Chainlink: The Blockchain Oracle of Finance (LINK-USD)

One of the biggest issues in the wider public blockchain landscape is interoperability. Since public blockchains generally do not have access to off-chain data, data oracles such as Chainlink (LINK-USD) have become very important components for ecosystems such as DeFi to function properly. of the crypto ecosystem. In this article, we’ll explore what Chainlink does, the economics of the token, and what the recently released Chainlink Cross-Chain Interoperability Protocol, or CCIP, enables.

What is Chainlink?

Mainly developed by Chainlink Labs, Chainlink is a smart contractor network that connects blockchain networks and applications. Founded in 2017 by Sergey Nazarov, it currently has over 2,000 integrations that range between DeFi, NFTs, Web3 gaming, and proof of reserves. Chainlink strives to be a decentralized network as it enables thousands of independent node operators. There are currently 86 such operators, one of the more notable non-crypto native node operators being T-Systems (TMUS). The rationale behind decentralizing the nodes is that it eliminates the single point of failure potential associated with using a more centralized oracle with a single node.

In addition to nodes, Chainlink is already being used by Google (GOOG) (GOOGL), AccuWeather, and the Associated Press among other non-crypto-focused entities.

What makes Chainlink such an important Oracle for the entire crypto market is the fact that it is a chain agnostic network. It can link any input to any blockchain. With the proliferation of so many layer one blockchains, the ecosystem has obvious concerns about fragmentation. Interoperability networks such as Chainlink aim to address the fragmentation problem and provide real-time price data across the entire market.

SWIFT and CCIP

More recently, traditional finance, or “TradFi”, can now also use Chainlink through an integration with the SWIFT system. This integration will bring about a dozen TradFi setups to the Chainlink network. Those TradFi institutions include Citigroup (C), The Bank of New York Mellon (BK), and Lloyds Banking Group (LYG). According to SWIFT, the ability to use public ledger networks instead of building out their own networks is an attractive selling point for several TradFi companies:

Instead of building new infrastructure and technology stacks from scratch, financial institutions want to use their existing infrastructure to connect to blockchain ledgers, where tokens are registered in a way that is both compliant and secure. Not only would this help companies simplify their architecture and operations, but it also minimizes investment costs and reduces the risk of technology obsolescence.

According to SWIFT, there is an increasing interest from traditional companies in tokenized assets. Something Larry Fink seemed to confirm during a recent cable TV interview. Given the network fragmentation problem mentioned in the previous section, Chainlink is well positioned to capture interest from non-crypto-native companies because it can abstract network layers.

Chainlink’s recent release of CCIP appears to be a major step forward in blockchain interoperability. In addition to being able to send messages from one chain to another, CCIP allows application developers to build on top of Chainlink rather than choosing an individual blockchain network. So far, the supported networks are Ethereum (ETH-USD), Optimism (OP-USD), Avalanche (AVAX-USD), Arbitrum (ARB-USD), and Polygon (MATIC-USD).

Tokonomics

All this is supported by the LINK token. LINK is used to pay for data requests on the oracle network. Given the number of projects currently integrated with Chainlink, it’s not too surprising to see over 635,000 individual holders of the token.

• Total token supply: 1.0 billion.
• Circulating supply: 538 million (54%).
• Token price: $7.55.
• Market Capitalization: $4.0 billion.
• Fully diluted limit: $7.5 billion.
• Market cap: 20.
• Addresses: 635.8k.

There is a bit of whale concentration with the token distribution through retail companies that have been growing in recent years:

Despite no wallet address containing more than 3% of the total LINK supply, there are 21 whale wallets that account for 55% of the total coin supply. However, this is lower than about 75% at the beginning of 2019; indicating that retail holders are an increasing share of LINK token holdings. While LINK is unlikely to reach the level of address decentralization seen in something like Bitcoin, these wallet concentration numbers are an improvement over some of the other top coins in the crypto market.

According to Crunchbase, core developer Chainlink Labs raised $32 million through an ICO in 2017 and 3 additional rounds. The ICO money came from 9 entities, none of which I consider to be the standard crypto investment firms we generally come across, such as a16z, Coinbase Ventures or Pantera Capital. Chainlink’s early investors include: Nirvana Capital, TGE Capital, AlphaCoin Fund, FJ Syndicates, and Fundamental Labs. In my opinion, these are less “loud” companies from China, Australia and the US.

35% of the total coin supply was sold to investors in a 2017 token sale. An additional 35% is reserved for node operators and the remaining 30% remained with Chainlink Labs.

In terms of market cap, 20 could actually be considered quite a modest level considering the importance that Chainlink could eventually become for the entire financial market ecosystem if it is adopted as the blockchain oracle of choice by TradFi companies. Another possible key to that potential is that Chainlink can serve as a proof of reserve for off-chain assets in addition to on-chain smart contract assets. Public blockchains cannot independently interact with off-chain data sources, so Chainlink solves a legitimate problem.

Risks

Despite the encouraging ruling in the Ripple Labs case recently, regulation in the United States is still a clear uncertainty for the crypto market. After conducting an ICO in 2017, Chainlink Labs could come under regulatory scrutiny in the future. Since the company is the holder of LINK tokens, any negative ruling against Chainlink Labs in future lawsuits could potentially depress the price of LINK tokens if the company sells a large amount.

Another potential problem for Chainlink at the network level, if not most of DeFi, is the theoretical centralization problem of its multisig. In a critique of Aave (AAVE-USD) late last year, crypto analyst Chris Blec pointed out the potential flaw in trusting Chainlink’s oracle due to its smart contract structure:

This is very concerning for multiple reasons, the most serious of which is that Chainlink itself is completely controlled by a 4-of-9 multisig contract

Bec points out that if the multisig keys are compromised or if the holders of those keys decide to go “rogue”, it could be very damaging to the security of Chainlink and, by extension, the security of DeFi.

Resume

In my opinion, Chainlink is a very important protocol for the entire cryptocurrency ecosystem. The coin price has increased from $6 to over $8 in recent weeks. This price increase is undoubtedly in response to the release of CCIP and SWIFT integration. The latter is likely a sign that we will see a growth in engagement between traditional financial firms and public blockchain networks. Chainlink can serve as an important protocol for proof of reserves. With the well-documented bursts of centralized crypto companies like FTX and Celsius, there is likely to be a growing demand for easily verifiable off-chain data.

When researching coins and tokens in the cryptocurrency market, I generally try to find assets that can either drive some kind of network adoption, solve problems other networks face, or make people’s lives easier. Chainlink does all three because the network can scale thousands of independent node operators, connect blockchains to data that isn’t natively accessible, and enable network layer abstraction at the user level. Chainlink is not an exciting L1 trying to be an “ETH killer”. It’s an oracle. But it just has to be a bit boring and work well. I think it’s worth it in the crypto winter.