The Case for a $1,000 $LINK Token

Chainlink is a “decentralized oracle network” that allows blockchains to connect to real-world data (we’ll explain what this means in a second).

It has a market cap of $3.2B, FDV of $6.2B, and its $LINK token trades at $6.23. During the bull market of 2021, the token price exceeded $50

This article will cover the following:

• What is an oracle?
• What problem does Chainlink solve?
• How does it work?
• What are its plans for the future & what is Chainlink 2.0?
• Who are the key players in the ecosystem?
• What are its tokenomics?
• What’s the potential value of $LINK?

What is an Oracle?

Blockchains have one major limitation — they are unable to access data from external systems. This is by design — like a computer without an internet connection, they maintain their isolation to guarantee security and streamline efficiency.

Unfortunately, the vast majority of potential use cases for smart contracts require a connection to the outside world. Exchanges need accurate price information, insurance needs data to make decisions on policy payouts and many apps require market information to determine settlements.

The solution to this problem is known as an oracle, a separate piece of infrastructure that bridges a blockchain to real-world data. Oracles can source a variety of information including, price reports, weather, sporting scores, results of elections, geodata, random numbers, etc…

Oracles became very popular in 2020 and were among the best performing assets in crypto that year.

What is the “Oracle Problem”?

While the use of oracles will be necessary to create Web3, there’s one major issue — many oracles are centralized (i.e. controlled by a single entity or small group of entities).

This introduces a single point of failure and creates a potential bottleneck that can compromise the security and reliability of the system.

If a centralized oracle fails, is hacked, or is manipulated, it can produce inaccurate or fraudulent data. This can result in financial losses, legal disputes, or reputational damage for the users of the system.

Moreover, centralized oracles can also be vulnerable to censorship and manipulation by the government or other powerful entities. This can undermine the trust and integrity of the decentralized system and lead to a loss of confidence among users.

This vulnerability is known as the “Oracle Problem”.

Fortunately, protocols such as Chainlink are working to create “Decentralized Oracles Networks” — also known as DONs — to solve this problem.

What is the Solution to “The Oracle Problem”?

A DON is a network of multiple oracles that can independently gather data and cross-check their results.

This structure reduces the risk of centralization and eliminates the Oracle Problem by distributing the data-gathering and verification processes among multiple sources. The collective agreement of multiple sources provides accurate and secure data, making it more difficult for any one source to compromise the system.

The use of a DON improves the security of cryptographic systems by providing redundancy and fault tolerance. In a DON, a single oracle can be compromised without harming the entire system, as the consensus among multiple oracles can still be used to provide accurate and secure data. This reduces the risk of manipulation, denial of service attacks, and insider abuse, which are common attacks on centralized oracles.

In addition, the use of a DON can increase the transparency and trustworthiness of the data provided by oracles. A DON allows for the verification of data by multiple sources, reducing the risk of inaccurate or biased data. This can increase the trustworthiness of the data and improve the overall security of the system.

The King of Oracles: Chainlink

Chainlink is the largest decentralized oracle network, hosting nearly 1,500 independent nodes.

The protocol offers solutions to a variety of industries including:

• DeFi
• Enterprise
• NFTs and Gaming
• Social Impact
• Climate Markets

Let’s take a look at each…

DeFi

Chainlink provides real-time price feeds for a variety of use cases in DeFi including:

• DEXs
• Stablecoins
• Derivatives
• Insurance
• Yield farming

Notable partners include Synthetix, Aave, Trader Joe, Lido, Dodo and Liquity.

Enterprise

The protocol provides enterprise-grade infrastructure to allow large corporations to access the Web3 ecosystem.

Notable enterprise partners include T-Systems, LexisNexis, Swisscom and Accuweather.

NFTs and Gaming

Chainlink provides oracle services for several players in the #NFT and #P2E gaming space including Axie Infinity, BoredApeYC & Illuvium

Its most notable is as a random number generator (VRF) that assists with NFT creation, unpredictable gameplay and fair rewards.

Social Impact

The protocol partners with several nonprofits, NGOs and other institutions to assist with sustainability, financial inclusion and public goods projects.

Notable partners include Technalia, Lemonade and Arbol.

Climate Markets

Chainlink provides enterprise-grade middleware that help power climate markets

Notable partners include Hyphen, Floodlight and Correst.

How does Chainlink Work?

The ecosystem is powered by the $LINK token, which has three purposes:

1. Payment: The $LINK token is used by clients to pay for services provided by Chainlink. This creates a demand for the $LINK token and provides an incentive for users to acquire it.

2. Compensation: Oracles receive $LINK tokens as compensation for their work in providing data to the network.

3. Security: The $LINK token serves as collateral to ensure that oracles behave properly. To participate as an oracle in the network, an entity must stake a certain amount of $LINK tokens as collateral. If an oracle behaves improperly or provides inaccurate data, their collateral can be forfeited. This creates an incentive for oracles to behave honestly and provides a mechanism for punishing bad actors

To see how this works in practice, let’s imagine that Sushiswap wants to show the price of Ethereum on its site. They would:

1. Create a request for data from the Chainlink network to obtain the price of ETH
2. Submit this request along with payment in the form of Chainlink’s native token, LINK
3. Chainlink will then automatically select the best oracles based on 1) their reputation and 2) their ability to find the necessary data
4. Oracles will find the requested data (e.g. the price of ETH) and send it back to Chainlink. Oracles must stake LINK tokens as collateral to ensure proper behavior
5. Chainlink will aggregate the results, choose the most accurate answers and discards outliers. Oracles that are deemed to be negligent and / or malicious may face penalties and lose some or all of their collateral
6. The information is routed through Chainlink to Sushiswap.
7. Sushiswap can then populate their site with the current price of ETH.

While this model has proven very successful for Chainlink, the protocol is constantly evolving and in 2022 it began to introduce “Chainlink 2.0”

What is Chainlink 2.0?

Chainlink occupies an interesting position as the dominant “middleware” layer transferring data between blockchains and the real world. Since it’s already transferring data, it’s not a huge leap to perform computations on that data, store it or even transmit it.

This is exactly what the protocol plans to do with the release of Chainlink 2.0.

It’s utilizing “hybrid smart contracts” — computer programs that that combine ON-chain data with OFF-chain data — to create a new layer that can perform computations off-chain.

If executed correctly, this hybrid smart contract layer could create a lot of benefits, such as:

• Scalability
• Privacy
• Interoperability

Let’s dig into each…

Scalability

Chainlink 2.0 could serve as a de facto “Layer 2” network

Like traditional L2 solutions like roll-ups, it is designed to perform calculations off-chain and plug the results back into the native chain

This should increase throughput, decrease latency and reduce fees.

Privacy

As an independent bridge between blockchains and real-world data, Chainlink 2.0 is in a unique position to provide privacy solutions

For instance, Decentralized oracle networks (DONs) can utilize confidential computations to conceal their off-chain computations from the blockchains that relay their data. This provides a layer of privacy and security for the sensitive data being processed by the DON.

Interoperability

Chainlink 2.0 would theoretically be able to use its system of hybrid smart contracts to connect different blockchains

Its network of oracles could securely route messages between one another and transfer tokens between chains

In a way, it could function as an “upside down” Cosmos or Polkadot.

Instead of connecting multiple L1s at a base, or “L0” layer, it could connect them all at the L2 layer

If successful, this could be huge, as it could replace traditional interoperability solutions like “lock and mint” bridges

While it’s too early to tell whether Chainlink 2.0 will succeed, if it does it could represent a major paradigm shift in Web3 — a unified “middleware” layer that provides the functionality of a privacy tool, Layer 2 and bridge.

How Big is the Oracle Market?

While there are dozens of oracles serving the crypto market, Chainlink is by far the most popular with nearly 1,500 connections

Other notable players include Berry and Band Protocol.

What Traction has Chainlink Achieved?

Chainlink has achieved significant traction to date, it:

• Has enabled over $7 trillion in transaction volume
• Delivered 5 billion data points on-chain
• Supports 14+ blockchains and L2s

The protocol has also partnered with a variety of players in Web 2.0, such as Google Cloud and Oracle and dozens of projects across the Web3 ecosystem.

Chainlink also boasts a very strong community, often called the “Link Marines” with 79K reddit subs, 923K Twitter followers and 114K Discord members.

Who’s the Team Behind Chainlink?

Chainlink was created in 2017 by Sergey Nazarov and Steve Ellis.

It has over 400 employees listed on LinkedIn including Chief Ecosystem Officer Adelyn Zhou, COO Mike Derezin and CPO Kemal El Moujahid.

The protocol has a strong advisory board including Ari Juels, Eric Schmidt (ex-CEO of Google), Dan Boneh, Andrew Miller, Christian Catalini, Jeff Weiner, Tom Gonser, Balaji Srinvasan (ex-CTO of Coinbase) and Lynda Smith (ex-CMO of Twilio).

Tokenomics

$LINK has a capped token supply of 1 billion tokens

At launch, 35% of these were allocated to the public, 35% to the ecosystem and 30% to the company.

There are currently 517M tokens circulating.

While a 30% allocation to the company may seem high, it’s important to note that these funds aren’t simply going into the founder’s pockets

As @DeFiMinty points out, Chainlink is using this capital to fund development in lieu of VCs (notice there is no “private investor” allocation)

Valuation

It’s difficult to value Chainlink because there is no real-world analog to an oracle network. While oracles are important, they are a unique phenomenon to #Web3

But that’s not too concerning, as I’m not sure that $LINK should be valued as an oracle network anyway…

Given the plans for Chainlink 2.0, I don’t think it’s unrealistic to propose an upside case that values the network as a Layer 1.

In a sense, it could achieve what Cosmos and Polkadot are hoping to do and provide a unified layer for:

• Privacy
• Scalability
• Interoperability

Once we start to think about Chainlink as a potential Layer 1, the token’s potential expands dramatically.

L1s have already achieved substantial valuations — Ethereum crossed $500B in 2021 and both Solana and BNB exceeded have $100B in FDV in the past.

As such, I don’t think a long-term valuation of $1T (or $1,000 per $LINK coin) is impossible for Chainlink.

In fact, if we’re really going to think about Chainlink as an L1, things might get even crazier.

As I’ve argued in the past, the potential value of L1s is immense. They have the potential to disrupt traditional fiat currencies, giving them a potential market value of $35 Trillion!

(see the tweet below for more detail).

While it’s difficult to say how much of this market Chainlink will capture, the top 3 players in tech industries tend to hold 30%, 20% and 10% market share, respectively.

As you can see below, this could yield some extreme numbers…

Ultimately, it’s difficult to say where the protocol will end up, but given it’s entrenched position as the top DON in crypto AND the potential to start complementing or competing with L1s with the release of Chainlink 2.0, there are definitely several reasons to be excited about $LINK.

Note: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.