ChainLink

6.18 trillion dollars flowed through Chainlink this year. 

Are you missing out?

This article is split into 4 sections. 

SECTION 1 - Intro. What is ChainLink? 

SECTION 2 - Offerings. Product and Usecase. 

SECTION 3 - Tokenomics. Can you benefit?

SECTION 4 - The future. What’s to come?

SECTION 1 - Intro 

So, what is ChainLink?

ChainLink connects on-chain smart contracts to real-world data, off-chain computation, and cross-chain communication. 

Naly, what does that even mean?!

Simply put, ChainLink unlocks the full potential of smart contracts. Smart Contracts are a revolutionary piece of blockchain infrastructure that has forged the very DeFi realm we wander today. They offer self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code.

Instead of a contract relying on trust between intermediaries. Trust becomes math. Trust becomes immutable. Pretty darn cool right? You have been using these contracts all the time; every time you invest, withdraw funds, or mint an NFT, a smart contract has been executed.  But, this technology can reach far loftier heights.

How?

For smart contracts to reach their full potential, they must adapt, evolve and merge with the off-chain world. They must hybridize. Hybrid Smart Contracts combine code on the blockchain with data and computation from outside the blockchain. The enclosed math-based trust meets the data of the real world. 

Sounds pretty cool, but where does ChainLink come in?

It comes down to two pivotal offerings. 

1) Oracles 

2) Decentralized Oracle Networks (or DONs for short)

Oracles

Blockchains are isolated networks. Like a computer with no internet, they can't pull in data from the rest of the world. This is the job of the Oracle. An Oracle is a piece of middleware that facilitates communication between any off-chain system and the blockchain.

They have multiple functions:

• Listen for data requests

• Extract data from providers

• Format data from off-chain to on-chain

• Validate the performance of an oracle service

• Compute off-chain computation

• Broadcast transactions

• Output external data

So, oracles are essential to ensure this flow of information. But… does this not forgo the very problem we are trying to eradicate? Are we not building decentralized systems? Entrusting the flow of off-chain data to centralized nodes completely ruins this!

Doesn't it?!

DONs

In an ideal world, Oracles would ensure the same security and reliability as the blockchain. ChainLink has a solution and it’s called a Decentralized Oracle Network (DONs). DONs aggregate data from a multitude of chain link nodes to remove any single point of failure.

A great way to understand this process is via one of the most well-known sources of oracle support in DeFi. 

ChainLink price feeds.

SECTION 2 - Use Cases

ChainLink price feeds are the most widely used Oracle network in DeFi. Securing over $11 Billion worth of value, you would hope there isn't a centralized source.

Wait a sec, rewind. Why do you even need a price feed?

Let's say you go to Aave to borrow $ETH. What price of $ETH does Aave display Should it display the price of $ETH on Binance? What about Uniswap or FTX?Although similar, prices are not the same. So, what price is right? If only there was a trusted and decentralized source that aggregated data to pull from…

ChainLink aggregates a diverse collection of data via a systemic process.

1) Data Source Aggregation 

2) Node Operator Aggregation 

3) Oracle Network Aggregation 

Data Source Aggregation

Data aggregation firms pull raw market data from a collection of different centralized and decentralized exchanges. They then calculate refined pricing datasets. This data is made available via an API. 

Node Operator Aggregation

Each ChainLink node supporting a price feed is configured to connect with the APIs of multiple premium data aggregators. Every time the price changes, a ChainLink node fetches data and responds with the median value. 

Oracle Network Aggregation 

Multiple independent oracles are then grouped to form a Decentralized Oracle Network. The DON regularly produces oracle reports containing each node's median price.

At least 2/3 of nodes within a DON must contribute their results for an oracle report to be published on-chain. It’s an innovative approach for sure.  There is fundamentally more security compared to a dedicated sole Oracle provider, but it is enough?

There is no monetary incentive to stop node operators from colluding. The network could be attacked If ⅔ of these oracles did feed a false price. Unlikely, yes, but still possible. 

Okay, price feeds, that's one use case. 

What else?

• External Payments 

• NFTs and gaming

• Insurance 

• Supply chain 

• Enterprise systems 

• Government

The list goes on...

The lines between the web2 and web3 worlds are merging. Trusted sources of data aggregation are becoming more and more vital. And ChainLink has placed itself in the center of this world.

Weather data aggregation, life insurance, health insurance, bank payments, tokenization of real-world assets... These are examples of fields ChainLink is already working within.

ChainLink isn’t limited to Oracles.  Another key product offering is VRF.

Verifiable Random Function (VRF) provides a secure source of on-chain randomness across web3. VRF is a provably fair source of Random Number Generation. Why is that important? It unlocks a verifiable, on-chain solution to NFT randomness. Developers can access a product that ensures unpredictability within games. Just this year 8 million + VRF requests were made.

ChainLink also offers Keepers. An innovative tool that provides smart contract automation. Check out this tweet for more information:

Okay, so ChainLink provides some pretty vital utilities to the blockchain and web2 world. Neat. Are you able to capitalize on this?

Let's talk about the $LINK token.

SECTION 3 - Tokenomics 

LINK has a current circulating supply of just under 500 Million, with a max supply of 1 billion. It is currently sitting at $7.60, down 85% from its ATH back in May last year.

What about supply distribution?

• 35% of the supply is used as rewards and airdrops 

• 35% for investors 

• 30% for founders and project

Is that not a high proportion of tokens for the team? What’s the reason for this?The ChainLink team funds operations and bootstraps development via LINK. Quite simply, LINK is sold to facilitate further development of the technology. Ah, so constant price suppression… great. 

It is true that this distribution likely plays a large role in the selling pressure on LINK. However, it also unlocks the ability for continued development to occur. It’s a double-edged sword. 

It does reinforce continued development, but it certainly raises some investment question marks.  So, what factors inhibit the sell side for LINK, or even better, what stokes the buying pressure?

Any time a protocol wishes to utilize a ChainLink oracle, it must pay the provider in LINK tokens. LINK is a payment token for Oracle providers with 405,000 paid out in rewards last month.  This sounds great, but it also raises the question of whether Oracle providers are likely to sell the tokens to compensate for operation costs.

In a regular user's hands, the token holds no function nor unlocks a means of participation. Yes, ChainLink serves as not only one of the most useful technologies but also one with the greatest growth potential, but does it actually warrant an increasing LINK price?

There is immense growth, but is there value capture?

SECTION 4 - The future 

ChainLink has big plans for the future. Plans that are set to quell a lot of investors' initial trepidation. One of those is staking. Staking unlocks 4 huge catalysts for ChainLink. 

1. Crypto economic security 

2. Community participation 

3. Sustainable rewards

4. Empowering Node operators

Crypto economic security

Oracles will need to lock up LINK tokens as a form of service-level guarantee around network performance.  Similar to PoS, If this agreement is not adhered to, LINK will be slashed and redistributed.

Community participation

Users will be able to stake LINK tokens to support the performance of oracle networks. They can also raise alerts to nodes if they are deemed to be acting dishonestly. Users will receive rewards for doing so.

Sustainable rewards

1) Native token emissions from the supply will flow as rewards for stakers (4-5%)

2) User service fees will flow to stakers. 

Increase in services paid for = Increase in fees flowing to stakers.

Empower Node operators

Staking will help to establish a robust framework for how nodes are selected to participate in DONs. Apart from reliability, the amount of LINK staked will lay a pivotal role in gaining access to higher-value jobs for nodes.

This is a huge leap ChainLink is taking. There are now profound reasons for value accrual for LINK token holders alongside incentives that persuade node operators to stake rather than sell token rewards. One other catalyst for ChainLink's growth is CCIP. Cross Chain Interoperable Protocol is a system that allows the introduction of multichain smart contracts. It hint’s at a truly interoperable blockchain.

Just recently SWIFT, a network that transacts $5 trillion a day, envisioned using ChainLinks CCIP to help the SWIFT network to become interoperable across many blockchain environments. SWIFT is not the only worldwide powerhouse in the ecosystem. 

There are 1534 Projects and 1812 integrations within the ecosystem, and this is only set to grow.  It's impossible to fully break down the vast scale of what ChainLink is working towards. They are building.

The new BUILD program is a shining example. A program in which projects pay a portion of their token revenue to in return receives the suite of technology ChainLink provides, plus technical support. This token revenue then flows to service providers and LINK stakers.

Check out this great tweet by the guru ChainLinkGod describing the full Economic 2.0 system 

Longstory short, it ensures protocols can seamlessly integrate further development and fundamentally feeds back to more value accrual for LINK stakers.

ChainLink is clearly in a league of its own. The technology has cemented itself between the web2 and web3 worlds, and it’s way ahead of the pack. Growth is evident. Is value accrual?

I must admit, the initial tokenomics left many unanswered questions. However, with this new economic structure, there are multiple catalysts for increased buy pressure, further integration development, and user participation. This is alongside a rigorous improvement in economic security. ChainLink looks set to play a pivotal role in the future of blockchain infrastructure. Alongside an upgraded and promising economic model, I will personally be following closely. I will leave you with a couple of resources to conduct your own research:

The ChainLink bible