data package form; 4) Trading intermediary models, where the platform itself does not store or analyze data but serves as a trading channel.

An ideal data trading market should meet the following characteristics:

1) Large data volume; 2) High data quality; 3) Ability to provide corresponding analysis/organization services.

2. Competing Projects

Since products in the Polkadot ecosystem have not yet been officially deployed, we will compare leading projects in the Ethereum ecosystem's oracle and data trading markets to explore and discuss the development potential of oracles and data trading markets on Polkadot.

Chainlink

Chainlink is an oracle protocol that was first deployed on Ethereum and later on multiple chains, targeting B-end users. Chainlink's products include a node market (Chainlink Market), an API market (Honeycomb Market), and Chainlink Feed. Both the node market and API market are created by third-party service providers.

The Chainlink Market displays information about various nodes, configurators, and running scripts, allowing users to freely choose to purchase. Node operators or data providers can build nodes and adapters through Chainlink Market. Honeycomb Market is the API market, containing API interfaces from websites providing cryptocurrency prices, weather, financial information, etc. Chainlink Feed is an oracle network specifically created for DeFi projects, using shared data sources from reused DeFi data to reduce costs.

Data efficiency: The average response time is between 30-45 seconds, approximately three Ethereum blocks. Building on a blockchain with faster block times can shorten response times. Chainlink has also released off-chain aggregated data functionality to improve data aggregation efficiency and mitigate the impact of network congestion on data aggregation.

Data security: Data must be aggregated before updating. When the response nodes reach a preset value, the median is taken to trigger price updates on-chain, effectively avoiding the perception of data manipulation during transmission to the blockchain. Chainlink's collateral mechanism has not yet been launched, so there is blind trust in node operators' integrity. Once the collateral mechanism is online, it will ensure nodes do not act maliciously through reputation points, penalties, and other mechanisms.

Data accuracy and reliability: In terms of data sources, Chainlink uses trusted data aggregators (Coingecko, CoinMarketcap) to provide data, excluding sources that are down or have data anomalies. Data privacy: Oracles run in Trusted Execution Environments (TEEs), reducing the risk of hacker attacks. Trusted computing environments can encrypt oracle requests and computation content for data requesters, preventing nodes from seeing specific data.

Chainlink currently has over 300 partners, and most DeFi projects on Ethereum choose to directly connect to Chainlink oracles for data.

Ocean Protocol

Ocean Protocol is a data trading market protocol layer on Ethereum, providing the decentralized network needed to create markets. Ocean Protocol essentially operates as a trading intermediary, with data stored on the servers of data providers, while the market built by Ocean Protocol only stores metadata.

The v2 version mainly involves consumers providing AI algorithms, which then run on the asset provider's servers, outputting results to consumers. In this process, consumers do not receive the provider's data but only the results of the AI algorithm's computations, thus ensuring the privacy of the provider's data. In the v3 version, Ocean Protocol created a data market based on Balancer, where datasets can be sold at fixed or floating prices after creation.

Ocean Protocol is a protocol-level product, so it can be used to build large comprehensive markets or help users bypass the market for direct peer-to-peer big data trading.

3. Prospects

Oracles

Oracles are part of the infrastructure of public chains. Currently, the oracle business on Ethereum is almost monopolized by Chainlink, with other decentralized oracles like Tellor and Nest emerging, making competition in the oracle space on Ethereum quite fierce. The current development of the Polkadot ecosystem is still in a very early stage, with less competition and greater room for growth.

From another perspective, the Ethereum ecosystem serves as a testing ground, and projects and models validated in the Ethereum ecosystem can be transferred to Polkadot, acting as a catalyst for the rapid development of the Polkadot ecosystem. Kylin Network is currently attempting to become part of this catalyst, connecting as a parachain within the Polkadot ecosystem to build the underlying oracle infrastructure for Polkadot.

Data Trading Market

Figure 5-1 Global Big Data Market Size Forecast

Data plays an important role in future society, being used for analysis, prediction, etc. As shown in Figure 5-1, according to Statista's forecast, the global big data market revenue is expected to reach $64 billion in 2021 and $103 billion by 2027, indicating a broad development space for the big data industry.

Currently, in the web 2.0 phase, data is monopolized by leading companies, forming data silos, and personal data privacy is not guaranteed. Most personal data is monopolized by leading companies like Facebook and Twitter, which hold user data resources, while users generate data but do not have good usage rights and control over their own data.

Currently, exclusive data in China is mainly held by the government and a few large internet companies, and has not been fully opened up, but this work can only be promoted by the government from the top down. Large internet companies can form data closed loops themselves, and they prefer to package data into products and services for sale, which is more valuable than simply buying and selling data and can better avoid legal risks. Government data is not open, and currently only some low-value statistical data is released. The government's incentives for promoting data openness and the motivation for value realization are insufficient.

A decentralized data trading market can solve problems such as monopolies and privacy exposure. Currently, Ethereum has entered a bottleneck period, and Ethereum 2.0 is still filled with uncertainties. There may need to be a more scalable, customizable, and developer-friendly infrastructure. At present, Polkadot may be a choice.

Summary: Kylin Network is a data processing protocol within the Polkadot ecosystem, aiming to integrate functions such as oracles and data trading markets. Currently, Chainlink is the leader in the oracle space, holding 80% of the market share on Ethereum.

As a new ecosystem, Polkadot has considerable room for development. The big data trading market is still a relatively new industry, and there is currently no need for direct competition between decentralized trading markets. Kylin Network has already made a good start, and the project team needs to quickly and effectively implement its product.