Chainlink is a decentralized oracle network that facilitates the transfer of tamper-proof data from off-chain and on-chain sources.
Summary
Chainlink is a decentralized oracle network and a component of the Utilities & Services Crypto Sector (Exhibit 1). Oracles in general are trusted external services that provide data and information for blockchains. Chainlink’s oracle network was developed specifically to provide smart contract platforms with secure and reliable data from real-world data sources. That data then enables the creation of hybrid smart contracts in a decentralized, tamper-proof manner. While Chainlink is not a blockchain, it employs a similar model: a decentralized network of independent entities aggregating data from multiple sources to deliver a single reliable data point while removing single points of failure. Through its robust architecture and expansion into the world of traditional finance, Chainlink has become the Web 3.0 oracle service standard.
Exhibit 1: Chainlink is the largest asset of the Utilities & Services Crypto Sector
The Token
LINK is the native token of the Chainlink network and represents a piece of ownership in the ecosystem (Exhibit 2). The LINK token is designed for (i) paying for tamper-proof data feeds, (ii) paying fees for cross-chain swaps, and (iii) acting as collateral by data providers that offer oracle services.
Exhibit 2: LINK token basics
The Network and Technology
In the ancient world, an “oracle” was a source of knowledge from the divine. In computer science, an oracle is a type of software that can provide data or other information. Chainlink is the most widely used oracle platform across the public blockchain industry, securing tens of billions of dollars in value connected to decentralized finance (DeFi), NFTs, insurance, and gaming by making sure the data being used is reliable and accurate.
Chainlink’s network is designed to connect existing systems to any blockchain, secure cross-chain communication, deliver verifiable data on-chain, and act as a gateway for global enterprises to access public or private blockchains. For example, Chainlink has partnered with the Depository Trust & Clearing Corporation (DTCC) — the world’s largest securities settlement system, which processes over $2 quadrillion annually — in an effort to bring capital markets on-chain. Chainlink’s Cross-Chain Interoperability Protocol (CCIP) facilitates liquidity access across various blockchains, bridging major Web 3.0 public chains and private banks’ digital ledgers.
Exhibit 3: Chainlink stands out for its market dominance
Use Cases
Chainlink provides essential infrastructure to public blockchains and Web 3.0 applications. Without access to off-chain or cross-chain data, decentralized applications would be much more limited in their functions, and it would be unrealistic to build an alternative financial system on-chain. Hybrid smart contracts may offer a flexible, scalable, and cost-efficient approach to executing agreements on blockchains by combining the transparency and immutability of blockchains with real-world data. Chainlink has delivered over 10 billion data points on-chain with zero errors — enabling over $8 trillion in transactions, as shown through Chainlink’s oracle feeds as of 08/20/24 — and can be considered the primary data provision service for public blockchains, as shown in Exhibit 3.
Specific applications of Chainlink’s technology include:
- Asset Tokenization: Chainlink enables tokenized assets to stay updated with real-world data, such as market pricing, bonds, and real estate, ensuring synchronization across public and private chains.
- TradFi: Chainlink’s CCIP allows banks, asset managers, and other traditional financial service companies to easily connect to any blockchain network with their existing systems.
- DeFi: Chainlink’s decentralized oracle networks currently secure tens of billions of dollars within DeFi, as seen through Chainlink’s oracle feeds as of 08/20/2024, by connecting smart contracts to high-quality data and off-chain computations designed to remove downtime or corruption of data at scale. Chainlink services used by DeFi protocols may include pricing data feeds, proof of reserve, automation, verifiable randomness, and cross-chain interoperability.
- NFTs/Gaming: Chainlink’s decentralized oracle networks power top blockchain gaming applications by providing verifiable randomness for character distribution, map generation, and in-game NFT mints, which can all automatically update according to real-world data to create a fair dynamic gameplay experience.
Factors to Consider
Chainlink has an established track record, setting an industry standard for offering reliable data feeds across blockchains, and is currently being tested across global enterprises such as the SWIFT system, DTCC, and ANZ Bank according to Chainlink. While Chainlink has always provided essential blockchain infrastructure, LINK’s value accrual struggled until the release of CCIP, which enabled certain additional blockchains to become interoperable. In addition, onboarding traditional finance onto private and public blockchains must be paid for in LINK fees. As CCIP and Chainlink’s integrations continue to grow, we believe the LINK token has the potential to benefit.
As of 08/20/2024, only 40,875,000 LINK can be staked to secure the Ethereum price feed that is used across DeFi for a reward rate of ~4.3% as seen on Chainlink’s public staking pool. The staking pool is currently filled, meaning new LINK holders cannot stake their tokens.
Staking offers rewards and reduces circulating supply, potentially increasing the attractiveness of the LINK token while mitigating sell pressure. Chainlink plans to add more opportunities to stake in the future, which could benefit the LINK token.
Investment Risks
Chainlink faces several possible risks specific to the network, which include, but are not limited to:
- Competing Networks: Chainlink has a first-mover advantage, maintaining a majority share of the decentralized oracle market (Exhibit 3); however, new projects like PYTH could begin to take market share away from Chainlink.
- Economics and Valuation: Chainlink’s SCALE and BUILD programs offer incentives for new and existing projects to join Chainlink’s ecosystem, but the incentives are paid for using LINK tokens, adding sell pressure.
- Key Integrations: While Chainlink’s integrations are currently positive for the LINK token, losing these integrations could negatively impact the LINK token.
- Regulatory Environment: Different regulatory bodies are still working to understand and define the legal frameworks for cross-chain technologies like Chainlink’s CCIP. In the U.S., entities like the SEC and CFTC are involved in shaping these frameworks, but there is no comprehensive regulation yet.
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