Chainlink: The Blockchain Oracle Of Finance

Summary Chainlink is a crypto Oracle that connects blockchains with off-chain data. It is a crucial protocol for DeFi to properly function. With the recent release of CCIP, Chainlink will be integrated with traditional financial institutions via SWIFT. However, there are notable concerns about whether or not Chainlink's multisig contract is secure enough. One of the biggest problems in the broader public blockchain landscape is interoperability. Since public blockchains don't generally access off-chain data, for ecosystems like DeFi to properly function, data Oracles like Chainlink (LINK-USD) have become very important components of the crypto ecosystem. In this article, we'll explore what Chainlink does, the economics of the token, and what the newly released Chainlink Cross-Chain Interoperability Protocol, or CCIP, enables. What is Chainlink? Primarily developed by Chainlink Labs, Chainlink is a smart contract oracle that connects blockchain networks and applications. It was founded by Sergey Nazarov in 2017 and currently has over 2000 integrations that vary between DeFi, NFTs, Web3 gaming, and proof of reserves. Chainlink aims to be a decentralized network as it allows for thousands of independent node operators. There are currently 86 such operators, one of the more notable non-crypto native node operators is T-Systems (TMUS). The rationale behind decentralizing the nodes is that it eliminates the single point of failure potential that comes with utilizing a more centralized single node oracle. Node Setup (Chainlink) Beyond nodes, Chainlink is already being utilized by Google ( GOOG ) (GOOGL), AccuWeather, and the Associated Press among other non-crypto focused entities. All Blockchains (Chainlink) What makes Chainlink such an important Oracle to the entire crypto market is the fact that it's a chain-agnostic network. It can link any input to any blockchain. With the proliferation of so many layer one blockchains, the ecosystem has clear fragmentation concerns. Interoperability networks like Chainlink aim to address the fragmentation problem and provide real-time pricing data throughout the market. SWIFT and CCIP More recently, traditional finance, or "TradFi," can now utilize Chainlink as well through an integration with the SWIFT system . This integration will bring roughly a dozen TradFi institutions to the Chainlink network. Those TradFi institutions include Citigroup ( C ), The Bank of New York Mellon ( BK ), and Lloyds Banking Group ( LYG ) among others. According to SWIFT, the ability to use public ledger networks rather than building out their own networks is an attractive selling point for several TradFi businesses: Instead of building new infrastructure and technology stacks entirely from scratch, financial institutions want to leverage their existing infrastructure to connect to blockchain ledgers, where tokens are recorded in a way that is both compliant and secure. Not only would this help firms simplify their architecture and operations, but it also minimizes investment costs and reduces risk of technology obsolescence. According to SWIFT, there is an increasing interest from traditional firms in tokenized assets. Which is something that Larry Fink seemed to corroborate during a recent interview on cable TV. Given the network fragmentation problem mentioned in the previous section, Chainlink is well-positioned to garner interest from non-crypto native firms as it can abstract away network layers. Cross-chain messaging (Chainlink) Chainlink's recent release of CCIP appears to be a major step forward in blockchain interoperability. In addition to being able to transmit messages from one chain to another, CCIP allows application developers to build on top of Chainlink rather than picking an individual blockchain network. So far, the networks that are supported are Ethereum (ETH-USD), Optimism (OP-USD), Avalanche (AVAX-USD), Arbitrum (ARB-USD), and Polygon (MATIC-USD). Tokenomics Underpinning all of this is the LINK token. LINK is used to pay for data requests on the oracle network. Given the amount of projects currently integrated with Chainlink, it's not too surprising to see over 635k 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 cap: $7.5 billion. Market Cap Rank: 20. Addresses: 635.8k. There is a bit of whale concentration with the token distribution through retail holdings have grown over the last few years: LINK Concentration (IntoTheBlock) Despite no single wallet address holding 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 down from about 75% in early 2019; indicating retail holders are increasing share of LINK token holdings. While LINK is unlikely to achieve the level of address decentralization observed in something like Bitcoin, these wallet concentration figures 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 a 2017 ICO and 3 additional rounds. The ICO money came from 9 entities, none of which I consider to be the standard crypto investment firms that we generally come across like 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" firms from China, Australia, and the US. 35% of the total coin supply was sold to investors during a 2017 token sale. An additional 35% is reserved for node operators and the remaining 30% stayed with Chainlink Labs. LINK Allocation (Messari) Market cap rank-wise, 20 could actually be considered to be a fairly modest level given how important to the entire financial market ecosystem Chainlink could ultimately become if it is adopted as the blockchain oracle of choice by TradFi firms. 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 can't interact with off-chain data sources independently so Chainlink does address a legitimate problem. Risks Despite the encouraging ruling in the Ripple Labs case recently, the regulatory environment in the United States is still a clear uncertainty for the crypto market. Having conducted 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 litigation could potentially depress the price of LINK tokens if the company sells a large amount. Another potential concern for Chainlink at the network level, if not most of DeFi, is the theoretical centralization concern of its multisig. In a critique of Aave ( AAVE-USD ) late last year, crypto analyst Chris Blec pointed out the potential flaw in relying on Chainlink's oracle due to the structure of the smart contract: This is highly concerning for multiple reasons, the most severe of which being that Chainlink, itself, is entirely controlled by a 4-of-9 multisig contract Blec points out that if the multisig keys become compromised or if the holders of those keys decide to go "rogue," it could be highly detrimental to Chainlink's security and by extension the security of DeFi. Summary In my view, Chainlink is a very important protocol for the entire cryptocurrency ecosystem. The coin price has rallied from the $6 range to over $8 in recent weeks. This spike in price is no doubt in reaction to the release of CCIP and SWIFT integration. The latter of which is likely a sign that we'll see engagement growth between traditional financial firms and public blockchain networks. Chainlink can serve as an important protocol for proof of reserves. With the well-documented blowups of centralized crypto firms like FTX and Celsius, there is likely growing demand for easily verifiable off-chain data. When I examine coins and tokens in the cryptocurrency market, I generally try to find assets that can either achieve a network adoption of some sort, solve problems plaguing other networks, or that make people's lives easier. Chainlink sort of does all three because the network can scale thousands of independent node operators, connect blockchains to data that can't be accessed natively, and allows for network layer abstraction at the user level. Chainlink isn't an exciting L1 trying to be an "ETH killer." It's an oracle. But it just has to be somewhat boring and work properly. I think it's worth a long in crypto winter.