  The Kaup-Newell (KN) hierarchy contains the derivative nonlinear Schr\"
odinger equation (DNLSE) amongst others interesting and important nonlinear
integrable equations. In this paper, a general higher grading affine algebraic
construction of integrable hierarchies is proposed and the KN hierarchy is
established in terms of a $\hat{s\ell}_2$ Kac-Moody algebra and principal
gradation. In this form, our spectral problem is linear in the spectral
parameter. The positive and negative flows are derived, showing that some
interesting physical models arise from the same algebraic structure. For
instance, the DNLSE is obtained as the second positive, while the Mikhailov
model as the first negative flows, respectively. The equivalence between the
latter and the massive Thirring model is explicitly demonstrated also. The
algebraic dressing method is employed to construct soliton solutions in a
systematic manner for all members of the hierarchy. Finally, the equivalence of
the spectral problem introduced in this paper with the usual one, which is
quadratic in the spectral parameter, is achieved by setting a particular
automorphism of the affine algebra, which maps the homogeneous into principal
gradation.
